By: John Harrison, Executive Director of The Alternative and Direct Investment Securities Association (ADISA)
As part of his recently released American Families Plan, President Biden has proposed the limitation of 1031 like-kind exchange deferrals greater than $500,000. Naturally, this is a newsworthy event that has the potential to affect a great number of individual Americans who own investment property, be it a remote farm or an urban apartment building.
And while this limitation is, in itself, a cause for concern, what has been just as alarming for myself and those of us at ADISA is the negative characterization of like-kind exchanges from some of the nation’s top publications. Bloomberg, The Wall Street Journal and others have repeatedly and incorrectly labeled Section 1031 by the pejorative term, “loophole.”
Merriam-Webster defines a loophole as “an absence or something vague in a rule or law that allows a person to avoid punishment.” This is not what Section 1031 is. It is in no way vague, nor does it allow anyone to avoid punishment. Instead, Section 1031 is a one-hundred-year-old, legitimate statute of the Internal Revenue Code.
1031 like-kind exchanges allow investors to exchange one property for a similar “like-kind” property and, because of this exchange, they are able to defer immediate gains taxation until a later date when the property is sold. At that time, the investor pays the full taxes due.
The Wall Street Journal and similar websites and newspapers are a major source of information for individuals across the globe. With such a large outreach, it is imperative that they frame this issue in an accurate and responsible manner. The journalists at these publications are leaders in their industry, and they should be well-aware of negative connotation that the word “loophole” carries.
A 1031 exchange is nothing to be ashamed of. It is not some shady, tax-avoidance scheme conducted by large, faceless corporations. What Section 1031 is, is a clearly-defined, well-established potential tax benefit that helps to facilitate the overall flow of the real estate investment industry and can be utilized by any American who owns real estate investment property.
Over time, laws can change. New statutes can be established. This is part of our democratic process. But if we are going to examine the efficacy of Section 1031, then we must do so fairly and accurately, and this begins by properly defining a like-kind exchange.
The word “loophole” paints all real estate owners as dubious rulebreakers looking to take advantage of our real estate system. This could not be further from the truth. We work in one of the most highly regulated industries in the world, and Section 1031 is a valid and vital tool utilized by small and large real estate investors alike.
Section 1031 helps tenants, property owners, and the economy as a whole by accelerating the velocity of money and preventing excessive holding periods. This, in turn, helps to contribute to lower rents and an increase in real estate prices, among other potential benefits.
As leaders in the real estate investment industry, we are those who are most familiar with exactly how Section 1031 contributes to our country. Therefore, it is imperative that we work together to educate the decisionmakers and influencers who will ultimately decide the fate of this statute.
At ADISA, we are dedicated to saving Section 1031, and we will continue to communicate directly with lawmakers, legislators and journalists to ensure that Section 1031 is represented appropriately and that the voice of the 1031 industry is heard.
Since 2012, John Harrison has been the executive director of ADISA, an organization that represents the non-traded alternative investment industry. Harrison has been in association management for more than 25 years and has served in industry, education, and health associations in the U.S., Europe, and the Middle East. He was a cum laude graduate in biology and psychology from the University of Georgia, and earned an MBA and a doctorate in business administration from Georgia State University.
The views and opinions expressed in the preceding article are those of the author and do not necessarily reflect the views of The DI Wire.