Mary Cunningham, president and CEO of Chicago Deferred Exchange Company (CDEC), joined REIT.com for a video interview during REITWise 2015: NAREIT’s Law, Accounting and Finance Conference held in Phoenix.
Founded in 1989, CDEC is one of the largest providers of qualified intermediary and exchange accommodation titleholder services for investors looking to structure tax-deferred exchanges under Section 1031.
Cunningham noted that 1031, or like-kind exchanges, allow an investor who sells a property and reinvests the proceeds in a new property within a short period of time, to avoid paying taxes on gains made on the original sale. Like-kind exchanges are used extensively in the real estate sector, she said.
When REITs buy and sell asset under 1031 they don’t have to distribute the proceeds to shareholders, Cunningham observed, which allows them to more efficiently deploy the funds into income -producing property.
Cunningham also stressed that proposals to repeal or restrict 1031 exchanges would “severely harm” the real estate sector.
Investors who are accustomed to the deferral would hold on to their assets for longer, resulting in a lock-in effect, she said. Furthermore, there would be a higher reliance on debt financing, which could put pressure on the banking sector. Changes to the 1031 system would also decrease the velocity of the economy, as there would be fewer transactions and potentially lower gross domestic product in the long -term, Cunningham added.
While Section 1031has been around since 1921, Cunningham noted that in the last quarter century there has been a higher reliance on and wider application of the code. “It’s really become a very powerful economic stimulator,” she said.