- 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 or limit IRC Section 1031 like-kind exchanges. The industries most affected by like-kind exchanges include real estate, transportation, equipment/vehicle rental and leasing, and construction. These industries, among others with high use, would suffer a disproportionate burded from any changes.
The study finds that repeal of IRC Section 1031 would:
- shrink the U.S. economy, by $6.1 to $13.1 billion annually
- result in less federal tax revenue due to economic contraction
- discourage and slow the rate of investment
- negatively impact the overall economy, with an unfair concentration in certain industries
- unfairly burden certain businesses and taxpayers
- be 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 November 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:
- Transactional activity would be reduced, inhibiting the economic stream generated by transactions;
- The cost of capital would increase;
- Average holding periods would increase;
- The velocity of investment in the economy would decrease;
- Real estate values would drop;
- Rents would rise; and,
- The economy would contract.
The Ernst & Young study determined that a repeal of Section 1031 would 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 are an important capital formation tool, and they matter. Like-Kind exchanges 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 certain industries and taxpayers, harm the economy as a whole and cost the government in the long run.
Both studies recommend retention of Section 1031 like-kind exchanges.