Like-kind exchanges help the economy by creating jobs and generating economic activity and are an important tool for the rental housing industry.
August 24, 2022 |
Updated August 25, 2022
For the past fifteen years, America’s tax code has been under intense scrutiny. Throughout the debate, an important, but relatively unknown provision has been frequently targeted by lawmakers aiming to fund other policy priorities. Known as a “like-kind exchange,” this provision remains in place as a critical tool for rental property owners and other investors in commercial real estate. Here’s what you need to know.
Section 1031 of the U.S. tax code allows like-kind exchanges of business or investment property, meaning that taxes on any gains from the sale can be deferred if those gains are reinvested in one or more similar properties. The ability to postpone taxes on these sales helps the economy by more efficiently allocating capital, creating jobs, generating economic activity and helping businesses grow.
A 2022 study by Ernst and Young found that like-kind exchanges supported 976,000 jobs and contributed $48.6 billion in labor income and $97.4 billion of value added to U.S. GDP in 2021. Further, a similar study in 2020 reveals that 10 to 20 percent of commercial real estate transactions utilize Section 1031 exchanges, making financing multifamily buildings more feasible. Removing this tool from housing providers would cause rents to increase by 6 percent, the study concludes.
Given its contributions to the rental housing industry and economy, the National Apartment Association (NAA) has consistently and aggressively defended Section 1031 for over a decade. Most recently, we were part of coalition efforts to protect 1031s during discussions surrounding the 2017 Tax Cuts and Jobs Act and the Build Back Better negotiations last year which ultimately became the Inflation Reduction Act of 2022. NAA supported the 2022 Ernst and Young study which produced excellent educational materials that demonstrate the necessity for lawmakers to maintain Section 1031 for the future.
For more information on like-kind exchanges, please contact Ben Harrold, NAA’s Manager of Public Policy.