Biden Proposes Taxes on Real Estate Investments and 1031 Like-Kind Exchanges to Pay for Caregiving Plan

Presumptive Democratic nominee Joe Biden on July 21 released a policy proposal to fund universal childcare and in-home elder care by taxing real estate investors and targeting the taxation of like-kind exchanges.  (The Real Deal July 21)

  • The proposal states that $775 billion would be raised over 10 years to pay for the plan “… by rolling back unproductive and unequal tax breaks for real estate investors with incomes over $400,000 and taking steps to increase tax compliance for high-income earners.” 
  •  A senior Biden campaign official added the plan would prevent investors from using real estate losses to lower their income tax bills and would take aim at the taxation of like-kind exchanges, according to a Bloomberg report
  • Real Estate Roundtable President and CEO Jeffrey DeBoer responded by noting the many ways in which like-kind exchanges contribute to economic growth and create greater opportunity for entrepreneurs from under-represented demographic groups.
  • “The long-standing like-kind exchange tax law has encouraged investment in affordable housing and other properties, generated state and local tax revenue, and spurred new jobs through labor-intensive property improvement.  Exchanges reduce the need for outside financing, leading to less leverage and debt on U.S. real estate. As a result, exchanges allow cash-strapped minority, women, and veteran-owned businesses to grow their business by temporarily deferring tax on the reinvested proceeds,” DeBoer said.
  • He added, “Like-kind exchanges are particularly important during economic downturns when access to capital is less certain. In short, like-kind exchanges create a more dynamic real estate marketplace, ensuring properties do not languish, permanently underutilized and under-invested. Congressional review of like-kind exchanges is reasonable and appropriate, and we will support sensible reforms, as The Roundtable has in the past, that preserve and maintain the provision’s broad-based economic benefits.”  (National Real Estate Investor, July 21)
  • The Biden Plan for Mobilizing American Talent and Heart to Create a 21st Century Caregiving and Education Workforce” does not contain details on the specific changes to like-kind exchange (LKE) taxation.  (CNBC, July 21)

A 2015 economic study commissioned by The Real Estate Roundtable and other national real estate organizations on the US commercial real estate market highlights the critical role that 1031 exchanges play in stabilizing rents, safeguarding  property values and strengthening the economy.   (“The Economic Impact of Repealing or Limiting Section 1031 Like-Kind Exchanges in Real Estate” by Professors David C. Ling and Milena Petrova)  

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Roundtable Welcomes New Study Quantifying Vast Economic Benefits of “Like-Kind” Property Exchanges

(WASHINGTON) The Real Estate Roundtable welcomes today’s release of an economic study that quantifies the vast economic benefits of “like-kind” property exchanges (authorized under Section 1031 of the U.S. tax code), while illustrating the unintended negative economic impacts of proposals to scale back or repeal this nearly 100-year-old tax provision.

Drs. David Ling (University of Florida) and Milena Petrova (Syracuse University), who co-authored the study —“The Economic Impact of Repealing or Limiting Section 1031 Like-Kind Exchanges in Real Estate” — based their findings on more than 1.6 million real estate transactions spanning 18 years (1997-2014) and totaling $4.8 trillion (unadjusted for inflation).

“The new Ling-Petrova study demonstrates how critical like-kind exchanges are to the health and vibrancy of real estate activity in the United States,” said Roundtable President and CEO Jeffrey DeBoer. As he explained, “Acquiring and improving commercial real estate requires large amounts of capital, and section 1031 helps real estate businesses grow and expand organically — with less debt. In short, like-kind exchanges allow property owners to put more of their earnings back into the private sector — hiring workers, upgrading and improving properties, and generating much-needed economic activity.”

Like-kind exchange rules allow taxpayers to defer tax when they exchange one property held for investment or business use for other property of a “like kind.” They also contribute to a more dynamic real estate sector by eliminating potential “lock-in” effects (particularly in the case of less-productive assets).

Such exchanges, thus, foster increased investment and reinvestment activity; allow real estate owners to better allocate resources; and decrease debt levels in commercial and multifamily real estate transactions. Additionally, “1031 exchanges” help to safeguard property values — which underlie local government budgets across the country — and help to protect tenants by stabilizing rents.

In a letter to congressional tax-writers in March, The Roundtable and coalition partners asserted, “There is strong economic rationale for the like-kind exchange provision’s nearly 100-year existence in the Code. Limitation or repeal of section 1031 would deter and, in many cases, prohibit continued and new real estate and capital investment.”

As the coalition explained, like-kind exchanges:
  • are integral to the efficient operation and ongoing vitality of thousands of American businesses, which in turn strengthen the U.S. economy and create jobs.
  • facilitate taxpayers’ ability to exchange a property for more-productive property; to diversify or consolidate holdings; and to transition to meet changing business needs.
  • are used by companies large and small in a wide range of industries, using different kinds of business structures.

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