The preservation of the like-kind exchange is an ongoing legislative issue for CARW and the National Association of REALTORS. Every few years, proposals are circulated to curb or even ax the 1031 like-kind exchange, which is a pillar of the commercial real estate industry. Section 1031 is used by all sizes and types of real estate owners, including individuals, partnerships, LLCs, and corporations. The vast majority are held by mom-and-pop investors – sole proprietors and pass-through businesses and S corporations. A recent survey of NAR members indicated that 70 percent of REALTORS have participated in a 1031 like-kind exchange in the past 4 years. NAR contends that the like-kind exchange provision – a basic tool that helps to prevent a “lockup” of the real estate market – is vital to a well-functioning real estate sector and a strong economy. Real estate owners use the provision to efficiently allocate capital to its most productive uses, keeping our economy on stable ground.
Updated research from EY highlights emerging trends related to real estate like-kind exchanges (LKEs) and their growing importance to the US economy. The report by EY economist and former Treasury Deputy Assistant Secretary for Tax Analysis Robert Carroll was released in May 2022.
- LKEs under section 1031 of the tax code allow businesses to defer capital gains tax on the disposition of real estate if the gain is used to acquire replacement property of like kind within six months.
- The EY report—“Economic Contribution of the Like-Kind Exchange Rules to the US economy in 2021: An Update”—updates EY’s prior research that used LKE data from 2019.
- The survey found that the dollar volume of like-kind exchange activity and number of transactions increased by 70% between 2019 and 2021. The increase was identified by a survey of qualified intermediaries as the US economy recovered from the COVID recession.
- According to the author, the increase in LKE activity “is likely due, in part, to the transition of many qualified real property assets to new or modified uses to meet post-pandemic business models and tenant needs, a trend that may continue, at least to some degree, for the next several years.”
LKE Economic Impact
The EY report estimates the impact of like-kind exchange rules on the cost of capital and assesses the likely impact of section 1031 on investment decisions and investment levels. EY’s significant findings include:
- Job growth and labor income
Overall, economic activity generated by Section 1031 exchanges in 2021 supported 976,000 jobs and $48.6 billion of labor income. - Gross Domestic Product
Like-kind exchanges generated $97.4 billion in value added in the United States in 2021. “Value added” measures a sector’s or industry’s contribution to the production of final goods and services. - Federal, state, and local tax revenue
Taxpayers engaged in like-kind exchanges—along with suppliers and related consumer spending—were estimated to generate approximately $13.1 billion in federal, state, and local taxes during 2021.
The EY research builds on the groundbreaking academic research on LKEs commissioned by The Roundtable and other members of the Real Estate Like-Kind Exchange Coalition at the height of the tax reform debate. This work by Professors David Ling (Univ. Fla.) and Milena Petrova (Syracuse U.) was subsequently published in 2020 in the peer-reviewed Journal of Real Estate Literature here and here.