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By Clinton Lu, TFS Properties
Earlier this spring, Biden proposed a number of tax law changes in regards to his Build Back Better program. Aimed at freeing up more money for the little guy, the program divided itself into various parts, one of which was the American Rescue Plan. Within this plan, Biden proposed to do away with the benefits received by performing a 1031 exchange, also known as a “like-kind” exchange, but was this portion of his proposal signed into law?
Section 1031 Like-Kind Exchanges
The IRS Code is divided into sections, one of which details the tax break individuals can take advantage of when it comes to the capital gains taxed on real estate. This particular section, allows investors to roll their profits from a real estate sale into the purchase of another property of the same, or like, type. In doing so, investors defer the capital gains tax that they would typically incur, and are able to reinvest all of the money from their sold property (downleg) into different investment property or properties (upleg.)
Possible Effects of Biden’s Tax Proposal
While it might sound like a good idea on paper, increasing taxes on real estate profits has serious consequences. “The White house emphasizes that its tax increases would affect only the top 1% to 2% of individual taxpayers,” but doing away with 1031 Exchanges would seriously impact both big AND small investors alike.
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Both big and small investors can benefit from performing a 1031 Exchange and according to the Congressional Joint Committee on Taxation, investors could save over $40 billion in taxes in the next three to four years if it were to remain in place. That’s money that could—and in many cases, will—be reinvested into other real estate properties and further drive the economy.
This cycle within the real estate industry was so important that the Mortgage Bankers Association and the National Association of Realtors appealed the proposal to halt the exchange. As a result, it seems their efforts, as well as the voices of many others, prevailed.
The Final Verdict
Many feared that ending Section 1031 exchange benefits would have a profound effect on the real estate market. However, this particular part of Biden’s tax proposal was not signed into law. Investors can still defer their taxes on capital gains through a 1031 Exchange and preserve their capital while doing so.
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