Like-kind exchanges in the real estate market are an important factor for property acquisition and disposal, and they also support the nation's financial growth, job creation, and economy, according to a new survey from the National Association of Realtors (NAR).
The survey, titled “Like-Kind Exchanges: Real Estate Market Perspectives 2015,” questioned NAR's commercial and residential members and determined that realtors are active participants in like-kind exchanges, with 63 percent of realtors noting that they participated in a like-kind exchange transaction between 2011 and 2015. The survey also found that these like-kind exchanges in which realtors participated created between 10 and 35 new jobs, mostly resulting from spending on building improvements following acquisition.
Real estate investors and commercial property owners place a very high priority on current like-kind exchange tax rules, NAR said. Of those surveyed, 40 percent indicated that transactions would not have occurred in the absence of the tax provision, and 56 percent said even if the project would have occurred it likely would have been smaller in scale.
According to the survey, the like-kind exchange rules, or Internal Revenue Code Section 1031, allows taxpayers to defer tax when they exchange investment or business properties for another property of a “like kind.” The main benefit of the like-kind exchanges is the opportunity to us capital and resources efficiently, which encourages economic growth and job creation. Replacement properties must be identified in 45 days and the transaction completed within 180 days.
"Like-kind exchanges that allow investors and businesses to defer capital gains taxes on the exchange of similar properties bring great advantages to investors, real estate markets and the economy," said Lawrence Yun, NAR chief economist. "Realtors and their clients often look for better economic use of existing properties that are underutilized, which helps promote local economic development and increase the nation's gross domestic product."
Among the reasons for participating in a like-kind transactions, survey respondents and their clients noted deferral of capital gains taxes, equity to acquire additional properties, estate planning, portfolio diversification, and completion of a development project.
Tax savings from like-kind exchanges help bring more capital into local markets, NAR determined. Eighty-six percent of respondents said the savings from tax deferment allowed them or their clients to invest additional capital and make improvement in their acquired properties. These investments are mostly responsible for the creation of new jobs, such as in construction and property management.
NAR believes like-kind exchange transactions are vital to the real estate investment sector, and repealing the tax provision would negatively impact real estate markets and the industry.
"Like-kind exchanges help investors more efficiently allocate capital and resources with less borrowed money into new investments that drive economic activity in communities across the nation," said Chris Polychron, NAR president and executive broker with 1st Choice Realty in Hot Springs, Arkansas. "Any tax reform plan repealing like-kind exchanges would hurt investors and small businesses, increase financial leverage, weaken growth and the economy, and result in the loss of jobs."
Robert Dietz, Ph.D., VP for tax and market analysis for the National Association of Home Builders (NAHB) said on their Eye on Housing blog that the land development sector also benefits from existing like-kind rules.
“The study highlights the importance of the like-kind exchange rules for the real estate sector, as well as the construction of new residential and commercial properties,” Dietz said. “While the research did not examine the land development sector, this industry also benefits from the existing rules.”
Click here to view the National Association of Realtors' (NAR) Like-Kind Exchange Survey.