Updated June 3, 2021
Over the past year, there has been growing speculation regarding the potential tax policies of a Biden White House and how they may affect real estate. President Biden’s address to Congress on April 28, 2021, made it clear that his proposed tax policies would have a major effect on real estate and several related industries. As you may be aware, the Administration has specifically targeted IRC §1031 tax deferred exchanges and has proposed plans to place limitations on it. Read the official White House Fact sheet here.
Section 1031 allows investors to reinvest the proceeds from their sale into new business or investment real estate and defer gain that would normally be subject to a capital gains tax. Tax deferred exchanges are not new — they have been available in one form or another since 1921, and in its current format since 1986.
What are the proposed limits to 1031 Exchanges?
According to the United States Treasury Greenbook, published on May 28, 2021 – the American Families Plan proposes to limit IRC §1031 to $500,000 in gain, per taxpayer and per tax year. Married couples filing jointly would be limited at $1,000,000 in gain per tax year. Information is still limited.
When would any change take effect?
The Administration’s Plan is only in the proposal stage right now and has not passed Congress. Accordingly, no changes have been made to the Tax Code or Section 1031. Historically, when changes are made to the Tax Code, they have an effective date starting in the next tax year. In 2017, changes made to Section 1031 by the Tax Cuts and Jobs Act did not affect ongoing personal property exchanges that were started prior to the effective date of the amendment. Although the Greenbook indicates that the proposed limitations would apply to “exchanges completed” after December 31, 2021, which could affect exchanges started later in the year that carry over into 2022. Clarification is needed on this issue.
Will the proposed changes pass Congress?
Using a process known as “reconciliation”, which requires a simple majority, the Senate will likely play a prominent role in what ultimately becomes law. With each political party evenly matched, and the Vice President casting a tie-breaking vote, moderate Democratic Senators will play an outsized role. While the real estate industry is hopeful that Congress will recognize that 1031 exchanges are a tax revenue generator, and not make any changes, there is a small chance that these proposed changes could become law. For more on the political process and benefits of Section 1031 exchanges, see our Articles.
Political Path to Repeal of 1031
The American Families Plan: A Problematic Proposal for Real Estate Investors
A 1031 Exchange isn’t a Loophole
What Can You Do? Send a letter to Congress: An updated grassroots email is available for you to send to your members of Congress urging them to preserve Section 1031 on the 1031buildsamerica.org website.
Write Congress through the FEA – https://1031buildsamerica.org/take-action/
Legal 1031 does not provide tax or legal advice, nor can we make any representations or warranties regarding the tax consequences of any transaction. Taxpayers must consult their tax and/or legal advisors for this information. Unless otherwise expressly indicated, any perceived federal tax advice contained in this article/communication, including attachments and enclosures, is not intended or written to be used, and may not be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any tax-related matters addressed herein.
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