Tax Reform & The Importance of the 1031 Exchange

Tax Reform & 1031 Exchange

There are a lot of rumblings out there about potential tax reform. President Trump has talked openly about how he wants to lower federal corporate income tax rates from 35% perhaps down to as low as 20%. How do we pay for this reduction in tax and the simplification of the tax code?

1031 on the Chopping Block?

Some pundits have speculated that section 1031 could be a victim of federal tax reform, thinking that Congress will throw it out in an attempt to simplify the code and to create some revenue raisers to offset these reductions in other areas. But throwing out section 1031 would likely have the opposite effect.

Market Stagnation

Let’s start with the assumption that 1031 elimination would result in more tax revenue collection. The result of eliminating 1031 would be stagnation and decreased velocity in the marketplace. I don't care if you lower rates down to 5%, a lot of our clients are just adamant that they don't want to pay any taxes on the sale of their real estate. They do not want to give away their hard-earned equity, and they will stay locked into their current properties and never sell them if they are going to get slapped on the wrist with this disincentive called taxes.

Without 1031 there is no tool to allow people to move their capital to the most advantageous investment. That stimulates property values, job growth, and has an unusual effective of benefiting the entire economy because capital is moving to different geographic areas around the country and into different business segments where it's needed.

Section 1031 Has Been Around for Nearly 100 Years

Getting back to the idea that simplification requires the elimination of 1031, it’s important to note that section 1031 and its predecessors have been in the tax code since 1921. It’s almost a hundred years old. There's a reason that it survived as long as it has in the code because it fulfills an important function.

It says that as long as you have a continuation of investment into another like-kind property, the government is not going to punish you by making you recognize gains because you're continuing your investment into another like-kind property. We want investors to be able to move their cash to where it's needed in the economy because it benefits them, but more importantly it benefits the whole economy by creating jobs and increasing property values.

We Need to Preserve Section 1031

If we eliminate 1031, deals will stop happening. That will cause property values to decrease. When property values decrease, then you can't even refinance out your equity and you're locked into the property and unable to sell.

The last time we had tax reform in 1986 the real estate market plummeted and it stayed down for a considerable time. That exasperated an already bad situation and created an unintended consequence with the savings and loan crisis, which all of us taxpayers ended up having to bail out. Eliminating 1031 is not a good idea. We need to preserve 1031 even through the most comprehensive of tax reforms because it is a vital key to keeping property values up, stimulating the economy, and creating jobs.

  • 1031 Hotline: If you have questions about 1031 and tax reform, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.


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