A major tax advantage for the real estate industry may be one of the casualties in a sweeping federal tax reform expected this year. Some lawmakers are eyeing the 1031 exchange provision to get the tax-rate cut they seek. The provision allows sellers of real estate and other assets to defer capital gains taxes by reinvesting any profit in “like-kind” properties. The 1031 exchange applies to a range of assets, but real estate accounts for the largest portion of exchanges at 36 percent.
The Joint Committee on Taxation estimated in 2014 that repealing like-kind exchanges could raise $40.6 billion in extra tax revenue over one decade. Several lawmakers consider the provision to be loophole that has limited economic benefit and, therefore, some are looking to put it on the chopping block in order to pay for lower tax rates.
Any threat to 1031 exchanges would cause a lot of transactions not to occur, and investors who purchase real estate through 1031 exchanges are more likely to invest in those properties than those who pay cash. “Therefore, you have capital you can now put into the newly acquired property.”
The House Ways and Means Committee has yet to release a bill on the matter, although The Wall Street Journal reports that the chatter among lawmakers on such legislation is growing.