For nearly a century, 1031 exchanges have been a boon for real estate investors looking to upgrade their investment properties and reduce their tax exposure. 1031 exchanges allow buyers and sellers of investment/business property to defer capital gains taxes by rolling the proceeds from a sale into another investment/business property of equal or greater value. Recently, the Biden administration announced a legislative proposal, The American Families Plan, which has significant implications for real estate investors. Let’s look at how President Biden’s American Families Plan’s proposed changes to 1031 exchanges could affect your investment goals.
As of right now, the new proposal will significantly impact and limit the special tax breaks provided by a 1031 exchange. The plan also includes a number of tax-related provisions that can greatly affect real estate investors and alter the calculus of their investment decisions. As these changes move through the legislative process, it becomes increasingly important for you, as an investor, to understand the intricacies of the proposed changes and anticipate how this may affect your future investment plans. Let’s first take a look how the 1031 Exchange currently works.
What is a 1031 Exchange Today?
Steps in a 1031 Exchange:
The following are the steps you must take in order to properly complete a 1031 exchange.
What the American Families Plan proposes to do:
A Before and After Comparison
To illustrate how these changes may affect you, let’s look at a quick example of an investor selling and purchasing a new asset before the changes and after:
Before | After |
John purchased a residential property for $200,000 approximately 35 years ago. He recently sold the property for $950,000 and used a 1031 exchange to purchase a convenience store for $1,400,000. John used the entire proceeds from the sale of the residential property to purchase the convenience store. Here are John’s tax liabilities before and after the proposed legislation. | |
Capital Gains Taxable Amount: $750,000 | Capital Gains Taxable Amount: $750,000 |
Maximum Deferrable Capital Gains: No Limit | Maximum Deferrable Capital Gains: $500,000 |
Amount Deferred: $750,000 | Amount Deferred: $500,000 |
Capital Gains Subject to Tax: $0 | Capital Gains Subject to Tax: $250,000 |
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Zahn Properties and Lyon Stahl do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.
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