The Devastating Economic Impact of Biden’s Proposed 1031 Exchange Repeal

Democratic presidential candidate Joe Biden's proposed tax plan would eliminate 1031 exchanges for taxpayers making more than $400,000 annually. While this may seem like a reasonable cut to some people, it would actually have a devastating impact on the real estate industry and the economy as a whole. In this article, we're going to discuss why eliminating 1031 exchanges would be bad for the economy.

Negative Impact of Eliminating 1031 Exchanges

Dismantling section 1031 would be detrimental to the commercial real estate industry and the greater economy. Farmers, bankers, title closers, and real estate agents would all suffer. Some are saying that Biden's targeting of like-kind exchanges is politically motivated, as President Trump has personally benefited from using 1031 exchanges in his own businesses. While that may be true, it's not a good reason to completely eliminate like-kind exchanges of real estate because real estate is an engine that drives economic growth and job creation.

1031 Exchange History

The 1986 tax overhaul really decimated the real estate industry for years afterward. This proposal would have a similarly devastating impact. Pull tax incentives from real estate and watch the economic carnage that ensues. Section 1031 has been a part of the Internal Revenue Code for decades and has survived numerous legislative changes. In 2017, the GOP tax plan that was signed into law (The Tax Cuts and Jobs Act) eliminated personal property exchanges of items like aircraft, art, and business equipment, but kept intact the provision for 1031 exchanges of real estate. 

Some commentators point out that unlike other investments that are untaxed while they are held, the value of real estate is constantly taxed during ownership through county and sometimes municipal property taxes, and taxed again on transfer through state deed tax or transfer taxes (which are based upon the value of the real property). Still other observers say that real estate is just plain more illiquid than other types of investments. 

Consequences for the Real Estate Industry & the Economy

Real estate closings are really complicated and difficult, and it takes much longer to market, sell, and close real estate than other types of investments. Without the extra inducement of 1031, the number of sales will plummet nationwide as owners will be locked-in for tax reasons, and also from the practicality of liquidity difficulties. This will be further exasperated by a lack of potential buyers because there will be nobody trying to exchange-up to buy their properties. The result will be that sellers will either choose not to sell to avoid being penalized with taxes...or won't be able to sell because the underlying demand from purchasers will be anemic. Ultimately, this will lead to stagnation, lower property values, and inefficiency in the marketplace.

It's not like the commercial real estate industry is soaring right now. As a result of COVID, the industry has fallen to new depths, with hotels and restaurants (among others) facing an existential crisis. Tapping the real estate industry to pay for the debt accrued because of COVID would be akin to kicking a person when they're down. Wouldn't it make more sense to have another industry that's doing really well right now pay for these services?

• Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2020 Copyright Jeffrey R. Peterson All Rights Reserved

1031 Exchange Warnings for House Flippers

House flipping is the act of buying a house for the purpose of quickly reselling it at a profit. It is a common strategy used by many real estate investors. But can a flipped property be used in a like-kind exchange transaction? This article is all about 1031 exchanges and house flippers. Specifically – whether or not you can utilize a 1031 exchange for property that has been flipped.

Do House Flips Qualify for 1031 Exchange?

All 1031 exchange property has to be held for the right purpose – that is, for use in your trade or business, or for investment. As a result, property that is primarily held for re-sale (i.e. a flipped house) may not qualify for 1031 exchange treatment. In essence, if you try to do a 1031 exchange with a property that you just bought and flipped over the course of a few months, the IRS is likely to flag that 1031 exchange as inappropriate.

There are, however, strategies you can use to circumvent this and potentially use flipped property in a 1031 exchange transaction. For example, if you rehab a property and then rent it out for several years, you could likely use it in a subsequent 1031 exchange.

Exchange Your Property

A 1031 exchange is one of the best ways to defer capital gains taxes when selling property in the United States. If you are considering the tax-saving benefits of a 1031 exchange, your first step should be to contact a qualified intermediary who can help you through the proceedings. The 1031 exchange intermediaries at CPEC1031 have twenty years of experience working with clients on their 1031 exchanges. They bring that experience to the table with each and every commercial transaction. Contact us today to schedule a time to chat with one of our intermediaries about your exchange.

• Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2020 Copyright Jeffrey R. Peterson All Rights Reserved

1031 Exchanges in Community Property States

In this article, we are going to discuss the things you need to keep in mind when conducting a 1031 exchange in a community property state.

A 1031 Exchange Scenario

The help illustrate our point, let’s consider a 1031 exchange scenario. Assume we have a husband and wife (Eric and Mary) who want to conduct a 1031 exchange on their property. Eric and Mary own the relinquished property together. In a 1031 exchange it’s important that the same taxpayer (or taxpayers) who own the relinquished property acquire the replacement property. So Eric and Mary should both purchase the replacement property together.

However, what if Eric wishes to purchase the replacement property through an LLC? Does that still satisfy the same taxpayer requirement?

It really depends on whether the state in which Eric and Mary live is a community property state. If the taxpayers are in a community property state, this setup would work. In these states the LLC is viewed as a disregarded – pass through entity, with Eric and Mary as the taxpayers behind the LLC.

But most states are not community property states, but rather common law states. In those states an LLC would be considered a separate taxpayer, which would create a potential issue for a 1031 exchange. In this situation, Eric and Mary could either acquire the replacement property in their own names, or set up two separate LLCs and acquire the property as tenants in common.

CPEC1031

At CPEC1031, we partner with each and every one of our clients to provide the highest possible level of service. With more than two decades of experience in the realm of 1031 exchanges, we have the skills needed to help you through all the steps of your 1031 real property exchange. If you are interested in deferring taxes when you sell your next piece of real estate, contact us today at our office in downtown Minneapolis to chat with one of our professionals. We work with clients throughout the state of Minnesota and across the country!

• Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2020 Copyright Jeffrey R. Peterson All Rights Reserved

Biden Tax Plan Would Eliminate 1031 Exchanges – Here’s Why That’s Bad

Democratic presidential candidate Joe Biden’s proposed tax plan would eliminate 1031 exchanges for taxpayers making more than $400,000 annually. While this may seem like a reasonable cut to some people, it would actually have a devastating impact on the real estate industry and the economy as a whole. In this article, we’re going to discuss why eliminating 1031 exchanges would be bad for the economy.

Negative Impact of Eliminating 1031 Exchanges

Here are some of the negative impacts that would result from the elimination of section 1031:

• Economic Stagnation

• Lower Property Values

• Less investment in workforce housing

• Fewer Jobs

• Less liquidity in real estate, resulting in declining living conditions and upkeep

The 1986 tax overhaul really decimated the real estate industry for years afterward. This proposal would have a similarly devastating impact. Pull tax incentives from real estate and watch the economic carnage that ensues.

1031 Exchange Professionals

At CPEC1031, we have over two decades of experience in the 1031 exchange industry. Our qualified intermediaries are well versed in the intricacies of 1031 exchanges and can help walk you through the entire process. Contact us today to learn more about the 1031 exchange process and how we can help you defer capital gains taxes on the sale of real estate. You can find us at our primary offices in downtown Minneapolis.

• Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2020 Copyright Jeffrey R. Peterson All Rights Reserved

What Happens if a Taxpayer Dies During a 1031 Exchange?

Planning is essential in a successful 1031 exchange, but there are some things you just can’t plan for, such as the death of a taxpayer during a 1031 exchange. This is a situation few anticipate or prepare for. So what happens to a 1031 exchange if the taxpayer doing the exchange dies in the middle of the process? In this article, we are going to discuss the appropriate course of action if a taxpayer dies during the course of a 1031 exchange.

Option 1 – Let the 1031 Exchange Fail

Your first option is to let the 1031 exchange fail. In this scenario, you would not move your sales proceeds into a like-kind replacement property. Instead, you would sell the relinquished property, pay the required capital gains taxes, and return the remaining proceeds to the deceased taxpayer’s estate. This is certainly a viable option, but a very tax inefficient one, at that.

Option 2 – Continue the 1031 Exchange

The more tax-efficient option is to continue the exchange on behalf of the deceased. In this scenario, you would roll the net proceeds from the relinquished property into a replacement property of equal or greater value, equity, and debt. This would allow the deceased’s heirs to avoid the capital gains tax bill and keep that money working in a continued investment.

1031 Exchanges in Minnesota

Real estate 1031 exchanges are a great way to keep your money working for you over time by deferring taxes on the sale of real property. However, 1031 exchanges are also highly regulated and you need to meet several requirements in order to complete a successful exchange. That’s where a qualified intermediary comes in. Having a qualified intermediary on your side is the best way to ensure your 1031 exchange is a success. Contact us today at our downtown Minneapolis office to learn more about the 1031 exchange process.

• Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2020 Copyright Jeffrey R. Peterson All Rights Reserved