Late last year, Congress took the first step toward passing comprehensive, pro-growth tax reform by making permanent a series of tax provisions that resulted in a more accurate budget baseline. When members of Congress begin outlining specific proposals within tax reform, they must not tax “like-kind exchanges.”
Like-kind exchanges are defined under section 1031 of the tax code as an exchange of properties and take the form of a simple simultaneous swap, or a more complex, mutually dependent “deferred” or “reverse” exchange. The tax code allows an individual to defer paying capital gains taxes on transactions that meet one of these definitions.
Not only do like-kind exchanges give investors important business flexibility and tax relief, these transactions also promote strong job creation and economic growth.
Conversely, ending this provision would have serious economic consequences.
Specifically, ending this tax relief would harm property value and hurt investors and small businesses as there would be less capital available for investment, fewer jobs and higher property prices.
According to a recent report by the National Association of Realtors, 40 percent of transactions that occur as like-kind exchanges would not occur at all if current rules were removed.
Another study, compiled by finance professors Dr. David Ling of the University of Florida’s Warrington College of Business and Dr. Milena Petrova of Syracuse University’s Whitman School of Management found that residential rental properties would have to charge 11.8 percent more to gain the same rate of return, or the price of acquiring property would have to fall 10.6 percent.
Regrettably, proposals to curtail this important provision have already been brought up in recent years. President Obama has called for limiting the use of like-kind exchanges in past budget proposals. Just last year, he called for removing art and collectibles from section 1031 eligibility and the year before, Obama’s budget proposed limiting capital gain deferment to property valued at $1 million per taxpayer per year.
Obama’s proposal to limit like-kind exchanges would wreck havoc on investment and job creation and Congress should have no part in destroying this important pro-growth provision when it again considers tax reform in the coming months and years.