Two studies explore the micro- and macro-economic benefits of like-kind exchanges and the impact a repeal of Section 1031 would have on the economy. The Ling and Petrova microeconomic study provides an in-depth look at the impact of like-kind exchanges on the commercial real estate market. The Ernst & Young macroeconomic study takes a wide look at the impact of a repeal on the overall U.S. economy. Section 1031 like-kind exchanges play an important role in the U.S. economy: encouraging investment, contributing to federal tax revenue, reducing the use of leverage, and improving liquidity in the market. Both studies recommend the retention of Section 1031.
- Ling & Petrova Microeconomic Study, “The Economic Impact of Repealing or Limiting Section 1031 Like-Kind Exchanges in Real Estate”
- Ernst & Young Macroeconomic Study, “Economic Impact of Repealing Like-Kind Exchange Rules”
Ling & Petrova Microeconomic Study
This in-depth microeconomic study of the U.S. commercial real estate markets highlights the critical role that Section 1031 like-kind exchanges play in stabilizing rents, safeguarding property values and strengthening our economy.
The study finds significant benefits from like-kind exchanges:
- Like-kind exchanges encourage investment.
- Like-kind exchanges contribute significant federal tax revenue.
- Like-kind exchanges lead to job creation.
- Like-kind exchanges result in less debt.
Released: July 2015
Ernst & Young Macroeconomic Study
This Ernst & Young analysis examines the macroeconomic impact of recent proposals to repeal the IRC Section 1031 like-kind exchange rules. These rules are used extensively in the real estate, transportation, equipment/vehicle rental and leasing, and construction industries.
The study finds that repeal of IRC Section 1031:
- results in less federal revenue
- shrinks the U.S. economy, up to $13.1 billion annually
- discourages investment
- negatively impacts the overall economy, with an unfair concentration in certain industries
- unfairly burdens certain businesses and taxpayers
- is at cross-purposes with the goals of tax reform.
Released March 2015, Revised November 2015
Combined Implications on the U.S. Economy
Studies quantify that benefits of like-kind exchanges provide essential incentives for a robust economy; Recommend retention of Section 1031
The Ling & Petrova microeconomic study, focusing in-depth on the effects of a repeal of Section 1031 on the real estate industry, complements the findings from the Ernst & Young macroeconomic study focused on the effects of a repeal of Section 1031 on the overall economy.
The March 2015 Ernst & Young study, “Economic Impact of Repealing Like-Kind Exchange Rules,” concluded that a repeal of Section 1031 would slow economic growth, reduce GDP and hurt many small businesses.
The July 2015 Ling & Petrova study, “The Economic Impact of Repealing or Limiting Section 1031 Like-Kind Exchanges in Real Estate,” confirms findings from the Ernst & Young study. Together the studies show the long-term impacts that a repeal of Section 1031 would have on the economy:
- Real estate values would drop;
- The cost of capital would increase;
- Average holding periods would increase;
- The velocity of investment in the economy will decrease;
- Rents will rise; and
- The economy will contract.
The Ernst & Young study determined that a repeal of Section 1031 would unequivocally result in lower economic growth in the U.S. economy and was at cross-purposes with the stated goals of tax reform. The findings of both studies reinforce the argument that like-kind exchanges matter: they provide an essential incentive to improve properties, increase investment, reduce leverage and reduce holding periods, all of which stimulates transactional activity. Like-kind exchanges help keep the economy moving. A repeal of the provision would unfairly burden several important industries, harm the economy as a whole and cost the government in the long run.
Both studies recommend retention of Section 1031 like-kind exchanges.