To build back better, Congress should encourage real estate investment, not restrict options
Tax season may still be months away, but for many Americans, a proposal to change a section of the tax code keeps them from sleeping at night. The Biden administration is proposing to drastically limit the same-kind exchanges in Section 1031, used by all types of homeowners – large and small – to improve properties and invest more in their communities. At a time when many companies are still recovering from the financial hardships felt during the pandemic, the proposed changes would significantly undermine the progress we have made in rebuilding our economy.
In April, the Biden administration unveiled the American Family Plan – a $ 1.8 trillion spending plan outlining the administration’s major initiatives and how it would fund them. Among the many potential funding methods, the administration has proposed to cap the annual deferral of capital gains tax offered by exchanges of the same nature under Section 1031.
Over the past 100 years, similar Section 1031 exchanges have allowed landowners to defer capital gains tax on the sale of one property when the proceeds of the transaction are used to finance another property. . The government still collects these taxes, but only after the sale of the new property.
In many cases, these exchanges offer a scale of economic opportunities. They encourage businesses to take the proceeds from one sale and reinvest it in another property, often by upgrading existing homes or investing in new commercial and multi-family projects that build and strengthen communities. If the American Families Plan was designed to create an “investment in our children, our families and our economic future,” why would it take away a tool that many Americans use to invest in their future?
About 40% of similar exchanges are for rental housing, providing an essential tool for the expansion of affordable and workforce housing. If the capital gains tax was no longer fully deferral, a study found that landlords would have no choice but to dramatically increase the rent.
At a time when so many cities are redesigning to adapt to the challenges of the past year and a half, we need Section 1031 to develop more affordable rental housing and reallocate and renovate offices, commercial spaces and hotels. Without these exchanges, many properties could languish, with few owners willing to transform the spaces to meet today’s needs.
These exchanges are also commonly used by individual landowners, small businesses, farmers, and even conservation groups seeking to protect wildlife and natural resources. Land conservation agreements can swap environmentally sensitive plots for less sensitive areas or offer conservation easements. A landowner who chooses to sell a permanent conservation easement can use a similar exchange of 1031 to acquire replacement properties.
According to a recent study by Ernst and Young, similar exchanges in Section 1031 will support 568,000 jobs in 2021. From title agents to construction workers, from plumbers to employees of small businesses, similar Section 1031 exchanges are a major tool for job creation, adding $ 55.3 billion in product value. American gross domestic.
Similar exchanges are also profitable – and more. The same Ernst and Young study found that similar exchanges under Section 1031 will generate about $ 7.8 billion in federal, state and local taxes this year.
The ball is now in Congress’ court – and we urge Congress to preserve the current tax treatment of capital gains from Section 1031 exchanges. More than just a tax provision, similar Section 1031 exchanges are often the first step to financial stability for homeowners and small businesses. Any change in that trade, especially as our economy begins to rebound, would have major consequences for our economic prospects, middle-class Americans, and future generations.
Diane Tomb is the CEO of the American Land Title Association. Bob Broeksmit, CMB is the President and CEO of the Mortgage Bankers Association.