NC REALTORS® traveled to Washington, D.C. to meet with North Carolina representatives and ask them to support Section 1031 protections.
In May of 2017, NC REALTORS® traveled to Washington, D.C. to meet with our North Carolina Representatives and Senators and give them the following message:
The North Carolina REALTORS® Commercial Alliance asks that you support the Section 1031 like-kind exchange protected in the federal tax code.
Like-kind exchanges under Section 1031 of the tax code are one of the few business-related tax incentives available to and used by taxpayers of all sizes, including individuals, partnerships, limited liability companies, and corporations. Like-kind exchanges are a powerful tool that accelerates domestic investment and broad-based job growth by leveling the playing field for small businesses and entrepreneurs and rewarding businesses that invest in jobs in the United States.
In the case of real estate, by deferring capital gain recognition, like-kind exchanges help get properties into the hands of new owners with the time, resources, and desire to restore and improve them. Without Section 1031, many of these properties would languish – underutilized and underinvested – because of the tax burden that would apply to an outright sale.
Like-kind exchanges are also a critical tool for small businesses to build equity, reducing the need for third-party financing. Small firms and entrepreneurs lack access to the capital markets used by large corporations and often struggle to obtain financing from banks and traditional lenders. Like-kind exchanges help small businesses grow organically without overreliance on debt and leverage. Owners are able to reinvest their equity without reduction for taxes, allowing them to put more equity into their transactions. Properties acquired in a like-kind exchange are subject to a much smaller overall debt burden – ten percent less than similar real estate acquired outside of a like-kind exchange.
By encouraging reinvestment and property improvements, like-kind exchanges create a more dynamic real estate market that generates thousands of jobs in construction, skilled trades, and other real-estate related industries.
Land Real Estate
For land real estate, like-kind exchanges encourage large landowners, such as farmers and ranchers, to combine acreage, acquire higher-grade land, or move into another property when they are ready to retire. Moreover, section 1031 very often is the key ingredient in agreements to set aside land for preserving open space, or for scenic or environmental conservation purposes.
Like-kind exchanges also facilitate the provision of affordable housing in communities across the country. Section 1031 can fill gaps not covered by other housing incentives, making the development of affordable housing economically viable. The low-income housing tax credit, for example, does not extend to land acquisition costs. New limits on like-kind exchanges would increase the cost of renting an apartment or other home. A study by the University of Florida and Syracuse University concluded that an owner would have to raise rents by nearly 12 percent to offset the tax consequences of repealing Section 1031.
Section 1031 does not eliminate or erase tax liability. In more than a third of exchanges, some tax is paid in the year of the exchange. At least 88 percent of replacement properties acquired in a like-kind exchange are ultimately disposed of through taxable sales (not subsequent like-kind exchanges), at which time the taxes are paid. In addition, depreciation deductions are immediate reduced going forward. Perhaps most importantly, like-kind exchanges help support the tax base at all levels of government. The provision positively affects state and local government budgets because frequent turnover of real estate generates recording fees, as well as property reassessments that increase the property tax base. Due to lower debt and greater capital investment rates, the taxes paid on sale of these properties are significantly greater than that of non-exchanged properties.
In short, like-kind exchange rules generate broad economic benefits by helping small businesses grow and expand, spurring investment and job growth, and providing a valuable incentive for land conservation. We urge you to include the preservation of like-kind exchanges without any limitation on gain deferral as an important component of your economic agenda.