Smaller property investors might be affected by Biden’s real estate tax plan

Real estate investors would experience a tax hike under President Joe Biden’s plan to help fund the $1.8 trillion American Families Plan.

The American Families Plan allocates funds for childcare, paid family leave and education programs.
The tax hike would happen because Biden’s plan removes a real estate investor’s right to defer taxes on property gains over $500,000. If this plan goes into effect, it will likely impact smaller property investors.

The plan would put a stop to a strategy known as like-kind or 1031 exchanges — named for Section 1031 under the Internal Revenue Code — which allows investors to defer capital gains taxes on real estate by carrying the profits over to their next purchase of property of the same kind, such as one apartment building for another or one rental house for another.

A 1031 exchange is allowed if the replacement property is identified within 45 days of the closing of the sale of the first property. Under current law, real estate investors can use 1031 exchanges throughout life to buy and sell property and defer capital gains taxes. Someone who holds a property until death may also pass it on to their heirs tax-free.

In November 2020, the congressional Joint Committee on Taxation estimated that between 2020 and 2024 1031 exchanges could save
investors more than $40 billion in taxes if the current law remains in force.

A 2020 survey from the National Association of Realtors found that from 2016 through 2019, around 12% of real estate sales were part of a
1031 exchange. Of those, 84% involved small business investors, such as sole proprietorships and S corporations.

Many smaller investors tend to use 1031 exchanges for investments in multifamily properties and single-family rentals.