There are three legislative proposals under consideration that propose to eliminate or severely restrict the application of IRC Section 1031 to defer capital gains taxes.
There is a sense that some Members of Congress may think that the proposal to permit 100% immediate expensing with unlimited loss carry forward, coupled with proposed lower tax rates, would make like-kind exchanges unnecessary. This is not accurate; these proposals are not fair and equivalent substitutes for the benefits provided by Sec. 1031.
At a minimum, Section 1031 needs to be retained for exchanges of land and other assets for which expensing is unavailable.
HOUSE The Tax Reform Act of 2014, filed by former HWM Chairman, Dave Camp, called for the complete repeal of Section 1031 Tax-Deferred Exchanges. While former Rep. Camp is gone and this Act was never passed, it remains a starting point for drafting a new bill. Rep. Kevin Brady, Chairman of the House Ways & Means Committee, like his predecessor, Rep. Paul Ryan, now Speaker of the House, is committed to accomplishing comprehensive tax reform. Although now targeted for 2017, the Committee is working on a blueprint for tax reform.
SENATE Chairman Orrin Hatch, Chairman of the Senate Finance Committee, and Senator Ron Wyden, Ranking Member, are also committed to tax reform. Five Committee Working Groups were established in 2015 and charged with providing input. Senator Wyden released a Discussion Draft of a proposed Cost Recovery Reform and Simplification Act of 2016 that is an evolution of a prior “pooling proposal” from former Senate Finance Committee Chairman Baucus. Although Senator Wyden’s proposal does not call for elimination of Section 1031, the details of how 1031 exchanges will be impacted are yet to come. The prior “Baucus proposal” called for a repeal of Section 1031 for personal property, and suggested either a repeal or limitation to a much narrower “similar or related in service or use” standard for real estate.
TREASURY The Obama Administration’s 2017 Proposed Budget would limit the deferral of gain for all Section 1031 exchanges to $1,000,000 per taxpayer, per year. Additionally, the FY 2017 Budget would completely repeal exchanges for artwork and collectibles.
HOUSE The House Ways and Means Committee Chairman, Paul Ryan, was expected to release a draft proposal for Tax Reform prior to the August Congressional recess. The proposal he inherited from the former Ways & Means Committee Chair included complete repeal of Section 1031. This proposal was never released.
SENATE Chairman Orrin Hatch of the Senate Finance Committee stated that June/July would be the time to do a Tax Reform bill and his five Committee Working Groups were charged with providing their input to him by the end of April. The proposal he inherited from the former Senate Finance Committee Chair provided for either a repeal of Section 1031 or a limitation to a much narrower “similar or related in service or use” standard in place of the current “like kind”.
TREASURY The Obama Administration released its 2016 Proposed Budget which limited the deferral of gain for Section 1031 real estate exchanges to $1,000,000 per taxpayer, per year. Additionally, the FY 2016 Budget would completely repeal exchanges for artwork and collectibles.
2014 Proposals There were three major proposals presented in 2014. These all died at the end of 2014, but the threat of these being the starting point of a new bill is strong.
HOUSE The House Ways and Means Committee draft Tax Reform Act of 2014 called for repeal of section 1031 effective January 1, 2015.Read the Executive Summary Read Discussion Draft Section-by-Section Summary
SENATE The Senate Finance Committee’s Discussion Draft: Cost Recovery & Accounting proposed to repeal section 1031, but left the door open for real property and intangible property exchanges. It also suggested a potential modification of the like-kind standard to the narrower section 1033 standard requiring that the properties be similar in service or use.Read the Summary
TREASURY The Treasury’s proposed FY2015 Budget proposed to limit real property exchanges to $1 million annual gain deferral, but was silent about personal property exchanges.
All of this activity takes the immediacy of this issue to a very high level.
The overarching objective for everyone that benefits from this powerful economic stimulator must be to avoid having Section 1031 included in a new tax reform bill. Insiders believe that if a repeal or limitation on Section 1031 is included in a new draft we will have a very difficult, uphill battle to preserve Section 1031.
Stakeholders need to advocate NOW in favor of retaining Section 1031. They must immediately contact their Representatives and Senators and convince them NOT to put 1031 repeal or limitations in a Tax Reform bill.
If a Section 1031 repeal or limitation proposal makes it into a Tax Reform bill, then taxpayers, their representatives and businesses of all kinds affected by the measure will have to expend an enormous amount of energy and money to fight the legislation for the next 3 years.
Anyone sitting on the fence and thinking that they don’t have a stake in this or aren’t willing to contribute to the effort should view these events in terms of efficiency of resources.
A four month sprint is cheaper and easier than a three year marathon. If stakeholders don’t join the four month fight, we are guaranteed a three year fight.