In Bisnow’s Biden Is Going After 1031 Exchanges Again. CRE Is Mobilizing To Stop Him, IPX1031 EVP Suzanne Goldstein Baker was quoted that IPX1031 and industry partners have spent significant time and energy educating our policymakers as to the powerful economic stimulus that is provided by section 1031.
President Biden released his FY2023 budget last week, and it again proposes a cap on deferred gain from like-kind exchanges. This is not a new threat to Section 1031. It is identical to the proposal in the White House’s FY2022 budget.
The proposal would limit the amount of gain that could be deferred in a like-kind exchange to an aggregate amount of $500,000 per year per taxpayer ($1 million in the case of married individuals filing a joint return). Any gains from like-kind exchanges in excess of $500,000 ($1 million married filing jointly) would be taxable in the year of the relinquished property sale. If passed, the proposal would be effective for exchanges completed in taxable years beginning after December 31, 2022.
The practical effect of the proposed limitation would be elimination of the benefit of Sec. 1031 like-kind exchanges for virtually all commercial real estate and all but the smallest of ranch and farmland transactions. Given the high values of commercial real estate – the places where we work, shop, dine, recreate, and live (in the case of apartment complexes and mixed-use properties) along with the surging values of agricultural land – where our food is grown — the impact is tantamount to repeal.
This is a short-sighted and misguided proposal that will do more harm than good.
The Administration’s estimate of the cap is a mere $1.95 billion per year. In a $5.8 trillion dollar budget, this is “budget dust.” We have presented and continue to present our elected policymakers with an economic impact study by Ernst & Young which estimated that the direct and indirect economic activity supported by like-kind exchange transactions generates approximately 6 times the amount of federal, state and local tax that the proposed cap is estimated to raise.
Additionally, like-kind exchange activity, especially in the case of larger, commercial real estate transactions, generates many jobs. Even the smallest like-kind exchange will directly generate at least 30 jobs and taxable income for real estate agents, lenders, qualified intermediaries, title insurers, escrow closers, surveyors, appraisers, attorneys, accountants, contractors, skilled tradespeople, unskilled laborers and more. The larger transactions, such as hotel properties which typically involve significant renovation, are the biggest direct job generators. Research by Ernst & Young has concluded that like-kind exchange activity is a significant contributor to US GDP.
We, along with our colleagues at the FEA and a coalition of real estate industry associations have done and will continue to do extensive education with members of Congress to provide the facts about the benefits of Section 1031 to our policymakers. Read comments made by our EVP Suzanne Goldstein Baker in Bisnow’s recent article HERE. And watch this blog for updated Ernst & Young findings to be released soon.
IPX1031 Tax Reform resources