Ernst & Young (EY)
EY Macroeconomic Study (2022): “Economic Contribution Of The Like-Kind Exchange Rules To The US Economy in 2021”
David C. Ling & Milena Petrova
2020, “The Tax And Economic Impacts of Section 1031 Like-Kind Exchanges In Real Estate”
Economic Impact Studies
Two sets of studies explore the micro- and macro-economic benefits of like-kind exchanges and the impact a repeal of Section 1031 would have on the economy. The Ling and Petrova microeconomic studies provides an in-depth look at the impact of like-kind exchanges on the commercial real estate market. The EY macroeconomic studies takes a wide look at the impact of a repeal on the overall U.S. economy. Section 1031 like-kind exchanges play an important role in the U.S. economy: encouraging investment, contributing to federal, state, and local tax revenue, reducing the use of leverage, and improving liquidity in the market. From both the micro and macro views, the studies recommend the retention of Section 1031.
Authors of the economic studies appeared before Congress on May 27, 2021 to brief members of Congress on the newest findings concerning the impact of like-kind exchanges in the U.S. economy.
- Presentation: Bob Carroll, EY, Economic Contribution of LKE Rules, 2021
- Presentation: Milena Petrova, Economic Impact of LKE in Real Estate, 2021
- Speaker Biographies, Congressional Briefing on LKE, 5-27-2021
- Title Slide: Congressional Briefing sponsors, speakers
Reprinted with permission
COMBINED IMPLICATIONS ON THE U.S. ECONOMY
The studies quantify that the benefits of like-kind exchanges provide essential incentives for a robust economy. Their conclusions recommend the retention of Section 1031.
The Ling & Petrova microeconomic studies, focusing in-depth on the effects of a repeal of Section 1031 on the commercial real estate industry, found that like-kind exchanges are essential to a healthy, stable real estate market. The research suggests that like-kind exchanges represent 10-20% of all commercial real estate transactions.
The EY studies concluded that Section 1031 is such a powerful stimulator of economic activity that its repeal would slow economic growth, reduce GDP and hurt many businesses. Conversely, retention of Section 1031 is estimated to generate 976,000 jobs, $48.6 billion of labor income, and add $97.4 billion to U.S. GDP in 2021.
Together, the Ling & Petrova and EY studies show the long-term impacts that a repeal of Section 1031 would have on the economy:
- Real property transactions would decline, inhibiting the stream of economic activity generated by exchange transactions
- The cost of capital would increase
- Average holding periods would increase
- The velocity of investment in the economy would decrease
- Real estate values would drop
- Rents would rise
- The economy would contract
The findings of the studies reinforce the argument that like-kind exchanges are an important capital formation tool, and that they matter. Like-kind exchanges provide an essential incentive to improve properties, increase investment, reduce leverage and reduce holding periods, all of which stimulates transactional activity. Like-kind exchanges help keep the economy moving. A repeal of the provision would unfairly burden certain industries and taxpayers, harm the economy as a whole and cost the government in the long-run.