Will Biden’s Tax Plan Change 1031 Exchanges?

There has been quite a bit of discussion lately as it relates to 1031 exchanges and the potential changes that may happen due to President Biden’s Tax Plan. Before we get into those changes, let’s briefly review. A 1031 exchange allows you to sell a business or investment property and purchase another without having to pay a capital gains tax. A 1031 exchange is basically a deferment of paying taxes on profit that is reinvested.

This was originally created in order to boost reinvestment of the sale proceeds to stimulate growth. Currently, investors can use 1031 exchanges to buy and sell tax-deferred real estate throughout life. If the investor holds the property until death, they can pass it on to heirs tax-free.

President Biden’s proposal would still allow for 1031 exchanges of real property but minimize the benefit to only allow a deferral of $500,000 per year or $1 million if filing a married filing joint return. This money would be put towards the American Families Plan, paying for childcare, paid family leave, and education programs.

According to the National Association of Realtors, this could be problematic in the future considering that 12% of real estate sales were part of a 1031 exchange from 2016-2019. Furthermore, 47% of those 1031 exchange transactions were made up of sole proprietorships and S corporations.

This plan has not passed yet, but start planning now, completing a 1031 exchange is not a simple undertaking and can take a considerable amount of time. Contact our office today so that we can review your situation and create a personalized strategy that fits your situation.