This blog post was written by George Ratiu, Director of Quantitative & Commercial Research and Erin Fitzpatrick, Research Intern.
Like-kind exchanges (LKE) provide an important vehicle to sell and acquire property, and are an integral component of small business activity. The Internal Revenue Code (IRC) Section 1031 codifies that the tax owed on any gain after a sale may be deferred as long as the proceeds are reinvested in a similar property through a like-kind exchange. The provision is of great importance to real estate investors, brokers, agents, and members of the NAR.
The Like-Kind Exchanges: Real Estate Market Perspectives 2015 report—based on a survey of over 100,000 REALTORS®—highlights the importance of LKEs to real estate. Based on NAR members’ responses, the average total fair market value (FMV) of all real estate sold or transferred in 2014 was $7.0 million per respondent. Of the estimated $7.0 million of total fair market value that the average REALTOR® disposed or transferred in 2014, nearly 40 percent was disposed or transferred pursuant to IRC Section 1031. The deferred gain component accounted for 36 percent of the total fair market value sold or transferred during the year, with the difference likely made up of realized gains.
When asked about the total fair market value of their transactions during 2014, members indicated different volume, consistent with NAR’s other surveys of member activity. Commercial members reported an average annual transaction volume of $7.7 million. Residential members indicated an average sales volume of $5.0 million for 2014.
When asked about the proportion of fair market value which was tied to like-kind exchanges and deferred gain, commercial members pointed to a slightly higher percentage compared with residential members. Based on the $7.7 million in total transactional value, commercial members responded that 41 percent of it was exchanged pursuant to IRC Section 1031, and 37 percent elicited deferred gain for participants. In comparison, residential members had a slightly lower incidence of like-kind exchanges—33 percent, with an equal proportion benefiting from deferred gain.
To access the Like-Kind Exchanges: Real Estate Market Perspectives 2015 report, visit http://www.realtor.org/reports/like-kind-exchange-survey.