Nevada has some of the wealthiest real estate markets in the United States, and the Las Vegas Strip is home to many exclusive and highly coveted properties. Because of that, our state’s real estate provides the economy a significant tax boost and elevated property values, among other benefits. Section 1031 of the Internal Revenue Code allows these dollars to grow efficiently and encourages further commerce in real estate. As Congress moves forward in the coming months with tax reform, it is critical to preserve Section 1031. I urge Sen. Dean Heller to retain Section 1031 in the Internal Revenue Code unchanged.
Since 1921, Section 1031, or “like-kind” exchanges, has helped the economy grow and dollars to move efficiently through our economy. For example: If a real estate company sells its property for a profit, they can delay paying taxes on that profit if they put the money toward another property of a “like-kind.” This “exchange” of properties allows these companies to invest further dollars into their business without taking a hit from taxes until they sell the new property, in which they can again use Section 1031.
I have worked in real estate for many years, and can tell you first-hand that the real estate industry relies heavily on Section 1031. Like-kind exchanges permit real estate companies’ capital to be freed, which in turn allows capital investment in more properties. These properties, in turn, are sold to private buyers. When the property is sold, Section 1031 also provides a decrease in the cost of the land or building to the customer, as gains made by the real estate company on the transaction are not taxed until after the transaction. The gains from the exchange are simply deferred until after the sale of the newly acquired property. Critics of Section 1031 often state, but it is a common misconception, that these taxes are forgiven or lost in Section 1031 when they are merely deferred to further allow the efficiency of dollars to flow.
In 2015, Ernst & Young LLP published a report titled, “Report on the Economic Impact of Repealing Like-Kind Exchange Rules.” The report found the repeal of Section 1031 would cause an overall drag on economic growth with “longer holding periods and less-productive deployment of capital in the economy,” and “long-term contraction in overall U.S. GDP of approximately $8.1 billion annually.”
The safeguarding of Section 1031 has significant benefit to the real estate industry. In a study titled, “The Economic Impact of Repealing or Limiting Section 1031 Like-Kind Exchanges in Real Estate,” by economists Dr. David Ling and Dr. Milena Petrova, they explain the critical role like-kind exchanges play in the U.S. economy. A key finding is that like-kind exchanges contribute significantly to federal tax revenue. In fact, Section 1031 provides a boost to the tax revenue “because of the higher tax liability that arises in the years following the initial exchange.” If Section 1031 is repealed, however, property values would drop and in turn decrease federal tax revenue. The repeal would increase “the effective tax rate on the taxpayer’s investment … from 23 percent to 30 percent”.
The real estate industry is greatly affected by Section 1031 and like-kind exchanges. The benefits it provides to the industry, consumers and economy cannot be lost. As tax code is discussed and reformed, Section 1031 must remain if sound tax policy is to be created, the economy is to continue growing, and federal tax revenue is to increase.
Murry Dalaimo is the president of the commercial division at Access Realty in Pahrump. He has been selling commercial properties for more than 20 years.