1031 Tax Deferred Exchange Safe… for Now

Since November 2020, many landlords have feared that the 1031 “Like Kind” Tax Deferred Exchange could be on the chopping block. The Biden White House had proposed curtailing 1031 exchanges to help fund their Build Back Better spending program (BBB).[i] Other Democrat leaders have proposed eliminating 1031 exchanges altogether.

While there are some income-tax and real estate-related changes in the version of the bill currently before the Senate[ii] , we are pleased that neither the House-passed version of the BBB nor the Senate version currently include any limitations to IRC Section 1031.[iii]

Although not the first to call for this, the Biden administration has sought the elimination of certain tax preferences for real estate and other supposed “loopholes,” including 1031 exchanges, and the step-up in cost basis for appreciated assets at death.[iv] These are long-standing provisions in the tax code with decades of promulgated regulations and case law.

IRC Sec. 1031 has been characterized as a mere tax-avoidance strategy for ultra-wealthy real estate moguls.[v]  In reality, tax-deferred exchanges may represent a stimulant to the US economy that could not only lead to higher deal flow but potentially create jobs and benefits for taxpayers of all sizes.

From 2010 through 2020, like-kind exchanges accounted for 10 to 20 percent of all commercial real estate transactions, according to a September 2020 study by David C. Ling, a real estate professor at the University of Florida, and Milena Petrova, an associate professor of real estate and finance at Syracuse University.

Another study by Ernst & Young, published in May 2021, documents how eliminating 1031 exchanges could negatively impact the economy by up to $13.1 billion annually. All told, the accounting and consulting firm concluded that 1031 exchanges could support as many as 710,000 jobs that generate labor income of up to $34.4 billion this year. Ernst & Young also found that a repeal of 1031 exchanges likely would result in less federal tax revenue.

While this is certainly a political hot button, one of the likely saving graces is that Section 1031 isn’t Democrat or Republican—there are everyday real estate owners in both parties who take advantage of tax-deferred exchanges.

A 2019 survey from the National Association of Realtors found that multifamily properties and single-family rentals made up a sizable portion of 1031 exchanges among its members, with many conducted by smaller investors.

Net lease properties, such as single-tenant Walgreens, McDonald’s or 7-Eleven stores, are also popular for like-kind exchanges—around a third of those buyers have used the program, according to Alex Sharrin of Jones Lange and LaSalle (“JLL”), who oversees the firm’s national net lease investment practice.[vi]

While restrictions or elimination of 1031s appear unlikely for now, those in the property industry should keep an eye on future developments to help ensure it stays that way. As the research studies noted earlier have shown, like-kind exchanges can increase buying power, allow reinvestment into higher-income properties, and swap properties with significant management needs for ones with lower maintenance liability. For more information about passive real estate investments, please call 1031 Capital Solutions at 1-800-445-5908 or visit our website, 1031capitalsolutions.com.

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This is for informational purposes only, does not constitute as investment advice, and is not legal or tax advice. Because investors situations and objectives vary this information is not intended to indicate suitability for any particular investor. Please consult the appropriate professional regarding your individual circumstance. This material is not to be interpreted as tax or legal advice. 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. Investments in securities involve a high degree of risk and should only be considered by investors who can withstand the loss of their investment. Prospective investors should carefully review the “Risk Factors” section of any prospectus, private placement memorandum or offering circular. The data contained in this material was obtained from third-party sources believed to be reliable; however 1031 Capital Solutions, CIS, and CAM do not guarantee the accuracy of the information.

Services offered through Concorde Asset Management, LLC (CAM), an SEC-registered investment adviser. 1031 Capital Solutions is independent of CIS and CAM.

[i] National Law Review, as of 04.29.21

[ii] Schwab, as of 11.22.21

[iii] IPXExchange, as of 12.14.21

[iv] NBC News, as of 05.15.21

[v] Bloomberg, as of 04.28.21

[vi] The Real Deal, as of 05.03.21