WASHINGTON, D.C. - Like-kind exchanges, also known as 1031 exchanges, increase investment in multifamily and support lower rents, according to a study released today. This new research by David C. Ling and Milena Petrova looks at the economic effects of Congressional proposals to repeal or curtail 1031 exchanges across the commercial real estate sector.
“The elimination of real estate exchanges will likely lead to a decrease in prices in the short-run, followed by an increase in rents in the longer run. These negative effects will be more pronounced in high tax states,” said Ling and Petrova in the report.
Like-kind exchange rules encourage investors to remain invested in real estate by allowing property owners to defer capital gains tax if, instead of selling their property, they exchange it for another comparable property. As long as the taxpayer remains invested in real estate, tax on any gain is deferred. The government recoups the taxes once the owner ultimately sells the property.
Key findings include
- Assuming a typical nine-year holding period, apartment rents would have to increase by 11.8 percent to offset the taxation of capital gains and depreciation recapture income at rates of 23.8 percent and 25 percent, respectively.
- Governments collect 19 percent more taxes on commercial properties sold following a like-kind exchange than by an ordinary sale.
- Nearly nine in 10 (88 percent) of commercial properties acquired by a like-kind exchange result in a taxable sale in the very next transaction.
“We need at least 300,000 new apartments every year, and the multifamily industry cannot build without outside investment. Today’s announcement solidifies just how important 1031 exchanges are in meeting the exploding demand for rental housing,” said NMHC President and CEO Doug Bibby.
“Our industry needs every tool available to promote more investment in apartments. With a shortage of more than five million affordable housing units, like-kind exchanges must be a part of the solution,” said NAA President Doug Culkin.
For more details, please see the full study entitled, “The Economic Impact of Repealing or Limiting Section 1031 Like-Kind Exchangesin Real Estate.”
About the study’s authors: Dr. David C. Ling is a finance professor at the University of Florida’s Warrington College of Business, as well as past president of the American Real Estate and Urban Economics Association. Dr. Milena Petrova is a finance professor at Syracuse University’s Whitman School of Management.