New Study Identifies the Economic Benefits of 1031 Exchanges
A new research study conducted this summer shows what many real estate investors already suspected: that 1031 exchanges are beneficial for the economy. Repealing 1031 benefits is something that legislators are toying with as a way to use the capital gains received from these sales to support overall revenue for the country. Many industry experts have argued this for years, especially as Congress has argued that 1031 exchanges are not that beneficial. The results of this research and others indicates that there are many benefits associated with 1031 exchanges and that the potential impact of repealing them could be very negative for the entire economy.
A repeal of 1031 exchanges, however, could have been very detrimental to numerous stakeholders. Real estate owners and tenants are just two of the groups who would be negatively affected by a repeal of Section 1031, but it could also harm the US economy in general. Authors of the study, known as "The Economic Impact of Repealing or Limiting Section 1031 Like-Kind Exchanges in Real Estate" found that these changes are popular across the country as a way or conducting real estate transactions with tax benefits. In fact, the study's authors found that 1031 exchanges are widespread in use across the country, providing liquidity and more investments in the real estate market in general while also providing revenue for the Treasury and providing jobs to many people.
Misperceptions about limited benefits from 1031 exchanges is what has this on the chopping block to begin with, but this new study shows the truth behind the concerns. It turns out that government cost estimates may be overstated while the benefits of 1031 exchanges are being minimized or overlooked indefinitely. Many investors find it appealing to use the 1031 exchange over and over again with the same qualified intermediary. The qualified intermediate plays an important role in this process by facilitating the transaction for you. The qualified intermediary working with you accepts the funds on your behalf and then applies them to the second transaction.
To conduct the study, two professors looked at more than 1.6 million real estate changes between 1997 and 2010 to explore how like-kind exports have played into the bigger picture. This is the second study of this kind, with the first being the 2015 report from Ernst and Young called "The Economic Impact of Repealing Like-Kind Exchange Rules". According to that earlier earlier, repealing Section 1031 would harm the real estate market and go against the overall goals of tax reform.
