Biden Tax Plan Proposes Elimination of 1031 Exchanges for High-Net-Worth Individuals

July 1, 2021
Biden Tax Plan Proposes Elimination of 1031 Exchanges for High-Net-Worth Individuals

President Biden is proposing an elimination of 1031 exchanges for individuals making more than $400,000 a year. Those who make less would still be eligible. We answer questions about 1031 exchanges and the impact on high earners if it’s eliminated.

Q: What is a 1031 exchange?

A: In real estate, a 1031 exchange is a swap of one investment property held for business or investment purposes for another that allows capital gains taxes to be deferred. It can only be made with “like-kind” properties, and the IRS has tight restrictions on the use of vacation properties.

While the rule is “like-kind,” it doesn’t require the exact same type of property. You can exchange an apartment building for land or a ranch for a strip mall. The rules are liberal. You can even exchange one business for another. The sale and purchase must happen within certain time limits of each other, and the proceeds from the sale are held in escrow by an intermediary pending the swap purchase.1

Q: Are taxes due at the time of the exchange?

A: If your exchange meets the requirements of 1031, you’ll either have no tax or limited tax due at the time of the exchange. Once you sell the property, you’ll pay only one tax, and at a long-term capital gains rate.

Q: Can I do more than one exchange?

A: There are no limits to the number or frequency of exchanges you can do.

Q: What is the benefit of a 1031 exchange?

A: 1031 exchanges benefit individuals and small-business owners by allowing smaller and less capitalized real estate investors to increase their income and net worth by temporarily deferring tax on reinvested real estate sales proceeds.

Q: How might the elimination of exchanges affect investors?

A: The elimination of 1031 exchanges, which have been part of the tax code since 1921, could have a significant negative impact on future real estate values and the economic prosperity of many small investors who own investment property.    

Given pandemic-related market uncertainty, investors have been relying on the stability of their real estate holdings as a hedge against a sometimes-unpredictable economy. Adverse changes or elimination of 1031 exchanges could cause significant tax consequences for existing investors and erode value for wealth transfers to future generations.2

Consult With an Advisor

Because 1031 exchanges can be complex, especially around timing, consider working with a wealth advisor to help ensure you meet the IRS requirements for eligibility and the exchange is factored in as part of an overall wealth plan. So far these exchanges have survived as lawmakers have generally seen their benefit on the economy.

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1“1031 Exchanges: What You Need to Know”

2“1031 Exchange: Deal or No Deal’

This article is limited to the dissemination of general information pertaining to Mariner Wealth Advisors’ investment advisory services and general economic market conditions. The views expressed are for commentary purposes only and do not take into account any individual personal, financial, or tax considerations. As such, the information contained herein is not intended to be personal legal, investment or tax advice or a solicitation to buy or sell any security or engage in a particular investment strategy. Nothing herein should be relied upon as such, and there is no guarantee that any claims made will come to pass. Any opinions and forecasts contained herein are based on information and sources of information deemed to be reliable, but Mariner Wealth Advisors does not warrant the accuracy of the information that this opinion and forecast is based upon. You should note that the materials are provided “as is” without any express or implied warranties. Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance. Past performance does not guarantee future results. Consult your financial professional before making any investment decision.

The tax laws discussed are proposed at this time and any final laws or regulations passed may vary significantly from the proposed. Tax laws and regulations are complex and subject to change, and MWA cannot guarantee that the information herein is accurate, complete, or timely. Please consult with your tax advisor for more information specific to your situation.

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