Like-Kind Exchanges Support Lower Rents, Says NMHC

Washington, D.C.—Like-kind exchanges, also known as 1031 exchanges, increase investment in multifamily and support lower rents, according to a new study. This new research by David C. Ling and Milena Petrova looks at the economic effects of Congressional proposals to repeal or curtail 1031 exchanges across the commercial real estate

Washington, D.C.—Like-kind exchanges, also known as 1031 exchanges, increase investment in multifamily and support lower rents, according to a new study. This new research by David C. Ling and Milena Petrova looks at the economic effects of Congressional proposals to repeal or curtail 1031 exchanges across the commercial real estate sector.

Like-kind exchange rules encourage investors to remain invested in real estate by allowing property owners to defer capital gains tax if, instead of selling their property, they exchange it for another comparable property. As long as the taxpayer remains invested in real estate, tax on any gain is deferred. The government recoups the taxes once the owner ultimately sells the property.

Key findings include

  • Assuming a typical nine-year holding period, apartment rents would have to increase by 11.8 percent to offset the taxation of capital gains and depreciation recapture income at rates of 23.8 percent and 25 percent, respectively.
  • Governments collect 19 percent more taxes on commercial properties sold following a like-kind exchange than by an ordinary sale.
  •  Nearly nine in 10 (88 percent) of commercial properties acquired by a like-kind exchange result in a taxable sale in the very next transaction.

For more details, please see the full study, “The Economic Impact of Repealing or Limiting Section 1031 Like-Kind Exchangesin Real Estate.”