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ADISA Heads to Capitol Hill as Advocate for Section 1031 Exchanges

Jul 10, 2015


"Comprehensive tax reform" continues to gain steam on Capitol Hill, as various members of Congress compete one proposal against another in favor or against Internal Revenue Code Section 1031 Like-Kind Exchanges. ADISA’s CEO/Executive Director John Harrison has been actively advocating in regards to the importance of Section 1031 exchanges on behalf of members, and this week, took the campaign to Capitol Hill.
 
ADISA and members of the Real Estate Roundtable commissioned a study that focuses on the impact of Section 1031 exchanges and the harm limitations on them may have on the real estate sector. The report, The Economic Impact of Repealing or Limiting Section 1031 Like-Kind Exchanges in Real Estate, is authored by Professor David Ling, Ph.D., of the University of Florida, and Assistant Professor of Finance Milena Petrova, Ph.D., of Syracuse University.

Download the report here.
 
Earlier today (July 10), the coalition and authors of the study held a briefing with congressional staff at the Capitol Visitor Center in Washington, D.C. to present the results of the groundbreaking report. With statistics in hand, the coalition held the briefing to explain how real estate like-kind exchanges function, describe who uses them and why, and to demonstrate how prevalent these exchanges are throughout the country.
 
The report examined 1.6 million real estate transactions over an 18-year period. Following is an overview of the study results from today’s presentation:
 
Results of the study demonstrated that real estate like-kind exchanges are widespread. In fact, the study show that approximately 6 percent of all commercial real estate sales, based on dollar volume and number of transactions, are Section 1031 exchanges. The use of exchanges in high-tax states varies between 10 percent and 18 percent of all sales in their respective market. Authors of the study explained today that these percentages are likely understated.
 
Additionally, study results show that deferred gains from real estate exchanges are associated with a relatively small static loss in Treasury revenues. Authors estimate that in 2011, deferred gains from real estate exchanges were associated with a revenue loss, in present terms, of approximately $200 million to $3 billion. At the same time, the study reports that replacement exchanges in 2011 are associated with an increased investment value ranging from $517 million to $1.85 billion.
 
As reported by Ling and Petrova, eliminating real estate exchanges in markets where marginal investors expect to use an exchange, commercial real estate prices will decline between 8 percent and 17 percent in markets with moderate taxes, and between 22 percent and 27 percent in high tax states and markets. Rent increases are estimated at approximately 8 percent to 20 percent in moderately taxed markets, and between 28 percent and 38 percent in highly taxed markets.
 
Real estate exchanges were found to be associated with increased investment, reduced leverage and short holding periods. Today’s presentation established that:

  • Replacement like-kind exchanges are correlated with an investment that is approximately $305,000 greater, 33 percent of value, than acquisitions by the same investor following a sale of a property.
  • Capital expenditures, specifically building improvements, in replacement exchange properties tend to be higher by about $0.27 per square foot to $0.40 per square foot.
  • Investors in like-kind exchanges use 6 percent less leverage when compared to ordinary acquisitions.
  • Holding periods for properties acquired through 1031 exchanges are, on average, six months shorter.
 Finally, the study found that most exchange replacement properties are subsequently sold in fully taxable sales. The authors stated that “in 88 percent of our sample, investors disposed of properties acquired in a 1031 exchange through a fully taxable sale. The estimated taxes paid in an exchange followed by a taxable sale versus an ordinary sale are on average 19 percent higher.”
 
ADISA believes that Section 1031 exchanges are a vital investment tool and will continue to help protect them on behalf of our members and the country. Visit www.adisa.org/legislative/1031 to learn more about this important issue and how you can help protect 1031 exchanges.