This blog post was co-authored by Jeffrey Kiesnoski & Daniel Raupp.

In the months leading up to the 2020 Presidential election, Joe Biden announced one of his biggest initiatives, should he be elected, is to fund childcare and eldercare programs by eliminating 1031 Exchanges, the section of the tax code that allows real estate investors to sell one property and use the proceeds to purchase another while deferring capital gains tax.

Here we go again.

1031 Exchanges have been around for nearly 100 years and have been on the chopping block by leaders of both political parties over the last several election cycles. A look back at the history of 1031 Exchanges, previous proposals to eliminate them, and the math that might force Biden to look at alternate revenue sources explain why 1031 Exchanges are at risk once again.

If you are considering a 1031 Exchange, you may want to consider moving forward with your transaction now to capture the higher basis on your appreciated property and defer capital gains tax prior to the election and a potential change in administrations.

Historical Context on 1031 Exchanges Matters

Section 1031 became part of the tax code in 1921 because of two main features:

1) Real estate investors aren’t unfairly taxed if they don’t take possession of funds after the sale of certain property

2) It incentivized reinvestment of proceeds after the sale of a property by allowing deferment of capital gains taxes if a like-kind investment is purchased

As a result, 1031 Exchanges have helped Americans build wealth, drive revenue to local governments, and even assisted with environmental protection efforts by allowing farmers to swap land to aid conservation efforts.

But the tax revenue generated by repealing the law rather than the many ancillary benefits of keeping it drive repeated efforts by republicans and democrats to consider alternatives. President Obama in 2014 proposed capping tax savings from 1031 Exchanges at $1 million. In 2017, Republican lawmakers proposed an overhaul of the entire tax code that most speculated would have eliminated 1031 Exchanges. Both times 1031 Exchanges survived with only minor changes.

Why a Biden Administration Would Push to Eliminate 1031 Exchanges

A new tax revenue source would be the main reason a Biden administration would seek to eliminate 1031 Exchanges.

The United States’ budget deficit is at an all-time high while some of our country’s most vulnerable populations have been among the hardest hit by the COVID-19 pandemic. Biden has said he would take what Congress’ Joint Committee on Taxation estimated as $50 billion in taxes between 2019 and 2023 and apply it to child and elder care programs.

Biden could also benefit politically by eliminating 1031 Exchanges. While Trump has not released his tax returns, he has acknowledged paying little or no taxes in some years, likely due in part to 1031 Exchanges. Many of Biden’s supporters would enthusiastically support any legislation aimed at reducing Trump’s wealth. 

Why We Believe 1031 Exchanges Would Survive Under a Biden Administration

While detractors’ of 1031 Exchanges label them as a tax loophole, they continue to exist because they positively impact communities, help families build wealth, and create jobs.  Rather than just being a tool of the ultra-wealthy, 1031 Exchanges make it possible for middle-class Americans to use the proceeds from one property to finance the purchase of another without requiring them to raise capital while deferring taxes.

This is especially relevant in today’s economy when so many tenants across the country have been unable to pay rent. A 1031 Exchange could help landlords swap low-performing assets for more potential revenue-producing assets. While it depends on individual circumstances, a Delaware Statutory Trust (DST) allows investors to purchase fractional shares of professionally managed, institutional-quality assets that seek to produce monthly income. 

There are also real estate industry groups strongly behind 1031 Exchanges. Upon hearing Biden’s proposal, Jeffrey DeBoer, president and CEO of the Real Estate Roundtable, defended 1031 exchanges by explaining they "allow cash-strapped minority, women, and veteran-owned businesses to grow their business by temporarily deferring tax on the reinvested proceeds. Like-kind exchanges are particularly important during economic downturns when access to capital is less certain.”

While detractors may salivate over potential new tax revenue, several previously completed studies have outlined the impact of 1031 Exchanges. A 2015 Ernst & Young study determined that repealing exchanges could, among other things, shrink the economy by more than $13 billion, discourage investment, and lower federal tax revenues.

Still, many investment property owners are moving to complete their exchanges before year-end, thus avoiding the potential risk that the benefits of the 1031 Exchange could disappear under a new administration. You may want to strongly consider taking similar action and avoid the political uncertainty that is certain to prevail up to November 3^rd.

For more information, contact our team today!