Is it the End of 1031 Exchange Tax Benefits?

President Biden has proposed new legislation as part of his 1.8 trillion dollar American Families Plan, to abolish the deferment of capital gains tax on income investment (residential and commercial) gains over $500K. This is part of a broad effort to have raise taxes on the rich to pay for the expansion of services including free pre-school to economically challenged Americans.

Currently, investors can sell their current investments and "defer" taxes on their capital gains (money they would have gained in profit) by rolling the proceeds of their sale into another investment property. This deferment would generally help current investors take their equity and buy other larger more profitable properties or expand their real estate investment portfolio how the see fit. This process of deferment of capital gains could theoretically continue until the investor's death.

Most experts feel the abolishment of this tax deferment vehicle would be more harmful than helpful in the long run. However smaller scale investors won't be hit as hard by the changes because of the proposed capital gains minimum of $500K which won't apply as broadly to many independent investors.

How the Biden administration specifically plans to tackle 1031 exchanges remains to be seen. Enforcing regulations may be tricky no matter how the law is written and as always, lawyers will try to come up with a way to minimize the impact.

When will these proposed changes come into effect if the bill passes? There’s no date set yet. Bear in mind that when major tax changes occur, they often contain grandfathering arrangements so they may not apply so broadly to every investor who already owns a property...check back for updates!