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Study Finds Repealing Like-Kind 1031 Exchange Rules Would Shrink GDP by $8B to $13B a Year and Hurt US Small Businesses

1031 Tax Reform Update – March 2015

March 18, 2015

IPX1031® announced that The Section 1031 Like-Kind Exchange Coalition released an economic impact study yesterday which concludes that repealing the like-kind exchange rules would slow economic growth, reduce GDP and hurt many US small businesses.

The Ernst & Young study was commissioned in response to legislative proposals to repeal Section 1031. Some recent tax reform plans, like former Rep. Dave Camp’s (R-Mich.) Tax Reform Act of 2014 have proposed eliminating or greatly reducing the benefits of Section 1031 like-kind exchanges, among other Code sections, to finance a lower corporate tax rate. However, the E&Y study concludes that eliminating Section 1031 would have a negative impact that would ripple through many segments of the economy. The study finds that GDP reduction would be driven primarily by decreased business investment due to increased cost of capital. The industries most impacted by a repeal of Section 1031 include real estate, specialty construction, truck transportation, and heavy construction.

The findings of the Ernst & Young study quantify that a repeal of the like-kind exchange provisions for the intended purposes of paying for a corporate rate cut, corporate tax reductions, or to fund increased spending, would unequivocally result in lower economic growth in the US economy.

These findings demonstrate that repeal of Section 1031 would be contrary to the stated goals of tax reform, namely: economic growth, revenue neutrality and fairness. It would further cause contraction in economic growth in the US, imposition of an unfair tax burden on certain economic sectors and would not be revenue neutral.

“Ten industries get hurt disproportionately. Real estate and specialty construction each get hit $8 billion per year, heavy and civil engineering construction $3.3 billion per year, and truck transportation $4.3 per year,” commented John Wunderlich, IPX1031® President. “Air transportation, industrial equipment, leasing, auto, oil and gas, and pipelines get hit $5 billion per year. This is a total loss of $26 billion per year or $260 billion over ten years.”

Like-kind exchange rules allow for businesses to sell and replace an asset without generating current tax liability from the sale under tax code Section 1031.

Read More

• The full EY Study can be found here
• 1031 Coalition press release can be found here
• FEA Ernst & Young press release can be found here
• Ernst & Young Study Synopsis can be found here

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