I.R.C. Section 1031 For Real Estate: A Policy Approach

Abstract

In 1921, Congress passed the first provisions for tax deferred exchanges. Three years later in 1924, because of abuses of the exchange statutes, Congress had to reevaluate the legislative intent and purpose of like kind exchanges and amend the original provisions. Those amended provisions and the legislative intent behind them make up today’s I.R.C. Section 1031 which governs the non-recognition (tax deferment) of like kind exchanges. Even though the statutory framework for Section 1031 is relatively light, the policy that surrounds 1031 Exchanges can be frustratingly complex. Since 1924, like kind exchanges have been a permanent fixture in U.S. Code. Over the course of its 90-year history, Section 1031 in the Internal Revenue Code of the United States of America has been called “the greatest real estate investment tool known to mankind”1 while simultaneously has been accused of being the largest tax loophole in the U.S. tax code. In the past decade, calls for Section 1031’s repeal have been growing more insistent and persistent. In 2015, the Joint Committee on Taxation identified like-kind exchanges as the second largest tax expenditure in the federal budget. As opposition grows larger, one cannot help but wonder if the 90-year old statute can still be justified. The thesis aims to take a policy approach to understanding Section 1031 by evaluating the legislative intent behind like kind exchanges and the extent to which the present-day statute satisfies or violates that intent. Chapter 1 provides brief introduction into Section 1031 Exchanges. Chapter 2 details the necessary policy, real estate, and tax background. Chapter 3 takes a detailed look at the statute as it stands today. Chapter 4 evaluates the historical justifications for like kind exchanges, which will provide the foundation for my conclusion and policy recommendations in Chapter 5.