With the presidential election coming up in November, it’s time to take a look at the tax plans proposed by the candidates – particularly Joe Biden. The tax plan recently released by Joe Biden’s campaign unfortunately includes the complete removal of section 1031.
Here is a helpful breakdown of the tax plan in its entirety (with an excerpt about the 1031 exchange repeal below):
Eliminate real estate loopholes. Under current law, owners of appreciated real estate assets used in a trade or business can defer capital gains taxes when exchanging the asset for property of a “like kind.” The proposal would eliminate this tax benefit and treat such exchanges as taxable events.
As we’ve discussed before, removing section 1031 from the tax code is not the great money-saving idea that some politicians like to think it is. 1031 exchanges help to encourage growth and stimulate the economy. These exchanges are good for real estate investors large and small – not just the super-wealthy.
Downsides of Repealing Section 1031
Here are a few reasons why repealing 1031 exchanges is a bad idea:
Protect 1031 like-kind exchanges to stimulate real property values and keep capital flowing in the economy.
Illiquid real estate sales may be stifled if 1031 like-kind exchanges are terminated.
1031 has been around since 1921 because low unemployment is intrinsically tied to real estate growth.
Real estate agents know that real estate sales and property values will suffer if 1031 is eliminated.
Banks know that property owners won’t be able to refinance if real property values drop due to tax code changes; and then they won’t be able to invest as much in their properties to maintain and fix up properties; and the quality of real estate stock will suffer.
In 2015, the University of Florida conducted a study in which they estimated the U.S. Department of Treasury lost between $200 million and $3 billion in potential revenue as a result of section 1031. That being said, those figures assume that real estate developers would continue to sell properties (and take the resulting tax hit) in the absence of the incentives offered by the 1031 exchange. This is highly unlikely, and even the authors of the study admitted as much. The ripple effects of getting rid of section 1031 would have numerous negative impacts passed on to parties beyond the property owner.
For these reasons, it’s important that we work to keep 1031 exchanges alive for the overall health of the economy.
Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.
Defer the tax. Maximize your gain.
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