Like-kind exchanges are vital in ensuring the availability of rental housing.
The National Apartment Association (NAA) and the National Multifamily Housing Council (NMHC) joined other trade associations to send letters on March 12 to Treasury Secretary Janet Yellen and top congressional tax writers underscoring the critical role like-kind exchanges play in real estate finance. With the Biden Administration and Congress on the lookout for potential revenue raisers, the multifamily housing industry is constantly making the case to policymakers that like-kind exchanges are vital to ensuring the availability of rental housing.
The industry letters specifically address how like-kind exchanges represent a vital tool to increase the supply of affordable rental housing and note, “Multifamily housing transactions represent 40 percent of real estate like-kind exchanges. Expanding workforce housing will require significant investment of private capital. However, tax incentives like the low-income housing tax credit do not apply to land acquisition costs. Investors can use section 1031 to acquire land for the development of new housing. New limits on like-kind exchanges would increase the cost of rental housing. The Ling-Petrova study concluded that an owner would have to raise rents significantly on tenants to offset the tax consequences of repealing section 1031.”
In addition to the industry letter, NAA and NMHC have worked with our real estate partners to update the so-called Ling-Pterova study, an academic study on the efficacy of like-kind exchanges. Most recently, Professors David Ling and Milena Petrova posted a summary of their work and concluded that if like-kind exchanges were eliminated:
“From our model, the average price decline under our base case (no state income tax) assumptions is 4.4%. The maximum price decline across our base case scenarios is 8.6%. When an 8% state income tax rate is included, the average and maximum price declines are 6.1% and 12.3%, respectively. These percentage price declines can also be interpreted as the percentage increase in the value of after-tax rental income that would be required in the longer run to offset the elimination of like-kind exchanges.”
Retained for real property as part of the Tax Cuts and Jobs Act enacted in late 2017, 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. When the taxpayer ultimately does sell the asset, the property tax is paid.
Like-kind exchange rules play a critical role in supporting the multifamily housing sector by encouraging investors to remain invested in real estate while still allowing them to balance their investments to shift resources to more productive properties, change geographic location, or diversify or consolidate holdings. In addition, without like-kind exchanges, property owners are deterred for tax reasons from selling assets that are in need of capital investment. Exchange rules allow those owners to transfer the property to new owners who can invest the necessary capital to revitalize the asset. Thus, like-kind exchange rules facilitate job-creating property upgrades and improvements.
NAA and NMHC will continue to make retention of current-law like-kind exchange rules a key pillar of our tax advocacy efforts.