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1031 exchanges have a positive impact on the United States economy

1031 exchanges have been a topic of Congressional discussion for decades. In California, for example, a Bill was introduced in 2010 to repeal the application of Internal Revenue Code Section 1031 to California taxes. But despite the occasional plea to eliminate or constrain the program, the outcome of those discussions has been that the benefits of 1031 exchanges far exceed the costs.

Since the 1920s, Section 1031 has enabled individual investors and businesses of all sizes to utilize their capital more efficiently. They have been able to do this by deferring the capital gains and depreciation recapture taxes on sales of business and investment properties that are replaced via an exchange with like-kind property. Like-kind exchanges are an integral part of the operations of many capital intensive businesses and are utilized across a broad spectrum of the economy as a means to increase efficiency and remain competitive.

Nearly 200,000 like-kind exchanges are said to be conducted by individuals, partnerships, and corporations on an annual basis[1], with the projected total market equity for these exchanges averaging $92 billion[2]. The average deferred gain per transaction exceeds $1 million[3]. The money that is saved in taxes here is then used elsewhere to benefit the United States economy.

Some opponents to Section 1031 have also asked for cutbacks, thinking that this will end up being more beneficial to the economy with more taxes being paid. But once again, this is not the case. 1031 exchanges are often already a major component of an exchanger’s tax and financial plan. Section 1031 is used by taxpayers, ranging from a retired couple whose life savings are invested in a residential rental property, to large corporations that lease assets like automobiles and construction equipment. Groups such as ranchers and farmers, for example, can use 1031 exchanges to sell their land and buy new land to expand the size of their business or adjust to changing market conditions. Hotel owners frequently use this transaction type to buy larger hotels, enabling them to hire more employees, which is an obvious plus. Cutting back the number of exchanges would only end up preventing these people from putting money back into the economy.

1031 exchanges encourage the reinvestment of capital. The reinvestment of capital in turn stimulates growth, expansion, and job creation. Many industries directly or indirectly rely upon the tax benefits created by Section 1031, both in California and across the country. Rather than repealing Section 1031 or trying to enforce cutbacks, legislature should look to preserve it as a means to stimulate economic recovery.

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[1] “1031 Exchange Data Since 1995,” Commercial Source, 14 Dec. 2012, http://blog.commercialsource.com/1031-exchange-data-since-1995/.

[2] “Size of the 1031 Marketplace,” Lou Weller, Deloitte, 2007.

[3] “Size of the 1031 Marketplace.”