Companies Exploit Tax Break for Asset Exchanges, Trial Evidence Shows - NYTimes.com.
It began more than 90 years ago as a small tax break intended to help family farmers who wanted to swap horses and land. Farmers who sold property, livestock or equipment were allowed to avoid paying capital gains taxes, as long as they used the proceeds to replace or upgrade their assets.
Over the years, however, as the rules were loosened, the practice of exchanging one asset for another without incurring taxes spread to everyone from commercial real estate developers and art collectors to major corporations. It provides subsidies for rental truck fleets and investment property, vacation homes, oil wells and thoroughbred racehorses, and diverts billions of dollars in potential tax revenue from the Treasury each year.
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The tax break also exposes one of the greatest vulnerabilities of the United States tax system: it depends on voluntary compliance. The I.R.S. staff is so outnumbered by tax lawyers and accounting departments at major corporations that there is often little to prevent taxpayers from taking a freewheeling approach to interpreting and administering the rules.
What’s more, the tax break is one of so many that it tends to escape attention. The independent Simpson-Bowles deficit commission appointed by Mr. Obama in 2010 raised the possibility of eliminating it and other tax expenditures, however, and some budget experts argue that the program should be severely limited or repealed.
Some financial planners and economists say that the tax break even favors real estate investors unfairly by allowing them to defer capital gains taxes that those who invest in securities and other ventures have to pay. And although it was originally intended to help farmers, some economists and lawmakers in agricultural areas say it has perversely contributed to suburban sprawl and the spiraling cost of farmland. Because it allows farmers to avoid capital gains taxes on land swaps, the tax break provides an incentive to sell farmland coveted by developers and buy property in less desirable and more remote areas.
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Even as the debate over the tax break continues, there is a deep conviction in the real estate business that it is justified. Advocates for the real estate industry say that a large majority of transactions are conducted in strict compliance with I.R.S. regulations. Because the asset exchanges spur investment and help create jobs, industry officials say they would strenuously oppose any effort to end them.
“Historically, these exchanges are a very important consideration for a very important segment of the economy,” said Jeffrey D. DeBoer, chief executive of the Real Estate Roundtable. “I have no reason to believe that Congress won’t ultimately recognize that.”A very important segment of the economy, or a very important segment of the financing of political campaigns? Land speculation doesn't create jobs for ordinary working people. Tax accountants, perhaps. Banks, perhaps. But land speculation is inert -- if what we want are jobs and widespread prosperity.
Recall that capital doesn't appreciate. Buildings and equipment, even with the best of maintenance, decline in value. What appreciates is land and natural resources -- and they rise in value for reasons which have nothing to do with the fellow, or corporation, who owns them. He is passive, inert -- and rent-seeking. We ought not to reward or even permit it. We can correct it through a better designed tax system.
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