1031 Tax Reform Issues
IF Tax Reform Repeals 1031
Will a repeal of section 1031 accomplish the goals of tax reform set by Congress? NO!
- Repeal of §1031 will not accomplish the goals of tax reform
- Repeal of section 1031 will not increase fairness
- Repeal of section 1031 will tax cash flow, not wealth
- Repeal of section 1031 will not raise significant revenue
- Repeal of section 1031 will cause a decline in real estate values, a drop in manufacturing, and economic stagnation
- Section 1031 encourages reinvestment over profit taking, and it provides a strong incentive to keep that investment at home, in the United States.
Can retention of section 1031 laws help achieve goals set by Congress? YES!
The tax deferral benefit provided by section 1031 is a valuable tool for meeting all of these goals. It provides a powerful engine to the US economy. Like-kind exchanges promote transactional activity that results in jobs and taxable income that, in turn, fuels other businesses, including small and mid-sized businesses. And since foreign real estate and assets used predominantly outside of the United States cannot be exchanged for domestic real estate and assets such as machinery and equipment, the section 1031 deferral benefit directly stimulates reinvestment in US communities and businesses, promoting job growth within our own borders.
1 “The Tax Reform Act of 2014, Fixing Our Broken Tax Code So That It Works For American Families and Job Creators,” House Ways and Means Committee, p.11.
1 Ibid., p.9
1 Ibid., p.10
Is section 1031 a tax loophole? NO!
Is section 1031 an “abusive tax avoidance scheme?” NO!
What are the risks of repealing section 1031?
- Repeal of section 1031 will cause a decline in real estate values
- Elimination of section 1031 would result in a substantial increase in depreciation deductions and reduced income tax revenue.
- Elimination of section 1031 would have a chilling effect on real estate, manufacturing and other business transactions.
- Fewer transactions also translate into fewer jobs not only in the 1031 Exchange industry, but also in the real estate, construction, title insurance, mortgage and other related industries, equipment lease financing, vehicle and heavy equipment rental and manufacturing, after-market alteration, customization and installation industries.
How would repeal of 1031 affect the cash flow of a business?
Without the current treatment under section 1031, cash-strapped owners of business-use and investment assets could be forced to downsize their businesses, farms, ranches, real estate holdings, etc. if they don’t have sufficient additional cash flow to acquire replacement assets and pay tax on the gain or depreciation recapture of the old asset.