On March 28th, the Biden administration released its $5.8 trillion 2023 federal budget proposal. As has been the case several times in the past, this year’s proposal includes limitations on the ability to use a 1031 “like-kind” exchange to defer capital gains taxes on the sale of appreciated investment property.
Under the section entitled “Repeal Deferral of Gain from Like-Kind Exchanges,” the proposal explains the administration’s desire to limit Section 1031 capital gains deferrals to an aggregate amount of $500,000 per taxpayer per year ($1 million for married couples filing jointly). The taxpayer would recognize anything above this amount as capital gains in the year the property transaction occurs.
If included in the final legislation, this change would impact 1031 exchanges occurring after December 31, 2022.
The Likelihood of Changes
It remains to be seen whether this proposal will actually come to fruition. Since it involves a change to the tax code, it would require the passage of legislation through Congress. The Democratic party still has a slim majority in Congress, and some Democrats support the 1031 exchange rules as they are currently written.
It is also important to note that this proposal does not represent a new threat to Section 1031 of the U.S. Tax Code. Instead, it is simply a repeat of what was included in the Biden administration’s 2022 budget.
The Bottom Line
As an investment property owner, this potential change to the Tax Code might heighten investor concerns, especially if they are considering a sale. But it may help to remember that despite many previous attempts by legislators to change 1031 exchange requirements, this powerful tax strategy has remained relatively unscathed for over one hundred years of its existence.
However, it is prudent to evaluate one’s own situation if one has been thinking about engaging in a 1031 exchange. Depending on the situation, it may make sense to get it done before the end of the tax year. This could help avoid the potential risk of facing a cap on capital gains tax deferral if this change is passed into law in 2023.
As always, the team at Fortitude Investment Group will continue to monitor the situation closely and keep you informed of any new developments regarding 1031 exchange legislation or tax code changes.
If you’re interested in learning more about the current 1031 exchange rules and how investors may be able to take advantage of them this year, contact our team to schedule a consultation.
Because investor situations and objectives vary this information is not intended to indicate suitability for any individual investor.
This is for informational purposes only, does not constitute as individual investment advice, and should not be relied upon as tax or legal advice. Please consult the appropriate professional regarding your individual circumstance. Fortitude Investment Group does not offer legal or tax advice.
There are material risks associated with investing in real estate securities including liquidity, tenant vacancies, general market conditions and competition, lack of operating history, interest rate risks, the risk of new supply coming to market and softening rental rates, general risks of owning/operating commercial and multifamily properties, short term leases associated with multi-family properties, financing risks, potential adverse tax consequences, general economic risks, development risks, long hold periods, and potential loss of the entire investment principal.
IRC Section 1031, IRC Section 1033 and IRC Section 721 are complex tax concepts; therefore, you should consult your legal or tax professional regarding the specifics of your particular situation.