Section 1031 of the Internal Revenue Code allows a real estate property used for business or held as an investment to be exchanged for another property that is of ”like kind.” IRS notes that “properties are of like-kind if they’re of the same nature or character, even if they differ in grade or quality. Real properties generally are of like-kind, regardless of whether they’re improved or unimproved. For example, an apartment building would generally be like-kind to another apartment building. However, real property in the United States is not like-kind to real property outside the United States.” The Tax Cuts and Jobs Act of 2017 limited Section 1031 only to exchanges of real property and not to exchanges of personal or intangible property. An exchange of real property held primarily for sale does not qualify as a like-kind exchange. In a deferred exchange — an exchange that occurs when the property received in the exchange is received after the transfer of the property given up — the seller of the property that is being exchanged for a like-kind property must identify the replacement property within 45 days after the relinquished property is transferred. The replacement property must be received within 180 days.
This is a report on a survey conducted among NAR members about their transactions during 2016 through 2019 to gather information on the use of Section 1031 like-kind exchanges involving NAR members and to assess their views on the economic impacts of repealing Section 1031 as is being proposed by some current tax proposals. In 2015, NAR conducted a survey on the like- kind exchanges in which NAR members participated during the period 2011 through 2015, so this study updates that report. In 2015, slightly over 60% of NAR members reported being involved in at least one like-kind transaction, which is about the same as the current report’s figure of 61%. The results show that majority of properties that were sold in a like-kind exchange were held by small investors and that additional capital was invested in the property acquired nine times out of ten. REALTORS® expect a decrease in property values and an increase in the holding period if Section 1031 were repealed. The deployment of capital to its best use, especially at this time when market opportunities are changing, is an important economic benefit of like-kind exchange transactions.
Summary of Survey Results
- On average, 12% of sales transactions of REALTORS® were part of a like-kind exchange during 2016-2019, with half of members reporting 5% or less of sales transactions were part of a like-kind exchange
- 61% of REALTORS® had at least one like-kind exchange transaction during 2016-2019
- 84% of the properties that were exchanged for like-kind properties were held by small investors in sole proprietorships (47%) or in S-corporations (37%)
- 52% of properties sold in a like-kind exchange were residential properties: (27% single-family homes for rent, 15% apartment buildings, and 10% condominium units)
- 8.5 years was the median holding period before properties were sold in a like-kind exchange transaction
- 37% was the mean deferred gain as a fraction of the value of the real estate sold in a like-kind exchange transaction
- 89% of REALTORS® reported their clients invested additional capital in the replacement property
- 75% of REALTORS® reported that the additional investment was at least 10% of the fair market value of the replacement property
- 94% of REALTORS® expect property values to decline if Section 1031 were repealed
- 87% of REALTORS® expect longer holding periods if Section 1031 were repealed
- 68% of REALTORS® expect higher rent in the acquired property (to be rented out) if Section 1031 were repealed
- 50% of REALTORS® expect an increase in debt financing if Section 1031 were repealed