By the Numbers: What Repeal of Section 1031 Would Mean

Although not much seems to be getting done in Washington at the moment, tax reform is still on the short list of goals for the current administration. And although section #1031 isn’t directly mentioned anywhere in the “Blueprint for Tax Reform” that began circulating in 2016, there are certain things that are mentioned that indirectly implicate this favorite tax-deferral strategy.

But what would the impact of repeal actually be? Would it only impact investors, keen on deferring capital gains taxes? According to several recent studies, no. According to a 2015 macroeconomic study by Ernst & Young, “the repeal or limitation of §1031 would not only have an adverse impact on the real estate industry, but it would also significantly affect the economy as a whole and result in the following:

• GDP estimated to fall by $8.1 billion each year
• Investments to fall by $7.0 billion
• Labor income to fall by $1.4 billion
• Economic activity of the combined residential & non-residential real estate industries will contract by $9.3 billion in annual output
• Economic activity supported by the specialty construction trade to contract by $7.7 billion in annual output
• Annual decline in federal revenue of approximately $1.6 billion

A second study supports these contentions. Analyzing over 1.6 million real estate transactions over a period of 27 years, Dr. David Ling, University of Florida, and Dr. Milena Petrova, Syracuse University, summarized that a repeal of §1031 would result in a decline of property values, decrease in construction activity and increase in rents for commercial tenants.

It is clear to anyone involved with 1031 exchanges that repeal will have significant and long-reaching affects. We will have to keep an eye on the nation’s capitol to see what, if anything, will happen.

If you’re considering a 1031 exchange, please visit our website to learn more about the exchange process, our qualified intermediary services and how we can help you find and close on your next 1031 exchange property.