Lessons from the Pros

Real Estate

Proposed 1031 Exchange Reform

I try to stay balanced in my articles and not get TOO political but sometimes I can’t help it.  The government is slowly eating away at tax benefits that make real estate attractive, such as the limit on the deduction of interest on your home if you are over a certain level of income.  Well, now they are coming after one of the best ways to continue to encourage growth in investment real estate, the 1031 exchange.

Here is a little back ground on a 1031 exchange also known as a “Like-Kind Exchange” –

“A tax deferred exchange that allows for the disposal of an asset and the acquisition of another similar asset without generating a tax liability from the sale of the first asset. This can include the exchange of one business for another or one real estate investment property for another. An 8824 form must be filed with the IRS detailing the terms of the deal.” by Investopedia

The first modern tax-deferred like-kind exchange was approved by the board of tax appeals in 1935.  In 1954, the Tax Code was amended to include section 112(b)(1) which is the present day definition of a tax-deferred exchange.  Since that time, it has been used by investors of all sizes to build wealth and grow real estate portfolios.  Now many of us would think this is a good and positive thing for the economy, but I guess not all.

In the budget just released by President Obama, there contains a significant proposed change to 1031 exchange rules.  If the proposal is accepted, it would limit a taxpayer to a $1 million exchange per year. The government projects this would generate $18.3 billion in tax revenue over 10 years.  I’m not even going to get started on how I feel that money in the economy would do more good than in the hands of our government.

So, once again the government feels they could use the tax dollars to benefit our society more than the free market economy.  If this reform goes through, it could severely hinder the future of investment rental and commercial real estate.

If you want a little light reading here is the link to the proposed budget for 2015 (please insert link).

Also of interest is that on February 25, 2014 the proposed Tax Reform Act of 2014 was published by the Chairman of the House committee on Ways and Means, Representative Dave Camp (R.-Mich.).  The Camp Proposal would repeal Section 1031 for Like-Kind exchanges occurring after 2014, unless a binding commitment to complete the exchange is in place before December 31, 2014.

The President’s budget is uncertain at this point and will be subject to a great deal of debate and very strong opposition.  But the big concern for me is that there have been changes to code Section 1031 officially proposed by the President and the Republican Chairman of the House Ways and Means Committee. This isn’t a probable indicator for things to go on unchanged.

So, if a 1031 Exchange is something you have been considering, now may be the time to make a move.   If you would like to learn more about an exchange, the Professional Real Estate Investor Class offered by OTA teaches the basics.

Great Fortune,

Diana Hill

DISCLAIMER This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.

Join over 170,000 Lessons from the Pros readers. Get new articles delivered to your inbox weekly.