The Blueprint for Tax Reform proposes 100% immediate expensing with unlimited loss carryforward for all tangible & depreciable personal property assets and real estate improvements, except land. It would also eliminate the business interest expense deduction. IRC Section 1031 is compatible with these proposals, and should remain in its present form for land and any other non-covered assets for the following reasons.

1. Section 1031 removes the lock-in effect, and permits taxpayers to make good business decisions without being impeded by negative tax consequences. Like-kind exchanges stimulate economic activity – property improvements that benefit communities, increase property values, and generate jobs ancillary to the exchange transactions.
2. Immediate expensing of all investment assets except for land does not remove the lock-in effect on a host of real estate owners. Land values represent approximately 30% of the value of commercial and multi-family residential improved properties, and up to 100% of agricultural land investments. If these property owners are faced with reducing the value of their investments and life savings through capital gains tax, even with lower rates, they will likely hold onto these properties longer.
3. Conservation easements and conveyances of environmentally sensitive lands that benefit our environment, preserve wildlife habitat, and create recreational green spaces for all Americans depend upon Section 1031 to provide the incentive for a landowner to engage in such transactions and exchange into more productive, less sensitive land. Without Section 1031, the economics of conservation easements will not work for most farmers and ranchers.
4. The expensing platform under the Blueprint provides no mechanism for asset sales and replacement purchases that bridge 2 tax years. A seasonal business may want to divest used equipment in late autumn and not take delivery of new equipment until early spring, the start of the new season. Section 1031 permits a taxpayer to avoid several months of debt service and storage expenses during the off season, without any negative tax consequences or impairment of cash flow. Without Section 1031, the seasonal business would be forced to acquire the new assets before year-end, or be faced with recapture tax on the Year 1 sale and less equity available for the replacement purchase in Year 2.
5. Finally, Section 1031 provides incentive for capital formation for landowners, who would be particularly disadvantaged if they had neither the option of a tax deferred exchange nor expense deductions for land acquisition and interest on related debt.

In Summary, retention of Section 1031 in the Blueprint removes friction from business transactions and stimulates economic activity that would not otherwise benefit from the proposed Blueprint.

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