The 1031 exchange has been targeted many times in the past by pols looking to raise tax revenue. Nevertheless, it has survived largely intact for decades, due in part to the loud voices within the real estate lobby.
But with the Democrats’ ongoing and unprecedented spending spree, concerns are growing that Presidents Biden’s call to limit or shutter the 1031 exchange could be more than mere bluster:
Kevin Aussef, CBRE’s global chief operating officer for capital markets, noted that while prior administrations have suggested ending 1031 exchanges, chances are better now that it will happen. “The threat is real,” he said. “One of the differentiators this time is the amount of stimulus that has been pumped into the economy, and, not surprisingly, policymakers are looking for revenue to offset the debt that has been created.”
Biden’s proposal calls for elimination of the 1031 exchange for gains in excess of $500,000, which (in theory) would help fund his proposed child care and family leave legislation. The president has also proposed increasing the capital gains tax rate, thereby making the possible blow to the 1031 exchange mechanism a “nightmare scenario” for many real estate investors.
Of course, neutering the 1031 mechanism would likely fail to raise the amount of tax revenue that is projected, since this policy enactment would almost certainly decrease deal activity. But in an era (and within an administration) that is obsessed with optics, removing this “loophole” just might be too tempting a scalp for the Democrats to leave it untouched.