The 1031 Exchange dates to 1921 and has undergone many changes over the past years including attempts by politicians on both sides of the aisle to not only weaken investor benefits but to seek the outright repeal of this important part of our tax code.
Shortly after the adoption of the first US income tax in 1918, Congress recognized that it was unfair to tax businesses and individuals who sell properties and reinvest the proceeds rather than spend them. The prevailing view which has persisted for almost 100 years was that if a taxpayer receives nothing in the transaction to pay taxes on (funds are transferred to the new property rather than spent), no tax should be owed.
In 2017 several House Republicans including Paul Ryan and Mitch McConnell floated various plans to strip and even eliminate the 1031 Exchange. These plans partially succeeded when the Tax Cuts and JOBS Act of 2017 was passed later in the year resulting in the elimination of the 1031 Exchange for personal and business property while, very fortunately, preserving the 1031 Exchange for business related real estate including rental properties.
In July of this year, Joe Biden proposed eliminating 1031 Exchanges for investors with annual incomes greater than $400,000 in order to fund a portion of his plan to finance $775 billion in government spending over the next 10 years on child and elderly care dubbed the “Caring Economy.”
While past efforts to eliminate the 1031 Exchange have not fully succeeded, we now live in different times. The devastating impact of COVID on our economy has greatly reduced tax revenues at a time when politicians are spending trillions to fund seemingly endless programs to prop up our economy.
Furthermore, there has been a growing shift in our political environment towards more aggressively raising taxes on wealthier individuals to reduce the perceived widening income gap in the US.
Unfortunately, it is now more popular for politicians to characterize rental property owners as a privileged class of fat cats that need to be further taxed to fund runaway government spending.
The 1031 Exchange was created by politicians and can be easily undone by them except for the efforts of landlord and real estate industry friendly lobby groups to keep this valuable part of the tax code alive.
As our spending mounts and deficits continue to rise, expect more efforts by politicians on both sides of the aisle to further compromise and eliminate what real estate investors have long enjoyed.
If you are planning a future 1031 Exchange, you might want to consider moving up your timetable if you believe you may miss out on potential tax deferral benefits
For more information on 1031 Exchanges and replacement property options please feel free to contact us at info@firstguardiangroup.com or you can also schedule some time on Paul’s calendar here for a personal consultation.
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