By: John Harrison, Executive Director of The Alternative and Direct Investment Securities Association (ADISA)
We now have the math on the table for both sides on the issue of 1031s. Here’s one side: the Biden budget estimates that the IRS will raise less than $2 billion a year for the next 10 years if 1031s are eliminated (their exact figure is $19.55 billion over 10 years).
In a federal budget of trillions, this is perhaps a rounding error. That’s the plus column for the IRS. And that plus column would be even less if there were the proposed $500,000 allowance for deferral for each taxpayer using a 1031 (this amount goes to $1 million for married filing jointly). So, the $2 billion figure would shrink from a rounding error to de minimis no mention. Incidentally, the $2 billion per year figure is close that of the Ling & Petrova study—thus, we have a solid idea of what the IRS would “gain.”
On the other side we have well-vetted estimates of what 1031s actually do: they enable a surprising amount of economic activity, that is about 15 percent of commercial real estate. First (from Ernst & Young), 1031s provide over half a million good jobs, and this brings a value add of over $55 billion per year to the economy. In case you’re wondering about what kind of jobs—perhaps it’s just folks in financial services—that is not the case.
The financial services jobs only comprise 73,000 of the mix; the lion’s share of 226,000 are in leisure, hospitality, trades and transportation. About 153,000 are in education, health services, and other business services. Then the rest are in manufacturing, construction, and the like. These people and their families depend on the activity generated by 1031s.
Those are the plus numbers for 1031s, what would be the minus numbers if they go away? Costs to maintain buildings would go up. Rents would go up (somewhere in the 12 percent range), capital investment would go down, and as a result, properties would sit longer (a holding period increase of a year or more). This means lower local tax revenues and decreases in services. State and local tax revenues losses of close to $3 billion per year. At least the pain would be spread across a diverse crowd: farmers, city apartment dwellers, conservation landowners, and commercial businesses of all sorts.
If we try to net both sides together, that is an annual gain to the IRS of little measure added to estimated losses of around $55 billion and 558,000 jobs per year, then we get, well negative $55 billion and minus 568,000 jobs at least in the short term. Who’s to say that those workers can’t find other employment easily, but then who’s to say they can’t and end up as further government costs? Thus, job losses at least have to be considered in the short term as a cost.
As you might suspect, we’ve done this math before, and when we show it to the legislators they nod and want to move on to something else. Even those not directly involved in 1031s at all see the value—and most likely how that value affects them personally. The creation of 1031 like-kind exchanges over 100 years ago was a good policy move by the Feds (and they should be proud of that). We just sometimes need to remind them of their success.
John Harrison is a regular contributor to The DI Wire. This article first appeared in the Summer 2021 volume of ADISA’s flagship publication, Alternative Investments Quarterly.
Since 2012, 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.