NAR Survey Finds Like-Kind Exchanges Promote Economic Growth Nationwide
John Jordan | July 2015
WASHINGTON—Real estate like-kind exchanges are an important vehicle for disposing of and acquiring properties and support the nation’s financial growth, job creation and economy, according to a report released on July 9th from the National Association of Realtors.
The Like-Kind Exchanges: Real Estate Market Perspectives 2015 survey of NAR’s commercial and residential members found that real estate investors and commercial property owners place a very high priority on current like-kind exchange tax rules; 40% indicated that transactions would not have occurred in the absence of the tax provision, and 56% said even if the project would have occurred it likely would have been smaller in scale.
“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.”
—NAR President Chris Polychron
Realtors are active participants in like-kind exchanges; 63% of Realtors participated in a like-kind exchange transaction between 2011 and 2015. The survey found that like-kind exchanges in which Realtors participated created between 10 and 35 new jobs, mostly resulting from spending on building improvements following acquisition.
“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 NAR Chief Economist Lawrence Yun. “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.”
Internal Revenue Code Section 1031, a provision that has been in the tax code since 1924, provides individuals and businesses with critically needed tax deferment on gains after the disposition of a property as long as the proceeds are reinvested in a similar property through a like-kind exchange. Replacement properties must be identified in 45 days and the transaction completed within 180 days.
Survey respondents said the primary reason that they or their clients participated in a like-kind property exchange, aside from the deferral of capital gains taxes, was for equity to acquire additional properties. Other reasons were for estate planning, portfolio diversification and completion of a development project.
The tax savings resulting from like-kind exchanges are also helping bring more capital into local markets. Eighty-six percent of respondents said the savings from tax deferment allowed them or their clients to invest additional capital and make improvements in their acquired properties; these investments are generally responsible for the creation of new jobs, such as in construction and property management, NAR stated.
According to the survey, in 68% of like-kind transactions, Realtors acted as a broker or agent, and 24% participated as an owner or investor in the transaction. A larger percentage of commercial members (76%) reported engaging in a like-kind exchange transaction compared to residential members (45%). Of the total, 40% participated in between one and three transactions, and 23% participated in four or more transactions.
Residential properties comprised the largest portion of recent deals, accounting for 27% of disposed properties and 24% of acquired properties, followed by apartments (17% of dispositions and 22% of acquisitions). Land assets accounted for 19% of dispositions and 17% of acquisitions; retail properties accounted for 8% of dispositions and 13% of acquisitions; and office buildings comprised 11% of dispositions and 10% of acquisitions.
Investors tend to hold on to their properties for several years; 47% of respondents reported their holding period was between five and nine years, and 27% indicated a holding period of 10 to 14 years.
NAR believes like-kind exchange transactions are fundamental to the real estate investment sector, and repealing the tax provision would have negative effects across 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 NAR President Chris Polychron, executive broker with 1st Choice Realty in Hot Springs, AK. “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.”
Survey respondents indicated that repealing like-kind exchange tax provisions would reduce equity in real estate; 67% indicated repeal would lead to a large increase in financial leverage. Realtors said the negative result would be reduced purchase money and new construction loans, and increased property holding periods. Ninety-six percent of Realtors also said real estate values would decrease if like-kind exchange provisions were repealed.
The National Association of RealtorsLike-Kind Exchanges: Real Estate Market Perspectives 2015 report is based on a survey of 49,593 commercial practitioners and 55,160 residential practitioners (total sample size of 104,753) in January 2015, which generated 3,450 responses from all 50 states and the District of Columbia. The survey had a response rate of 3.3%. The report is available at www.realtor.org/reports/like-kind-exchange-survey.