Like-Kind Exchanges (LKEs)

Summary

Currently, the tax code allows taxpayers to defer capital gain when exchanging real property used in a trade or business for a property of a like-kind. The prior Biden administration proposed restrictions on gains deferred through like-kind exchanges. RER advocates for preserving the current tax treatment of like-kind exchanges.

Key Takeaways

Land conservation organizations rely on exchanges to preserve open spaces for public use or environmental protection.

15-20 percent of commercial transactions involve a like-kind exchange. Exchanges get languishing properties into the hands of new owners who improve them and put them to their best use.  

Academic and outside research has found that exchanges spur capital expenditures, increase investment, create jobs for skilled tradesmen and others, reduce unnecessary economic risk, lower rents, and support property values.

Like-kind exchanges allow businesses to grow organically with less unsustainable debt, creating a ladder of economic opportunity for minority-, veteran- and women-owned businesses and cash-poor entrepreneurs that lack access to traditional financing. 

See the full fact sheet.

Position

Preserve Current Policy on Like-Kind Exchanges: The existing tax treatment of like-kind exchanges under Section 1031 supports healthy real estate markets and property values.

  • Like-kind exchanges helped stabilize property markets at the height of the COVID-19 lockdown. Exchanges are even more important during periods of market stress when external financing is harder to obtain.
  • Section 1031 is facilitating a smoother transition as real estate assets are re-purposed in the post-COVID economy.
  • Roughly 40 percent of like-kind exchanges involve rental housing. Section 1031 helps fill gaps in the financing of affordable housing. Unlike the low-income housing tax credit, developers can use Section 1031 to finance land acquisition costs for new affordable housing projects.
  • Exchanges help low-income, hard-hit and distressed communities where outside sources of capital are less available. Section 1031 also supports public services (police, education) by boosting transfer/recording/property taxes (nearly 3/4 of all local tax revenue).
  • Section 1031 is consistent with corporate and partnership tax rules that defer gains when the proceeds are retained and reinvested in businesses (sections 721, 731, 351, and 368).
Background

Like-Kind Exchanges

  • Since 1921, the tax code has allowed taxpayers to defer capital gain when exchanging real property used in a trade or business for a property of a like-kind, which today is covered in Section 1031.
  • In 2017, Congress narrowed Section 1031 by disallowing its use for personal property (art, collectibles, etc.).
  • The previous Biden administration would have restricted gains deferred through like-kind exchanges to no more than $500K per year ($1M/couple). A similar proposal has appeared in the last six budgets submitted by Democratic administrations.
Resources
MORE ISSUES
MORE ISSUES
Business-Related Property Taxes
Partnerships & Pass-Through Taxation
Carried Interest
Opportunity Zones (OZs)
Capital Gains
Like-Kind Exchanges (LKEs)
Business Interest Deductibility
Foreign Investment in U.S. Real Estate