For the first time in more than three decades, Washington is set to tackle a comprehensive overhaul of the U.S. tax code. If accomplished, American companies will have a competitive advantage with lower corporate tax rates, in addition to providing tax relief to middle-class American families.
While comprehensive tax reform is crucial to growing the economy, it should not jeopardize the contribution of capital from the nation’s individual investors or the job creation benefits of commercial real estate. To ensure that the real estate sector can continue to serve as an engine of economic growth, the Investment Program Association urges that individuals continue to have access to Section 1031 like-kind exchanges and that other key provisions of the Internal Revenue Code not be eliminated.
Section 1031 like-kind exchanges encourage investment and reinvestment in communities across the country by making it easier for taxpayers to relocate or upgrade into other real estate assets that better meet their business and personal needs, creating a more dynamic real estate market that generates thousands of jobs in construction, skilled trades and other real estate-related industries. Section 1031 like-kind Exchanges also help ensure that real estate owners can efficiently assign properties to their best use while helping underpin a property market that significantly benefits start-ups and small businesses.
A great example comes from IPA member Mark Kosanke, a CPA and registered principal with Concorde Financial Group in Troy, Mich. Kosanke’s client had owned and managed an apartment complex in Northfield, Mich., for 30 years. As retirement finally became reality, the client needed to unlock the value of the apartment building and reinvest that capital into an investment that didn’t require ongoing real estate management responsibilities. By reinvesting the sale proceeds from the apartment building through a 1031 like-kind exchange, Kosanke was able to diversify his client’s investment into four smaller real estate funds that more than doubled his monthly retirement income. Meanwhile, the apartment building’s new owner is busy upgrading the apartment complex, creating construction jobs, generating transfer and retail tax revenues and improving the housing stock within the community. Quite simply, 1031 like-kind exchanges grow the economy and build communities.
Two widely reported studies have concluded that repealing the 1031 like-kind exchange would cause a decrease in real estate investments and an increase in holding periods for real estate assets, which in turn will lead to decreased construction and investment activity. These decreased activities also have a direct negative impact on state, local and county tax revenues that are derived from property taxes and various transfer taxes and retail sales taxes on building materials. This would subsequently depress the market and employment levels, which could have detrimental long-term effects to the economy, including a decrease in gross domestic product by as much as $18 billion annually.
The IPA strongly advocates that Section 1031 like-kind exchanges be preserved. It is unfair for a taxpayer to recognize a gain when, in reality, he or she has maintained a continuity of investment in exchanged property.
The IPA supports comprehensive tax reforms that will grow our economy and American jobs. Similarly, the IPA strongly supports leveling the playing field for small businesses and entrepreneurs, rewarding businesses that invest in jobs in the United States. As such, Congress must preserve the Section 1031 like-kind exchange to allow deferral of capital gains on real estate investments.
Anthony Chereso is president and chief executive officer of the Investment Program Association, an organization that supports individual investor access to portfolio diversifying investment products.
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