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The use of the tax deferral mechanism also provides an opportunity to close the national wealth gap that the killing of George Floyd and the subsequent unrest have focused attention on, said William Brown, a founder of Springhill Real Estate Partners. The firm is a syndicator that pools like-kind exchange proceeds and money from smaller investors to invest in apartments in the West and Northwest. In general, like-kind exchanges allow these investors to trade up from duplexes to fourplexes, and then from fourplexes into larger apartment communities, and so on, he said.
“More and more minorities want to become real estate investors because they can see the benefit of building wealth and income,” said Mr. Brown, an African American and a past president of the National Association of Realtors. “Getting rid of the 1031 exchange would hamper their ability to do that, because most investors cannot afford to sell a property and then buy something else after paying taxes.”
Section 1031 also encourages the reuse of buildings because investors often focus on adding value to older properties that need work, said Karlin Conklin, a principal and co-president of Investors Management Group, another syndicator that invests in apartments. In 2017, Investors Management paid $19 million for a 136-apartment property in suburban Portland, Ore., and plowed an additional $1.5 million into it to build a clubhouse and make other upgrades.
“We made it a far better apartment community in which to live and a far better building within the neighborhood,” said Ms. Conklin, who with her husband has personally been investing in properties for more than 20 years. “Without exchanges, there’s going to be less money dedicated to improving older real estate stock that is in need of a capital infusion.”
The proposal to overhaul Section 1031 is nothing new — similar ideas have surfaced after presidential elections only to sink. In 2017, however, the Trump-era tax cuts eliminated exchanges of machinery, vehicles and other personal property from the provision.
In this congressional session, Democrats appear to be placing enormous emphasis on creating a fairer tax code along with investing in infrastructure and social programs, said Steve Wamhoff, director of federal tax policy at the Institute on Taxation and Economic Policy, a nonprofit group in Washington that advocates equitable revenue-raising measures.
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