updated May 2020
The Tax Cut and Jobs Act was signed into law on December 22, 2017, and took effect on January 1, 2018. Read about the impact the Tax Cut and Jobs Act had on Sec. 1031 here.
1031 Exchanges have been an integral part of real estate’s recovery. Now the government is proposing to eliminate all 1031 Exchange activity.
For decades, real estate investors, business owners and Fortune 500 companies have used 1031 Exchanges to defer the payment of capital gains tax and depreciation recapture tax associated with the sale of their investment properties. 1031 Exchanges also allow taxpayers to maintain or diversify their portfolios and increase their purchasing power. Any investment property or property held for productive use in a trade or business, ranging from vacant land to shopping centers, can be exchanged. The taxpayer must simply purchase new qualifying real estate and follow some basic rules to complete a tax deferred 1031 Exchange.
Even though 1031 Exchanges have long been recognized as a major factor in encouraging real estate sales, as part of tax reform in separate Discussion Drafts, the House of Representatives, Senate and the President’s Budget Office have all proposed eliminating or sharply curtailing the benefits of Section 1031:
- House Ways & Means Committee Chairman Dave Camp released a Discussion Draft of his Comprehensive Tax Reform Proposal on February 25, 2014. The Camp Proposal would repeal Code Section 1031 for like-kind exchanges occurring after 2014.
- Senate Finance Committee Chairman Max Baucus’ tax reform Discussion Draft includes a proposal to repeal Section 1031 in its entirety. The proposed repeal would apply to exchanges made in taxable years beginning after December 31, 2014.
- President Obama’s 2015 Budget proposal also contains significant changes to IRS Code 1031. The President’s proposal does not eliminate 1031 Exchanges, but limits the amount that can be deferred to $1 million per taxpayer per year.
The elimination of 1031 Exchanges will result in a sharp decrease in real estate transactions. Due to its severe impact on all areas of the real estate community and how this could potentially affect you, IPX1031 will keep you up to date on these proposals. Simply send an email to email@example.com to be added to the “Washington Update” list.