Commercial Investment Real Estate November/December 2017 | Page 16

FINANCING
FOCUS
Like-Kind Exchanges
IRC Section 1031 stimulates the economy, simplifies taxes,
and isn’t a loophole.
by Bill Horan
I
14
November | December 2017
Section 1031 is neither a loophole nor a tax savings vehicle, but
rather a powerful economic engine based on sound tax policy.
The nonrecognition exchange policy is based on the understand-
ing that the taxpayer continues with the same qualifying invest-
ment, with no intervening receipt of cash, and is left in the same
tax position as if the relinquished asset was never sold.
This valuable tax-deferred exchange should be retained in
its current form. It accurately reflects the economic reality of
investment continuity in which no profit is taken, so there is no
premise to tax.
Capital Formation and Liquidity
This nearly century-old tax policy permits efficient use of pro-
ductive capital and cash flow, while allowing taxpayers to shift
to more productive like-kind property, change geographic loca-
tions, diversify, or consolidate holdings. Tax-deferred exchanges
COMMERCIAL INVESTMENT REAL ESTATE
nternal Revenue Code Section 1031 exchanges are powerful
economic stimulators that are grounded in sound tax policy.
Current tax reform goals are to stimulate the economy, sim-
plify the tax code, and eliminate loopholes, according to the
Trump administration.
Section 1031 meets the first two goals, without being a loop-
hole. Since it allows the deferral of tax on capital gains, 1031
like-kind exchanges stimulate the economy by encouraging
both investment real estate transactions and the replacement
and upgrading of businesses’ machinery and equipment.
By deferring capital gain recognition, 1031 like-kind exchanges
help transfer properties into the hands of new owners with the
ability to restore and improve them. Without Section 1031, many
of these properties would languish — underused and under-
invested — because of the tax burden that would apply to an
outright sale.