Hot take:

The 1031 exchange is actually great for society. All countries should implement a similar tax-free real estate exchange.

Here’s how I see it

(preface: I’m Canadian and don’t benefit from the 1031)

For those unaware, the 1031 exchange allows you to sell real estate and defer all tax consequences on the gain, as long as you purchase another piece of real estate within a certain period of time.

It’s been getting a lot of hate on Twitter lately, seen as an unfair loophole.

What people are missing is that, it promotes risk taking and assets changing hands.

This enables new investors/entrepreneurs an opportunity to enter the market with new ideas to improve existing assets.

Without a tax-free exchange (like in Canada), real estate owners are discouraged to sell.

If they’ve owned the asset for a long period of time, they’ve depreciated the cost base to zero - meaning a massive capital gain upon sale.

So why take the risk to sell an asset you’re familiar with to buy an asset you’re unfamiliar with, especially if it means a massive tax bill in the process?

This leads to asset hoarding, which restricts supply and creates a barrier to entry for new entrepreneurs/investors.

So to conclude, the 1031 exchange is effective at increasing real estate supply which allows new players to enter the game and a shot at asset ownership.

This will ultimately improve existing buildings/infrastructure and create more wealth for more people.