1031 tax deferrals under attack

The Biden administration is proposing limitations on 1031 exchanges as part of its 2023 budget.

A 1031 exchange allows real estate investors to defer taxes when they rollover the proceeds from a sale into a “like-kind” property.
That means, for example, an investor can sell an apartment building and invest those funds into a warehouse without paying any capital gains taxes on the initial sale.

Under the proposal, investors would be limited to a $500,000 tax deferral ($1 million for married investors filing jointly) each year.
Any gains above that would be recognized in the year of the exchange. The proposal does not, however, apply to real estate investment trusts (REITs) or C Corporations.

Critics say the proposal would hurt small business owners and stall business expansion. According to the National Association of Realtors (NAR), 84% of 1031 exchange properties from 2016-2019 were completed by investors in sole proprietorships or S-corps. The median price for an exchange was $500,000 in 2019.

Likewise, critics say that wealthy property investors will simply wait out the tax change, holding onto their properties until the tax rules shift in their favor again and thereby slowing transaction volume in the real estate sector. The NAR reports that the median holding period for 1031 exchange investors is 8.5 years.