Last week, I attended the Federation of Exchange Same as intermediary, facilitator, or Qualified Intermediary. The party who facilitates a tax-deferred exchange by acquiring and selling property in an exchange to aid the taxpayer in complying with Section 1031 and all applicable rules. Accommodator s’ (FEA) annual conference, where it really struck home how impactful tax policy is for America.
The FEA is our nation’s only recognized association dedicated to education, proper conduct, and legislative representation for qualified intermediaries servicing IRC Section 1031 of the tax code, and as a sitting board member for over seven years, I am acutely aware of our membership’s activity levels. Activity levels that, in many ways, mirror our broader economy.
From 2009-2013, attendance was at an all-time low. Colleagues whose businesses prospered years earlier were experiencing a dramatic slowing in the number of 1031 transactions they facilitated. (“Exchangor" or "Exchanger") Individual or entity desiring an exchange. Taxpayer s’ wealth in America was being depleted; asset values dropped to a fraction of past highs; and the need for deferring tax gains seemed less probable than a good, long rain in California.
Fast Forward to 2015
FEA attendance is not a leading economic indicator, but it very well could be. Attendance by qualified intermediaries in the last two years is up 20% year over year. Hotel blocks are being sold out, and qualified intermediary companies are growing. Why? Because since 1921 our country has provided a powerful tax strategy to encourage capital growth, expansion, and reinvestment back into the economy. This strategy – the use of 1031 like-kind exchanges - allows American businesses to rebuild what was ignored during the recession. With Section 1031’s wide economic impact, why Congress would even consider repealing such a stimulus baffles me.
The construction industries for homes, roads, buildings, and apartments are struggling to keep up with demand. New trucks, cars, planes, tractors, and cranes are all necessary to meet these demands, but the acquisition of these assets come with a significant cost. Companies are once again growing, reinvesting, and expanding, and 1031 like-kind exchanges provide an affordable pathway for the acquisition of these assets. 1031s literally help build America.
This is exciting and incredibly rewarding. Qualified intermediaries around the country serve the vital role of ensuring accuracy in fulfilling the 1031 requirements. Our customers rely on our knowledge to guide them as they make strategic decisions to grow their business, add employees, and redeploy their earned capital in the most effective manner. Having the immediate access to ALL of their earned capital after a divestment stimulates so many sectors of our economy. Section 1031 is the oil in our economic engine.
Wide-Ranging Impact of 1031 Like-Kind Exchanges
One of our clients recently sold an income-producing piece of real estate and has dreams of building a bigger facility. Using a 1031 exchange, they’ve decide to reinvest into a vacant piece of land. In the months after closing on the new land, architects were hired, roads were graded, permits were submitted, and surveying was completed. Extra capital was sought out while dozers prepared the land. Engineers are now engaged, and construction has started - bricks being laid, plumbing being routed, carpet being installed and paint being applied. Movers will soon deliver new equipment, desks, and supplies. Employees will be hired and, with the help of Section 1031, our client is realizing their vision.
Nobody should sit on the sidelines and allow 1031s be repealed. Recent economic studies by both Ernst & Young and Ling & Petrova underscore the dramatic impacts to our economy should 1031s no longer be an option to businesses. As the next 15 months unfold, and we elect a new president and see changes in the Senate and the House, remember what drives our economy and your business. Tax policy that we can rely on, plan for, and grow in is what our economy needs to stay strong.