Guest post by Daniel Goodwin, The Inland Real Estate Group of Companies
With the Presidential election campaigning in full swing, politicians running for office will eventually be offering up their views on any number of pro-growth tax reforms. For the real estate industry, one of the most notable real estate provisions at risk—1031 like-kind exchanges—empowers both businesses and individual property owners to roll over their capital into new investments that spur economic activity across the country.
Put simply, a like-kind exchange enables a business or investor to defer the capital gains tax on a non-personal asset sale, provided that the capital is reinvested in a comparable asset within a prescribed time period. This practice of rolling over and reinvesting proceeds is actually a core catalyst of domestic real estate activity and helps fuel our entire economy.
When conceptualizing the value of like-kind exchanges, think about how the IRS’s home sale exemption permits homeowners to defer capital gains taxes generated by selling their house. This homeowner tax provision encourages individuals and growing families to apply the proceeds from their home sale to the purchase of a new house. The home sale tax deferral spurs real estate transactions, which, like 1031 commercial property exchanges, generate local transfer taxes and provides employment for the following small businesses: appraisers, accountants, contractors, mortgage bankers, real estate brokers as well as both law firms and title companies (just to name a few).
If a home seller had to write a check to pay state and federal capital gain taxes at the time of a sale instead of deferring the taxes, owners might choose not to sell, which would be devastating to the housing market with a consequential loss of employment opportunities for many small businesses.
Similarly, if commercial property owners were forced to pay capital gain taxes at the time of sale, many people would not sell, resulting in a loss of local transfer taxes and the loss of income for small businesses. Make no mistake about it; most tax free exchanges occur because commercial property owners want to move up to a larger property and reinvest their capital just like homeowners, not because they need to sell. People who elect tax free exchanges are voluntary sellers who, in many cases, will not sell if the 1031 program is eliminated, which makes any hope of generating tax revenue by eliminating the 1031 program unrealistic.
In attempting to advance reform that will simplify our federal tax code and help reduce the deficit, it is understandable that leaders in Washington will want to evaluate all existing tax policies. However, our leaders must remain deliberate and measured throughout this process to ensure we do not eliminate economic catalysts within our existing code.
Real estate like-kind exchanges contribute to the growth of our economy by stimulating transactional activity and promoting investments across the country. A U.S. manufacturer, for example, cannot obtain a 1031 deferral benefit by moving a plant overseas; it must reinvest domestically, promoting local business growth. This reinvestment also provides revenue for local governments in the form of transfer taxes, increased property taxes, new construction and improvements to existing structures—all of which build communities, job growth, and quality of life.
To be clear, I agree that our federal tax code is in need of an overhaul. There is tremendous opportunity in this election cycle to modernize and streamline an outdated system, but it should not come at the expense of eliminating tax provisions that fuel significant growth. As new legislation is proposed, lawmakers should draw on information shared by the Real Estate Roundtable, NAREIT, the Federation of Exchange Accommodators and National Association of REALTORS® to better understand how like-kind exchanges increase the size and number of real estate transactions, which stimulate the economy. And all realtors should engage themselves in the process and support candidates in favor of not only pro-growth policies and reform, but also pro-real estate and job creation policies as well.
Dan Goodwin is chairman and chief executive officer of The Inland Real Estate Group of Companies, Inc. Goodwin is a member of the National Association of REALTORS® President’s Circle, the Illinois Association of REALTORS® Hall of Fame, and The Chicago Association of REALTORS® Hall of Fame.