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Will the Tax Benefit from 1031 Exchanges Be Limited or Eliminated?

Many people gain a substantial tax benefit by using the proceeds from one property sale to fund the purchase of another property within 180 days. These tax-deferred transactions, known as 1031 exchanges, require strict adherence to IRS rules. If you’re considering a 1031 exchange, you should consult an attorney with experience in this area. You should also be aware that there might be a time when this benefit is sharply curtailed or eliminated completely.

The Biden administration has proposed limits on 1031 exchanges during both 2021 and 2022. Under this proposal, only $500, 000 in capital gains could be deferred in a 1031 transfer. This figure would be increased to $1 million for married couples filing jointly. However, following strenuous objections from lawmakers and representatives from the real estate industry, the proposed changes were not enacted.

Though cutting or canceling the benefit might marginally increase revenue to the Treasury, opponents of the change cited several potential negative effects, such as:

  • Postponement of transactions — The Biden administration estimates that approximately $2 billion could be raised annually by limiting the deferral amount. On the other hand, opponents believe the revenue would be much lower because property owners might delay making transactions anticipating that the rule would be changed back in the future.
  • Stifled business growth — Small businesses looking to expand their operation could be prevented from acquiring a new property because they cannot afford the tax hit that would occur under a restricted 1031 exchange rule.
  • Loss of revenue to states and municipalities — Like-kind exchanges of real property under Section 1031 generate significant revenue for states, counties and cities. Discouraging these transactions cuts down on fees that are collected and increases the likelihood that property will go unused while owners hope for the full 1031 deferral to be restored.

It’s impossible to say what will occur in the future, so you might want to speak with a qualified 1031 exchange attorney if you’re thinking about selling a property. Waiting too long to complete the transfer could lead to additional tax liability if the rules change down the road.

Norma Echarte & Associates in Miami guides South Florida clients through 1031 exchanges and other sophisticated real estate matters. For an appointment regarding your situation and options, please call 305-501-2844 or contact us online.

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