William Senné

The concept of “like-kind” exchanges has been around for a century. Since 1921, Congress has recognized that in some circumstances, the economic position of a taxpayer does not change if he or she exchanges business or investment property for that of a like-kind.  

Today, like-kind exchanges are a $10 billion-a-year national investment mechanism that creates jobs, raises wages and facilitates growth and development across a large spectrum of industries, ranging from medical to agriculture. Current law allows for any real property used for business or investment purposes to be exchanged for that of a like-kind without recognizing gains or losses.  

Unfortunately, there is a real fear that like-kind exchanges, or so-called “1031 exchanges,” will be diluted or outright eliminated in an effort to offset historic spending plans that are being circulated by Congress and the administration.  

Clark Fonda

$10B Threat to U.S. Economy 

Businesses and individuals across the country are in a pivotal period of rebuilding as we emerge from the pandemic. In many cases, a 1031 exchange is an important mechanism used by a business to increase office or property size, allowing entities to expand capabilities and hire more employees. This is especially important as our country continues to reopen. We must facilitate small business expansion and help the underemployed and unemployed get back to work.  

A 1031 exchange can also be used to help a business properly downsize and survive the negative impacts of a year-long pandemic, rather than simply close its doors and go out of business. Under these circumstances, the infusion of fresh capital into troubled properties helps improve neighborhoods and contributes to the growth of new and affordable housing units.   

The data supporting like-kind exchanges as a positive economic feature is overwhelming. The Federation of Exchange Accommodators published a report in May indicating that like-kind exchanges will generate an overall value of $55 billion in the U.S. economy in 2021 alone. Additionally, like-kind exchange rules will support over $4 billion in investment and over $11 billion in employee wages in 2021. Removing like-kind exchanges would not only eliminate the positive benefits, but would actually shrink the American economy by over $10 billion.  

Currently, there is not a direct or easy path to accomplish a repeal of 1031 exchanges in Congress. Proponents of a repeal either need 60 votes to defeat a procedural filibuster in the Senate, which is unlikely, or they need to pass a 1031 repeal bill via a lesser-known procedural method known as “reconciliation.”  

Under Senate rules, the process to qualify legislation under reconciliation is narrow and can only occur a certain number of times per year. Earlier this year, reconciliation was already used by Congress to pass the American Rescue Plan. Some senators have indicated a willingness to use reconciliation again this year to pass new spending initiatives. However, it is currently unclear whether the Senate parliamentarian, who controls Senate procedure, will allow additional reconciliation legislation during 2021, or whether tax provisions such as a 1031 repeal would be allowed to exist in such legislation. 

How It Could Happen 

Nonetheless, legislators in support of the 1031 repeal are continuing to try to pass it using the reconciliation process before the end of the year. In fact, Senate majority leadership recently announced a $3.5 trillion budget and spending plan in mid-July that will likely need to be passed via reconciliation in order to become implemented. The federal government will have to consider raising tax revenue to pay for such a plan, and proposals to adjust or eliminate section 1031 may very well accompany this $3.5 trillion budget as the details of the plan emerge.  

The fate of like-kind exchanges is a pressing and urgent matter before Congress. Section 1031 exists to promote growth for individuals and entities of all sizes across the country. Small businesses and individual entrepreneurs are often some of the strongest and most direct beneficiaries of 1031 tax policies, as their entire business models may very well be dependent on like-kind exchanges. Small business growth is an essential function in our economy and 1031 exchanges help create jobs, advance innovation, and enable continued development in our neighborhoods and communities. We encourage our representatives to preserve this important tax benefit. 

William Senné is president and CEO, and Clark Fonda is executive director of government affairs at Boston-based commercial real estate advisory firm Senné.