1031 Exchange News: Tax Reform Update
By: Todd R. Pajonas, Esq., President
September 20, 2021
News out of Washington this week indicates a positive outlook for Section 1031 exchanges to survive in their current form. The House of Representatives Ways and Means Committee advanced a reconciliation bill that did not include any changes to Section 1031, or several of the other tax reform proposals that had been floated earlier in the year by the Biden Administration, which would have affected real estate investors.
To provide an overview of the legislative process – there are currently two major funding bills working their way through the House and Senate – the $1 trillion “bi-partisan” infrastructure bill, and the $3.5 trillion reconciliation bill.
The infrastructure bill has passed in the Senate but is waiting for a vote in the House. Members of the Democratic Progressive Caucus are seeking to tie passage of the infrastructure bill to passage of the much larger reconciliation bill. The Republican party, as well as certain moderate members of the Democratic party, oppose this.
The reconciliation bill is where we will see changes to the tax code in order to make the bill revenue neutral. The House Ways and Means Committee has been tasked with drafting the initial version of the reconciliation bill. Previous proposals to limit 1031 exchanges, eliminate carried interest, and eliminate the stepped-up basis, are all absent from the most recent version of the bill that was advanced. This does not mean that any or all these proposed changes cannot be added back to a later draft of the bill, but we should take comfort that for the moment these proposed changes are not currently being considered for repeal or limitation.
Some of the proposals in the the latest House Reconciliation Bill, which are income and real estate related, are as follows:
1. Raise the marginal income tax rate from 37% to 39.6% and lower the threshold for married filing jointly from $628,300 to $509,300.
2. $5M+ income will be subject to a 3% surcharge for a total of 42.6%. (Effectively, a new top tax bracket.)
3. Capital gains tax rate will rise to 25% (currently at 20%). The 3.8% net investment income tax would continue. Accordingly, the effective capital gains tax rate would go from 23.8% to 28.8%.
4. Higher capital gains tax rate will be enforced retroactively except for sales of capital assets currently under a bone fide contract.
5. Corporate tax rate to increase from 21% to 26.5%.
6. Currently, there are proposals related to limiting capital gains treatment for carried interests. These proposed changes increase the holding period from 3 to 5 years, with the exception of carried interests in real property trades or businesses with adjusted gross income of less than $400,000.
It is important to note that some or all these proposed changes may or may not ever become law. It is still important to make your voice heard and let Congress know that tax benefits like the 1031 exchange are important to real estate and the broader economy. We will keep our network updated on new developments.
For more on current tax reform proposals, please the Tax Reform section of our website:
Please make your voice heard in support of preserving Section 1031:
Copyright © 2021 Legal 1031 Exchange Services, LLC. All rights reserved with the exception of public domain and fair use material linked and referenced in this article.
Disclaimer: This document is intended for use as information only by the named recipient(s) and should not be shared without the sender’s express permission. Taxpayers should conduct their own research and due diligence with their tax or legal advisors.
Legal 1031 Exchange Services, LLC does not provide tax or legal advice, nor can we make any representations or warranties regarding the tax consequences of your exchange transaction. Property owners must consult their tax and/or legal advisors for this information. Our role is limited to serving as qualified intermediary/accommodator to facilitate your exchange.
Disclosure: This to advise you that, unless otherwise expressly indicated, any perceived federal tax advice contained in this 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.