On September 16, NMHC and NAA joined the real estate industry in urging presidential candidate Donald Trump to preserve current-law like-kind exchange rules. There are concerns that policymakers may repeal the so-called 1031 rules to raise revenues to offset the cost of other tax or spending proposals. Like-kind exchange rules allow investors to defer capital gains taxes if, instead of selling their property, they exchange it for another comparable property. The rules play a critical role in supporting multifamily by enabling investors to shift resources to more productive properties, change geographic location, or diversify or consolidate holdings. Our letter follows similar correspondence sent to Hillary Clinton earlier this month.
The repeal of like-kind exchanges could harm the multifamily industry’s ability to house America’s workforce. That’s why our letter focuses on the ability of like-kind exchanges to “fill the gaps not covered by other housing incentives, making the development of affordable housing economically viable.” In addition, proposals to revise or restrict like-kind exchanges could have a significantly harmful effect on the value and trading of property.
Any new limits on like-kind exchanges would also increase the cost of renting an apartment or other home. In fact, the Ling Petrova Study, commissioned by the real estate industry to analyze the role like-kind exchanges play in commercial real estate, concludes that an owner would have to raise rents by nearly 12 percent to offset the tax consequences of repealing section 1031.
The Trump Tax Plan
Notably, our letter to Trump followed the roll out of his revised tax reform plan on September 15. Although silent on like-kind exchanges, the proposal notes that most tax expenditures would be eliminated. His proposal would also:
- Reduce the top tax rate for pass-through entities, including those that dominate the multifamily industry, from 39.6 percent to 15 percent for those entities that reinvest earnings into their operations; and
- Retain current-law capital gains rates, but carried interest would be taxed as ordinary income. Capital investments would continue to be depreciated, and entities would be allowed to retain the business interest deduction.
NMHC/NAA continue to educate policymakers about the significance of like-kind exchanges in the multifamily industry, emphasizing that this tax provision not be repealed to raise revenue for other tax or spending initiatives. Additionally, we are working to further evaluate Trump’s overall tax plan in the context of our industry.