1031 Exchanges Become Political Fodder ... Again!

Much like her predecessor in the office she hopes to hold come January, Hillary Clinton has placed 1031 exchange reform in the bulls-eye of her proposed plans for tax reform. While she has been vocal on the campaign trail about her plans to raise taxes on wealthy Americans, one of her lesser-known proposals has investors and the real estate industry at attention.

Clinton is proposing to put limits on 1031 exchanges, although unlike the Obama administration who targeted $1,000,000 as the threshold, she has not (yet) spelled out to what extent she would limit deferrals. This continued focus on 1031 exchanges by Democrats has led market analysts to presume she would follow in Obama’s footsteps and pursue a million dollar limit.

So how would a cap impact the market? It depends on who you ask. Those involved with multi-million dollar exchanges see a significant cooling of the market. Some investors, due to personal circumstances, will continue to sell regardless of any deferral limits. However, those who take into account the tax ramifications of a large sale will likely hold off, as any incentive to sell will evaporate.

Of course, according to data from the IRS, a majority of like-kind exchanges involve individuals with an average capital gain deferral of around $45,000 per deal. So for these investors, a cap may not have as much impact on sales volume.

However, what all experts agree on is the impact any proposed limits will have on those who have ancillary involvement with the exchange market. Any slowdown in commercial sales will have a negative impact on jobs, especially for engineers, lawyers and title companies – all of whom are intricately involved in 1031 exchange transactions. Likewise, construction jobs will be adversely impacted, as many exchange properties are improved on either before or after the transaction.

Not surprisingly, major real estate industry groups are lobbying hard against any changes. Time, and an upcoming election, will tell just how hard they have to fight to preserve 1031 exchanges.

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.