October 29, 2021
1031 Zombie Legislative Update
What a week it has been for the living!
The proposal to cap Sec 1031 like-kind exchanges at $500,000, effectively a repeal of this important tax-deferral, tax-timing tool, is Zombie legislation. It’s a bad idea that simply will never die. In 2017 we fought hard to preserve 1031 from the threat of repeal in the Tax Cuts & Jobs Act and succeeded for real estate assets. This year the Zombie 1031 threat was back as a potential Pay-For in the reconciliation bills.
Trick or Treat / Good News, Scary News
The good news is that 1031 is not included as a Pay-For in the Build Back Better framework issued by the White House Oct 28,2021. The scary news is that this has been a Zombie week like no other in Congress. As the amount of the reconciliation bill has been cleaved, so have some of the earlier Pay-Fors, such as increasing corporate and individual tax rates. That means other Pay-Fors must be offered up and 1031 continues to be at risk until it’s all done. This week has seen nothing short of legislative chaos in which proposals and Pay-Fors have changed dramatically from hour to hour.
Billionaires Income Tax Took a Breath and Died
On Wednesday morning, Oct 27, Sen. Ron Wyden, chairman of the Senate Finance Committee, released legislative text for a Billionaires Income Tax, which would have denied 1031 treatment to those subject to the tax, requiring “billionaires” to treat a 1031 exchange as a taxable sale. By Wednesday afternoon, the proposal was dead. In the event that this piece of Zombie legislation ever rises from the grave again, here is the skinny:
The Billionaires Income Tax would have applied to approximately 700 taxpayers who met either or a combination of the income test or the asset test for 3 consecutive years.
- Income Test: More than $100 million in annual income
- Asset Test: More than $1 billion in assets for 3 consecutive years.
The tax would apply to applicable taxpayers even if their ownership is held in a trust, partnership or other pass-through entity. Capital gains tax plus a “deferral recapture amount,” determined by calculating the amount of tax that would have been due on the gain allocated to each year of the holding period and adding interest on the deferred tax at the short-term federal rate plus 1%, would have been due upon sale or exchange.
Build Back Better is Better for 1031 – for Now…
The Administration’s framework for the Build Back Better bill has some good news for 1031 Exchangers:
- No limitations on Sec. 1031 like-kind exchanges
- No increase in the capital gains tax rate
- No taxation of unrealized gains prior to sale (mark-to-market) or at death
- No repeal of step-up basis
- No increase in ordinary income tax rates for individuals or corporations
Navigating the Haunted Halls of Congress
The negotiation of the Build Back Better reconciliation bill contents and Pay-Fors is very volatile, rapidly changing from day to day. There will surely be changes to the Administration’s framework and the House’ legislative text before the legislation is passed.
We are staying the course with our strategy of creating awareness among our policymakers of the broad benefits of Section 1031 to the US economy and to a wide spectrum of taxpayers. Take a moment now to click here and send a letter to your Senators and Representative to let them know how important retention of Sec. 1031 is to you and your business.
IPX1031 Tax Reform resources