Eight Ways 1031 Exchange Changes Could Make Economic Waves
This policy needs to be evaluated from multiple facets, instead of treating it like a simple line-item budgetary issue.
July 19, 2021 | Mark Hamilton | WealthManagement.com
In recent months, the political spotlight has once again turned to a 100-year-old tax policy: the 1031 exchange. Often referred to as a “loophole” by detractors, a 1031 exchange, in simplest terms, allows for the exchange of one investment property for another and the deferral of capital gains taxes on the transaction. It’s one of many policies on the docket for potential change under the new administration.
It’s important to stress upfront that this policy creates a tax deferral, not a loophole, and has massive impacts on the economic activity of a wide range of people around the country. I believe any changes to the efficacy of this technique could have wider-ranging consequences than intended.
Here are eight ways the 1031 exchange tax policy benefits the economy, local communities and the U.S. Treasury, as well as some potential implications that significant changes to the policy could have across the country.
1. Mom-and-pop investors are the biggest beneficiaries of the 1031 exchange.
While it’s easy to picture skyline-defining skyscrapers when thinking about real estate, such properties are vastly outnumbered by duplexes, dentist offices and dry cleaners in the United States. The typical property is much more modest than a high-rise, locally owned and valued between $250,000 and $5 million.
Nearly 90% of all properties sold in 2019 transacted in this range, their total value reaching more than $150 billion. So, smaller investors–not corporations–are the prime beneficiaries of 1031 exchanges.
2. Millions of apartment renters benefit from this policy directly.
Apartment transactions accounted for nearly one-third of all 1031 exchange activity in the past decade, roughly twice the share of any other property type. And the average apartment 1031 transaction was 20% smaller than the average for all apartment transactions.
