What Industry Data Says About Who Uses 1031 Exchanges

Three kinds of evidence exist on who uses section 1031: Treasury’s own tabulation of tax returns, the Joint Committee on Taxation’s tax-expenditure estimates, and academic studies by David Ling of the University of Florida and Milena Petrova of Syracuse University, funded by a consortium of real estate trade groups that includes the Federation of Exchange Accommodators. Read together they say three things. Among individuals and partnerships, exchanges are overwhelmingly real estate. The typical exchanged property is well under $1 million. And most replacement properties are eventually sold in taxable sales, not exchanged again.

What Treasury’s return data shows

The Office of Tax Analysis published a short paper in 2014 with deferred-gain data for 2007, the last year before the financial crisis for which consistent figures existed for every taxpayer type:

• Individuals deferred $21.2 billion. Real estate was over 90% of it, and “nearly half of this amount was deferred capital gain on residential rental properties.”
• Partnerships deferred $35.6 billion, with real estate “nearly 90 percent” of the total. Partnership deferrals fell to $6.1 billion in 2010 “due to the effects of the recession on real estate.”
• C corporations deferred $25.8 billion, more than half of it vehicle fleets rather than property. That category no longer exists: the 2017 act limited section 1031 to real property, as covered in our repeal and cap tracker.

The paper also records that the provision dates from 1921 and that most real estate exchanges are three-party deferred exchanges run through qualified intermediaries, which is why the identification and 180-day rules exist.

What the Joint Committee’s number measures

The Joint Committee treats like-kind deferral as a tax expenditure because the deferral runs beyond the year of exchange, while the budget baseline does not. Treasury’s paper quotes the committee’s fiscal 2014 estimate at $5.7 billion for corporations and $3.0 billion for individuals. Ling and Petrova quote the later estimate of $9.9 billion for 2019 and $51.0 billion over 2019 to 2023. Against that, Treasury’s own proposal to cap deferral at $500,000 was scored at $19.7 billion over 2025 to 2034 in the fiscal 2025 Greenbook. The gap between a gross deferral estimate and a revenue estimate is the behavioural question the studies try to answer.

What the 2020 Ling-Petrova study found

The Tax and Economic Impacts of Section 1031 Like-Kind Exchanges in Real Estate, submitted to the Real Estate Research Consortium in October 2020, works from 816,002 commercial transactions in a national transaction database between 2010 and June 2020.

• 45,214 sales, about 6% by count and 7% by dollar volume, were flagged as involving an exchange. Because the database only flags an exchange when a party discloses it, the authors add a brokerage research series (23% of brokered transactions in 2017 to 2019 involved an exchanging buyer) and a Realtor association survey (12%), and conclude that “the share of exchanges likely ranges from 10 to 20 percent of all CRE transactions.”
• The median relinquished property sold for about $575,000, and 75% sold for less than $1.5 million, using data from a national qualified intermediary. The authors’ conclusion: exchanges “are not primarily used by large institutional investors.”
• California accounts for roughly 40% of flagged exchanges by count and 35% by volume; New York is second at about 8%; Washington is about 5%.
• Exchange buyers invest more in the next property, on average $127,500 or 15.4% of value more than buyers after a taxable sale, and borrow less: mean loan-to-value of 30% against 43% for non-exchange purchases. Average holding periods were 10.5 years for exchanges and 11.4 years otherwise.
• In 38% of cases the replacement property cost less than the relinquished one, “which implies that in approximately one third of the cases some taxes are paid in the year the exchange is executed.”
• Their model finds that 63% of the value of immediate deferral is given back through lower depreciation on the replacement property and higher gain and recapture on its eventual sale; the net benefit averages 4% of the relinquished price before state tax and 6% with it.

The earlier studies, as summarised by the exchange industry

The Federation of Exchange Accommodators’ summary of the 2015 to 2017 Ling-Petrova-Barker studies reports that 88% of replacement properties acquired through an exchange were later disposed of in taxable sales rather than another exchange; that some federal tax was paid in the year of exchange in 34% of exchanges; that exchanges reduced borrowing at acquisition by about 10% when the replacement cost no more than the relinquished property; and that the underlying sample was 336,572 properties bought and sold between 1997 and 2014. It is an advocacy document, so read its framing as such; the figures come from the academic work.

What the data cannot tell you

The IRS does not publish a current count of Form 8824 filers, the Treasury figures stop at 2010, and the academic sample ends in mid-2020. Private market trackers publish newer estimates; we do not cite them because their methods are not public. None of the sources break out DST interests, which are reported on Form 8824 like any other replacement real property.

What to do now

1. Compute the number that matters to you. The 63% finding means an exchange is worth most when you expect to hold long or exchange again, and least when you expect a taxable sale within a few years. The planned guide on what you would owe without an exchange sets up that calculation.
2. If your property is below the $1.5 million line, you are the typical exchanger, and the replacement options for that size, including a Delaware statutory trust, are built for you.
3. Start at what a 1031 exchange is if the mechanics are new, then request a proposal once a sale date is in sight.

Sources

• Treasury Office of Tax Analysis, The Tax Treatment of Like Kind Exchanges (2014)
• Treasury, General Explanations of the Administration’s Fiscal Year 2025 Revenue Proposals
• Ling and Petrova, The Tax and Economic Impacts of Section 1031 Like-Kind Exchanges in Real Estate (October 2020)
• Federation of Exchange Accommodators, Summaries of Ling, Petrova and Barker Studies (2016 and 2017)
• 26 U.S.C. section 1031