Based on the latest data from the Bureau of Economic Analysis[1], the real estate industry accounted for $41.3 billion in Colorado. This comprised 13.5 percent of Colorado’s Gross State Product. The figure includes real estate transactions—sales, leasing, property management, etc.

For a significant proportion of real estate market participants in Colorado, like-kind exchanges (LKE) provide an important vehicle to sell and acquire property. The Internal Revenue Code (IRC) Section 1031 codifies that the tax owed on any gain after a sale may be deferred as long as the proceeds are reinvested in a similar property through a like-kind exchange. The Internal Revenue Service (IRS) makes note of the fact that while the gain “is tax-deferred […] it is not tax-free.”[2]

Like-kind exchanges can be utilized by individuals, partnerships, corporations, limited liability companies, and trusts. IRC Section 1031 allows investors to defer taxes when disposing of property, as long as the proceeds are reinvested in another property of like kind within 180 days. This tax deferral feature allows increased investment in properties and encourages a more active real estate market.

The Like-Kind Exchanges: Real Estate Market Perspectives 2015 report provides information about LKEs and their impact on real estate markets. The report is based on a national survey of REALTORS. In Colorado, 81 percent of respondents indicated that they engaged in 1 – 6 LKE transactions during 2011-14. An additional 13 percent indicated that they closed more than 12 transactions during the same time frame.

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Like-kind transactions were especially important to small businesses and investors in Colorado. Individuals or sole proprietorships comprised 40 percent of all LKE transactions. S-corporations made up 36 percent of exchanges, with C-corporations and REITs accounting for 19 percent of all transactions.Just as importantly, LKE transactions in Colorado involved properties held for a longer duration. Sixty-five percent of LKEs featured properties held for 5 – 14 years. An additional 26 percent comprised properties held for 15 – 29 years.

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Like-kind exchange transactions lead to additional investment in real estate properties, as 83 percent of respondents from Colorado indicated. The majority—67 percent—indicated that the average capital investment in property improvements was between 10% - 49% of the property’s fair market value. The additional capital investment translated into additional jobs, leading to increases in Colorado’s Gross State Product.

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Respondents to the survey were asked how the repeal of IRC Section 1031 would change the real estate market. Highlighting the importance of LKE transactions for Colorado, 33 percent of respondents indicated that, without the tax deferral provision, their LKE transactions would not have occurred. In addition, 46 percent of the state’s respondents also pointed out that without IRC Section 1031 the holding period would increase by “Greater than 50% of [a property’s] useful life.”

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To access the Like-Kind Exchanges: Real Estate Market Perspectives 2015 report, visit http://www.realtor.org/reports/like-kind-exchange-survey.

[1] Bureau of Economic Analysis, Regional Data: GDP & Personal Income. http://www.bea.gov/iTable/index_regional.cfm.

[2] Internal Revenue Service, Like-Kind Exchanges Under IRC Code Section 1031, FS-2008-18, February 2008.