The Benefits and Costs of Tax Deferral: An Analysis of Section 1031 Exchanges

David Barker, David C. Ling and Milena Petrova

Journal of Real Estate Literature, 2020, vol. 28, issue 1, 1-29

Abstract: We examine the effects of Section 1031 of the Internal Revenue Code on commercial real estate (CRE) investors and markets, as well as on U.S. Treasury revenue. We first develop a partial equilibrium model that quantifies for the property owner the present value of tax savings in an exchange versus a fully-taxable sale and the cost in foregone tax revenues to the U.S. Treasury. We estimate that the incremental present value of a CRE exchange, as a percentage of the price of the relinquished property, ranges from less than 1% to approximately 8%. We then discuss the extent to which these incremental net present values (NPVs) can be used as estimates of the likely effects that elimination of CRE exchanges may have on local market values. Finally, we discuss the effects of elimination on U.S. Treasury revenue.

Date: 2020
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DOI: 10.1080/09277544.2020.1793578

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