§1031 Supporters

IRC Section 1031 is a vital, cost effective and revenue neutral stimulant to the the U.S. economy and to job creation, and should not be repealed or modified under tax reform initiatives.

These National, Regional and State Business and Industry Associations Support of IRC Section 1031 Like-Kind Exchanges

On February 2, 2015, the Obama Administration released its 2016 budget which, in addition to limiting the deferral of gain for real property exchanges to $1 million annually, also
proposes to eliminate exchanges of art and collectibles.

In March, 2014, the Obama Administration released their 2015 budget which included a proposal to limit the deferral of gain for real property under IRC Section 1031 to $1 million dollar
annually.

On December 16, 2014, the following twenty-five national associations wrote the President urging him to omit this proposal:

Some highlights from the letter: “The revenue proposal to limit the deferral of gain on real property like-kind exchanges, if enacted, would undermine the functioning of the real estate marketplace, reduce capital investment, and discourage job- creating property improvements and land conservation efforts.”

“Allowing capital to flow more freely among investments encourage commerce, and supports economic growth and job creation…”

“Federal like-kind exchange rules positively affect local government budgets since more frequent turnover of real estate generates significant property tax and recording fees, as well as property reassessments that increase the property tax base.”

“Section 1031 is often a critically important means of facilitating conservation real estate transactions involving open spaces and/or significant environmentally sensitive properties that may be exchanged for other privately held property.”

“…Our current like-kind exchange rules generate broad economic and environmental benefits that serve the public interest.”

On November 21, 2013, the Senate Finance Committee (SFC) released a staff discussion draft on proposed reforms to cost recovery and tax accounting rules, in which Section 1031 like-kind exchanges were targeted for repeal. The SFC invited comments relating to the goals of business tax reform. In response, forty-four national, regional and state business and industry associations submitted comments in support of Section 1031 and/or opposing the SFC’s call for repeal of Section 1031.

On February 24, 2014, House Ways and Means Chairman Dave Camp released draft legislation to reform the tax code and Section 1031 was similarly targeted for repeal.

Following is a sampling of public commentary from the many associations in favor of Section 1031:

“Deferral of gain on like-kind exchange is a bedrock principle of our tax policy and nearly as old as income tax itself.”

“The roll-over of gain on like-kind exchanges ensures a well-functioning, dynamic, and efficient U.S. real estate market… Allowing capital to flow more freely among investments is critical to facilitate commerce and support economic growth and job creation…”

“Like-kind exchanges generate tax revenue for federal, state, and local governments and facilitate land conservation efforts… Like-kind exchanges result in smaller depreciation deductions for the taxpayer going forward.”

“Substituting a “similar use” concept for like-kind exchange rules would violate tax neutrality and weaken the real estate market… [A] “similar use” rule would reduce liquidity in the real estate market, make real estate development more costly, and reduce the likelihood that real property will undergo the improvements and upgrades that often occur when new owners take over the property.”

American Farm Bureau Federation: “Using like-kind exchanges, active farmers and ranchers are able to combine acreage, acquire higher grade land and consolidate parcels into contiguous plots. Agricultural equipment transactions are undertaken to acquire new machinery that is more technologically advanced or better suited for their operation. Without like-kind treatment, cash-strapped farmers and ranchers are more likely to defer expanding the business and to delay updating their equipment.”

U.S. Chamber of Commerce: “The Chamber welcomes the continuing discussion on tax reform, however, has significant concerns about the Draft Proposal, which concerns are articulated below.”

National Association of Manufacturers: “A number of manufacturers have captive finance arms to facilitate and support sales and leasing transactions with their customers, and in some cases, to enable sales where financing might otherwise be difficult to obtain. The captive finance arms use LKEs to reduce tax gains and thus, financing costs, enabling them to provide competitive financing for customers. The program provides dual benefits to both the lessor and the lessee. LKEs help ensure leasing is a viable, affordable option for customers. The proposed repeal of LKE would decrease cash flows and increase lending costs, which in turn decreases the ability to compete for sales and jobs in U.S. manufacturing.

Comments from a Joint Response by:

“We wish to restate objections… regarding the impact of like-kind exchange repeal…Our organizations represent companies that sell, use, rent, service, lease and manufacture construction, farm, forestry, transportation and mining equipment… IRC Section 1031 is neither a loophole nor a tax savings vehicle, but rather a powerful economic engine that promotes capital investment, improves business productivity and creates jobs. Tax-deferred exchanges are one of the few incentives available to, and used by, taxpayers of all sizes in all sectors of the economy. The non-recognition exchange policy is premised on the “continuity of investment” and ensures that a taxpayer who continues with the same qualifying investment, with no intervening receipt of cash, is left in the same tax position as if the relinquished asset was never sold. By deferring the tax consequences associated with replacing outdated equipment, LKE helps businesses invest in newer, more efficient and more environmentally-friendly machinery.”

Associated Equipment Distributors: “…we estimate that approximately a quarter of our members have LKE programs in place to manage their rental fleets. The tax liability associated with selling a fully depreciated asset acts as a disincentive to purchase newer, more efficient machinery. By allowing companies to defer that tax liability if they buy a new machine to replace the old, LKE frees up resources that makes the capital investment possible.”

Asian American Hotel Owners Association: “This provision provides tremendous benefit not only to hoteliers, but also to the communities in which our members live and work. Section 1031 exchanges allow hotel owners to have more available capital to invest in additional properties, which then increases economic development within the community, boosts the tax base and results in the creation of more jobs.”

National Association of Real Estate Investment Trusts: “Section 1031 is at the very essence of how the commercial real estate industry creates jobs, supplies needed investment in communities, meets consumer demands and increases property values.”

Iowa Soybean Association: “ISA President Mark Jackson, who farms near Rose Hill, said countless members have used it for land, conservation, equipment and other transactions.”

Iowa Farm & Land Chapter #2 REALTORS® Land Institute: In a 2013 survey, the members of the Iowa Realtors Land Institute estimated that if Section 1031 were repealed, land transactions would drop by nearly 30%, with many opining that repeal would be highly negative to the Iowa and agricultural economies.