Another Politician Takes Aim At 1031 Exchanges

Even though he lost his bid for the Democratic presidential nomination, Sen. Bernie Sanders has not let up on his declaration to bring egalitarianism to the United States tax code. In an October 4 press release, the former presidential hopeful announced his plans to introduce legislation in the next Congressional session to “fix our rigged tax system and close loopholes Donald Trump used to possibly avoid paying federal income taxes for nearly two decades.”

Sanders continued “Special tax breaks and loopholes in a corrupt tax code enable billionaires and powerful corporations to avoid paying their fair share of taxes while sticking the burden on the middle class. It’s time to create a tax system which is fair and which asks the wealthy and powerful to start paying their fair share of taxes.” If all of this sounds familiar, it is. Sanders repeatedly led attacks against economic class disparity throughout his failed presidential bid.

In Sanders’ sights? Four things. Section 469 passive loss rules, Section 465 at-risk rules, Section 1031 like-kind exchanges and current debt and depreciation provisions. While industry experts don’t believe much of what Sanders is proposing has the legs to move forward in the 2017 legislative session, one area that does have the industry’s attention is Sanders plans for 1031 exchanges.

Much like Hillary Clinton, Sanders sees like-kind exchanges as an easier target because that area of reform already has some support on Capitol Hill. Special measures have already been introduced to repeal Section 1031 altogether. Likewise, President Obama has proposed a $1,000,000 limit on the amount of capital gains tax any investor can defer each year.

However, whether legislators ultimately support any revamping of that section of the tax code depends on whether they see Section 1031 as a loophole or provisions that encourage economic growth. And that depends on which side of the aisle they find themselves.

Section 1031 has been part of the IRS code since 1921. Although other parts of the tax code have gone through significant revisions over the past decades, Section 1031 has been retained. Why? Supporters believe it is effective and helps small and medium-sized business growth. This line of thought has empirical support.

A 2015 study coming out of the University of Florida and Syracuse University showed that repealing like-kind exchanges would have an overall negative impact on the economy. It would reduce property values, increase taxes for property owners, increase rents and decrease real estate activities.

Of course, not everyone believes Section 1031 is beneficial. Some see it as a loophole that allows for the total elimination of capital gains tax under certain circumstances. One such person is Bernie Sanders. And with recent revelations about Donald Trump’s 1995 state tax returns very much on the radar these days, the loophole argument is gaining momentum.

Ultimately, of course, whether Section 1031 stays on the legislative radar will be determined by who is elected this November. Stay tuned.

Until then, we will continue to do business as usual. To find out how we can help you find and close on your next 1031 exchange property or to learn more about the exchange process and our qualified intermediary services, please visit our website.