In the midst of the tense political landscape, the Biden administration recently proposed their 2024 budget, with the goal of lowering household costs, increasing tax revenue, and lowering the deficit. As part of the budget, the administration is again trying to repeal Section 1031 of the Internal Revenue Code, reasoning that it would increase tax revenue for the government. Like many democratic administrations before him, Section 1031 was a target for Biden’s proposed 2020 budget and his new 2024 proposal, reigniting the debate over its implications for the real estate market, investment strategies, and the broader economy.

Section 1031 exchanges allow investors to defer capital gains taxes when they sell a property and reinvest the proceeds into a new property. In existence since 1921, this provision has long been a pivotal tool for investors to manage and grow their real estate portfolios without the immediate tax liability. By facilitating exchanges, Section 1031 promotes investment across various sectors, including real estate, agriculture, and manufacturing. This fosters a multiplier effect throughout the economy, as each exchange transaction stimulates additional spending, investment, and job creation across a multitude of industries.

In 2021, Ernst & Young conducted a study along with the 1031 Like-Kind Exchange Coalition and found that 1031 exchanges were pivotal in supporting nearly a million jobs (976,000) and they contributed $48.6 billion in labor income within the United States. Moreover, these exchanges added $97.4 billion to the U.S. GDP and generated around $13.1 billion in federal, state, and local taxes. Without the ability to defer taxes, investors will become more hesitant to sell properties, leading to a decrease in real estate transactions, associated business transactions, and liquidity in the market. Eliminating 1031 exchanges would significantly undermine these contributions, affecting job growth, GDP, and tax revenues critical for public services and infrastructure development. With a narrow focus on capital gains taxes, critics of Section 1031 ignore the vast benefits and tax revenues that are created through the reinvestment incentive created by this section of the tax code.

It is imperative for people to show support for Section 1031 to protect a vibrant part of the US economy. Contact your local representative to express your support for Section 1031 exchanges. Your voice can influence legislative decisions and help maintain this critical tax provision that benefits investors and the broader economy alike.

Follow the link below to get more information on your Congressional Representative.

Research conducted by EY provides insight into the economic activity supported by the I.R.C. Section 1031 like-kind exchange rules within the US economy in 2021. The research demonstrates the value of like-kind exchanges to the greater US economy, including employment and wage contribution, adding to GDP, and generating consumer spending.