No matter where you stand politically, there are certain things we can all agree upon, including the benefits of Section 1031 of the tax code. Section 1031 like-kind exchanges (LKEs) have been around since 1921, and, at their core, encourage continuity of investment - allowing asset owners to defer taxable gains into replacement assets rather than cashing out. From a planning and growth perspective, that’s particularly powerful as Section 1031 allows investors to follow opportunity - by moving their investments anywhere across the United States – without income tax penalty.
Who benefits from Section 1031?
Yes, ”The Donald” does benefit from 1031s, but so do ordinary American taxpayers, including rental property owners, farmers, collectors, rental car companies, construction contractors, and leasing companies. LKEs can be utilized by any taxpayer in any tax bracket and can significantly increase their cash flow. This increased cash is an effective economic stimulant, allowing asset owners to keep their money working in their businesses.
We need more jobs.
Both sides of the political spectrum say we need to create more jobs. Taken as a whole, the 1031 exchange process is job creation on steroids. Below is an example of Donald Trump saying “You’re hired” not “You’re fired” to an army of professionals.
Let’s say Trump receives an offer to buy one of his commercial real estate properties. Upon accepting the offer, a waterfall of events will take place:
- CPAs and attorneys will review the purchase and sale contract.
- Inspectors will arrive to verify the property’s condition.
- Settlement agents and attorneys will be engaged.
- Improvements to the property will likely be made requiring contractors and materials.
- Financing might be sought, requiring lenders and appraisers to be brought in.
In this case, Trump’s interested in a like-kind exchange and will need to hire a qualified intermediary. The qualified intermediary will invest the funds at a bank and Mr. Trump will hire another broker to assist him in finding one or more replacement properties, triggering another team of professionals to facilitate the purchase. Finally, a team of accountants will be hired to file the final tax returns showing the positive impact of the LKE.
Why would the government want to take away 1031?
Some politicians believe that by taking away this section of the tax code, more tax dollars will be captured without impacting the investment/job creation process described above. Frankly, they are wrong and taking away this powerful tax deferment tool will discourage investment in American assets and in American workers. Why would Congress endanger the American economic environment during this fragile period?
What can I do to save 1031?
Please visit www.1031taxreform.com for more facts and learn why this section of the tax code needs to be kept in place. Review the testimonials from average Americans who have benefited from this section of the code and please contact Congress to let them know you oppose the proposal to eliminate like-kind exchanges.
Photo: Gage Skidmore