The Biden administration has proposed limits to so-called 1031 like-kind real estate exchanges.

Internal Revenue Code Section 1031 allows for the deferment of gains on the like-kind exchange of real property. Tax liability simply moves to the next property.

According to the recently released Fiscal Year 2022 Budget and General Explanations of the Administration’s Fiscal Year 2022 Revenue Proposals — generally referred to as the “Green Book” — the Biden administration “American Families Plan” proposes to limit 1031 like-kind exchanges.

Here’s the summary of the proposal: “Currently, owners of appreciated real property used in a trade or business or held for investment can defer gain on the exchange of the property for real property of a ‘like kind.’ As a result, the tax on the gain is deferred until a later recognition event, provided that certain requirements are met. The proposal would treat the exchanges of real property used in a trade or business (or held for investment) similarly to sales of real property, resulting in fewer distortions. The change would raise revenue while increasing the progressive nature of the tax system.  

“The proposal would allow the deferral of gain up to an aggregate amount of $500,000 for each taxpayer
($1 million in the case of married individuals filing a joint return) each year for real property exchanges that are like kind. Any gains from like-kind exchanges in excess of $500,000 (or $1 million in the case of married individuals filing a joint return) during a taxable year would be recognized by the taxpayer in the year the taxpayer transfers the real property subject to the exchange. The proposal would be effective for exchanges completed in taxable years beginning after Dec. 31, 2021.”

Although the current proposal doesn’t appear to eliminate the 1031 exchange, it’s so limiting most property owners wouldn’t be able to take advantage of such exchanges. In addition, I believe the proposal would hurt commercial real estate values.

Keep in mind this is just a proposal and might not become law. But it’s my advice for now to call your congressional representatives today and tell them to vote against eliminating or limiting 1031 exchanges.

If you have questions regarding 1031 like-kind exchanges, consult with a reputable exchange facilitator and a good tax advisor or lawyer to get the most up-to-date information.