Some people are really worried that section 1031 will be eliminated by congress in the next major tax overhaul. This article will go over a brief history of 1031 exchanges, and what the future looks like for tax-deferred exchanges.
A Brief History of IRC Changes
The United States has had various iterations of the Internal Revenue Code and some major overhauls. The last overhaul happened in 1986, and guess what happened to the values of real estate after the ‘86 tax reform? They went down, and they stayed down for quite a while because Congress was insensitive to the plight of the real estate investor. The shock from the tax changes really hurt real estate values.
My hope is that in the future Congress will be more surgical and sympathetic to the needs of real estate investors and will incorporate section 1031 into the next overhaul. But the play that congress will have to entertain is that they will eliminate all of these many loopholes and incentives in order to gain the simplicity of lowering overall tax rates.
What Would Happen if 1031 Exchanges Went Away
There is however an illusion about section 1031’s elimination. People estimate that eliminating section 1031 would be a revenue raiser by eliminating the tax deferral. However the reality is if you eliminate 1031, all of the velocity you feel in the market will cease to continue. Another way of saying that is, a farmer or apartment building owner will simply stay in their property. They won’t want to sell it and take the tax hit on the sale, so they just stay in the property. With 1031 they could go into a bigger and better property.
1031 exchanges have been really HOT for the last 24 months. This has been a HUGE force that has helped to power-up the U.S. economy. When private capital can move tax-free to the most advantageous like-kind investments it drives development, job growth, and boosts private-sector productivity and efficiency.
Eliminating 1031 would not raise any additional revenue, but would slow deal velocity to a halt. Investors would rather stay locked-in to their tired old properties rather than pay unnecessary taxes on a sale and risk a move-up to a bigger property.
- 1031 Hotline: If you have questions about changes to the IRC, feel free to call me at 612-643-1031.
Defer the tax. Maximize your gain.
© 2016 Copyright Jeffrey R. Peterson All Rights Reserved