Potential Elimination of 1031 Exchanges

[Julio Gonzalez]

Are you aware of the potential elimination of 1031 Exchanges? The Biden Administration issued a $1.8 trillion plan for childcare and elderly healthcare, and one of the ways to pay for this plan is the elimination of 1031 Exchanges for investors with annual income of $400,000 or greater. Investors would no longer be able to defer tax payments on any gains greater than $500,000.

1031 Exchanges originated in 1921 in order to stimulate economic growth. They have been a key player for many types of investors including new investors trying to build equity, small businesses needing to upgrade to a larger facility without the financial burden of the capital gains tax, investors using real estate in their retirement planning as a way to generate a steady monthly income and many more.

Stock market volatility and low investment returns have created a large demand for real estate investments to help investors diversify away from market risk and generate a steady stream of income from income-producing real estate properties. Brad Watt, CEO of Petra Capital said “eliminating exchange rules at a time when the economy is suffering from the coronavirus pandemic would deal a ‘one-two punch’ to real estate values. 1031 exchanges benefit the “everyday” man by allowing smaller and less capitalized real estate investors to increase their income and net worth by temporarily deferring tax on reinvested real estate sales proceeds.”

The elimination of 1031 Exchanges could have a negative impact on the real estate industry including future real estate property values and the economic livelihood of the small investors who could lose billions of dollars in property values if the tax code is reformed. Kim Lochridge stated “the elimination of the 1031 exchange program would be absolutely detrimental to the real estate markets and industries. Real estate folks are learning a current work around by selling and in the same year buying another property and using the bonus depreciation (from a cost segregation study) in order to offset the capital gains on the sale.” However, this may only be a temporary workaround as bonus depreciation begins to phase out in 2023 and expires in 2027.

What strategies are you or your company using in light of the potential elimination of 1031 “like-kind” exchanges?