“The Tax and Economic Impacts of Section 1031 Like-Kind Exchanges in Real Estate”
PROF. DAVID C. LING, PHD, UNIVERSITY OF FLORIDA
PROF. MILENA PETROVA, PHD, SYRACUSE UNIVERSITY
Submitted to the Real Estate Research Consortium
Published: September, 2020
A microeconomic study focused on Section 1031 like-kind-exchanges within commercial real estate. The 2020 study,”The Tax and Economic Impacts of Section 1031
Like-Kind Exchanges in Real Estate” focuses on the period from 2010 to June 2020 and provides a comprehensive view of the use and geographic distribution of IRC Section 1031 like-kind exchanges. The authors examined data from CoStar, the National Association of Realtors, Marcus & Millichap Research Services and Investment Property Exchange Services (“IPX 1031”). This research updates a 2015 study by the same authors examining the impact of a repeal of Section 1031.
The updated research concludes that exchanges spur capital expenditures, increase investment, create jobs for skilled tradesmen and others, reduce unnecessary economic risk, lower rents, support property values, and generate substantial state and local tax revenue.
DOCUMENTS
Study Document: “The Tax and Economic Impacts of Section 1031
Like-Kind Exchanges in Real Estate”
Ernst & Young, 2020 Macroeconomic study, “Economic Contribution of the Like-Kind Exchange Rules to the US Economy in 2021”
Ling & Petrova, 2015 Microeconomic study, “The Economic Impact Of Repealing Or Limiting Section 1031 Like-Kind Exchanges In Real Estate”
Ernst & Young, 2015 Macroeconomic study, “Economic Impact of Repealing Like-Kind Exchange Rules”
About the Authors
[Text to be Added]
HIGHLIGHTS & KEY FINDINGS
- 10-20% of all CRE transactions are 1031 exchanges
- Exchanges preserve capital & encourage capital improvements which:
- Create jobs;
- Add to state & local tax bases.
- Greater investment– 1031 Buyers invest more capital (15.4%) into Replacement Properties than non-1031 Buyers.
- Exchange acquisitions are associated with:
- Tax expenditure is overstated
- Greater equity & lower leverage – 30% LTV for 1031 v 43% LTV for non-1031
- Reduced credit risk for investors and lenders.
- Exchanges…
- Encourage shorter holding periods
- Improve marketability of illiquid CRE
- 38% of all CRE exchanges involve multi-family housing
- Nationally, half of all exchanges valued above $575,000
- Vast majority of 1031s are one-time events, followed by taxable sale.
- Less than 20% of replacement properties are disposed of in a subsequent exchange
- Elimination of 1031 would cause:
- Decrease in transaction activity, capital investment & real estate prices (prices ↓ 6%)
- Increase in holding periods, cost of capital, leverage and rents (rents ↑ 6%).
- 63% of tax-deferral is recovered by Treasury through reduced depreciation deductions
