Four years ago, as Congress began debating what was to become the Tax Cuts and Jobs Act of 2017, the commercial real estate industry came together as never before to defend Section 1031, the like-kind exchange provision of the federal tax code, from legislative oblivion.
Unlike the perennial listing of like-kind exchanges on the “unwarranted loopholes” list by certain extremist think tanks, the threat to Section 1031 posed by House Republicans in the last tax reform bill was a clear and present danger. This was because their plan included the concept of immediate expensing of real estate. Policymakers driving that particular tax reform train, known as the Blueprint, saw no need to retain a deferred tax exchange mechanism in a world where the cost of any kind of real property investment could simply be written off in the year of purchase.
Sensing the immediate threat to one of real estate’s growth engines, trade groups and alarmed commercial practitioners joined forces and formed coalitions in the common quest to educate members of Congress and their staff about the economic growth and job creation benefits of Section 1031.
Over a multi-month coordinated operation, a veritable brigade of determined coalition members met with a high percentage of members of Congress from both sides of the political aisle. Armed with studies, surveys, and statistics, the coalition aimed to convince policymakers that retaining Section 1031 for real estate was essential in a bill designed to create jobs and invest in communities. These efforts paid off and the repeal bullet was dodged for real property exchanges.
“Now is the worst time imaginable to further harm a commercial real estate sector that is being horrifically damaged by the pandemic.”
Fast forward to September 2020, and a new and perhaps even greater threat has emerged. This time, the Democratic Party, looking to offset the cost of various spending programs, has targeted 1031s and other so-called “unproductive and unequal tax breaks for real estate investors” for extinction, at least in certain cases.
Too many policymakers do not understand the strong boost that real property exchanges can provide to efforts to reclaim our economy from its doldrums. It’s quicker and easier to simply believe a tagline about unscrupulous investors ravaging society through the tax code.
To meet this new threat, those who understand the growth benefits of the like-kind exchange must again answer the call to action, organize, and prepare to educate their members of Congress and those running for those offices. This process has already begun. A monumental study of the impact of real property exchanges on the economy has been updated to capture the latest data and trends. This paper, written by two outstanding university professors, was instrumental last time in convincing skeptics and friends alike of the need to retain 1031. The new research found that like-kind exchanges have increased significantly from 2016 to 2020 and that they are still used mostly by small investors and business owners. Armed with the updated data, commercial professionals can hopefully persuade fair-minded policymakers that now is the worst time imaginable to further harm a commercial real estate sector that is being horrifically damaged by the pandemic and to take away a critical tool for rebuilding our economy.
Commercial REALTORS® can play a key role in this education process. Who better knows the communities and economies of the states and districts of Senate and House members? Who can better pull together key commercial leaders to meet with policymakers and convince them that success in rebuilding and hiring has, and can again, come from carefully planned real estate development, based in many cases on the bedrock of the like-kind exchange? Please consider how you can aid in this vital effort.