Will the 2020 Election Mean the End of 1031 Exchanges? Austin Bowlin, CPA – Partner at Real Estate Transition Solutions
Biden’s Plan to Eliminate 1031 Exchanges Election years always have an element of uncertainty associated with them. Owning and managing investment real estate presents enough challenges, especially during difficult economic times, so the potential for significant policy change only makes the job that much more difficult. 2020 has already been an “unprecedented” year and now Presidential candidate Joe Biden wants to eliminate Section 1031 from the tax code to fund his proposal for universal childcare and in-home care for seniors. What is a 1031 Exchange? IRC Section 1031 allows for the taxes associated with the sale of investment property such as capital gains tax and depreciation recapture tax to be deferred, provided “like-kind” real estate is acquired within 180 days following the sale of the original property. Commonly referred to as “1031 Exchanges”, IRC Section 1031 has been part of our tax code for nearly 100 years and is utilized by thousands of small and large investment property owners every year. For further information on the history, rules, benefits and strategies available using 1031 exchanges, please visit our website at www.re-transition.com and download our free guide: “Understanding 1031 Exchanges” Why Eliminating IRC Section 1031 is a Bad Idea? Presidential candidate Joe Biden portrays 1031 Exchanges as a tax loophole for the wealthy, even though 1031 Exchanges are clearly codified within our tax code and are available to all owners of investment real estate – regardless of the property size or individual’s income. His proposal eliminates the use of 1031 Exchanges for taxpayers with annual income in excess of $400,000. Limiting the use of 1031 Exchanges is not only bad policy but reveals a lack of understanding of the role real estate plays in our economy. Real estate represents a major portion of the U.S. economy. According to Ibis World, a global industry research firm, commercial real estate employs nearly 3.3 million individuals within the United States and is the U.S.’s 7th largest industry. Real estate is such a large U.S. industry, in part, because of the ability for capital to move efficiently between properties. 1031 Exchanges are a major driver of that efficiency. Utilizing a 1031 Exchange, capital can be reinvested from one property to the next without a significant reduction from taxes. The movement of capital creates economic opportunity for brokers/agents, consultants such as appraisers, lenders, bookkeepers, property managers, construction workers, insurance agents and many other hardworking individuals. Candidate Biden talks about the taxes that are deferred annually through 1031 Exchanges as if these dollars would then be available to spend on social programs, which they will not. The reality is the volume or “velocity” of real estate transactions would decline significantly and with that decline would come the loss of hundreds of thousands of jobs. California’s implementation of Proposition 13 in 1978 is a perfect example of how this concept would play out. Proposition 13 stated that the assessed value of property for tax purposes could not increase (continued on page 9) 8
RENTAL ALLIANCE UPDATE October 2020
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