Background: President Obama’s 2016 Budget Proposal seeks to modify Like-Kind Exchange rules for real property and restrict some eligibility. The proposal would limit the amount of capital gains that can be deferred under section 1031 from the exchange of real property to $1 million (indexed for inflation) per taxpayer per taxable year. In addition, art and collectibles would no longer be eligible. The provision would be effective for exchanges completed after December 31, 2015.
For obvious reasons, any talk of repealing or reforming the 1031 tax provision has been hugely unpopular with real estate advocacy groups. A simple Google search on the term “1031 Exchange Reform” will reveal just how unpopular and how vocal these groups have been.
It should be noted that tax reform is, and always has been, a bi-partisan issue and advocates for repeal or reform of the 1031 provision come from both sides of the aisle. Primary arguments for tax reform and it’s overall objective has been stated as a need to create a simpler, fairer, flatter tax code that is more efficient and results in greater financial growth, job creation, and a strengthened economy. Over the past few years, multiple tax reform proposals have been advanced by the House Ways and Means Committee, the Senate Finance Committee and the Treasury Department. Within these tax code reforms, several proposals have called for the repeal or restrictions on the deferral of capital gains taxes realized from the exchange of like-kind property, called the 1031 Like-Kind Exchange (or LKE).
Let me state that I am in no way stating a position in favor of 1031 Exchange reform, my goal in posting this is to provide credible information links to keep my clients informed. And with that goal in mind, I have identified what I feel is the very best and least biased source of background information on the topic of 1031 exchange tax reform, in this recent article published by the American Bar Association: “POINT & COUNTERPOINT: To Repeal or Retain Section 1031: A Tempest in a $6 Billion Teapot.
The U.S. Department of Treasury has also published the General Explanations of the Administration’s Fiscal Year 2016 Revenue Proposals, called the “Green Book”, which provides the Administration’s explanation for proposed revenue proposals. See this two page excerpt of the specific section of the FY2016 Budget Proposal to Modify Like-Kind Exchanges (PDF) for more information.
According to the National Association of Realtors (NAR), 10s of billions of real estate transactions each year involved a tax deferred 1031 Like-Kind Exchange. NAR published a report in 2015 titled, “Like-Kind Exchanges: Real Estate Market Perspectives 2015,” which is based on a survey of 49,593 commercial practitioners and 55,160 residential practitioners (total sample size of 104,753) and generated 3,450 responses from 50 states and the District of Columbia.
How a 1031 Tax Provision reform such as the one Obama is proposing will impact the U.S. economy in general, and the average small business owner or real estate investor is hard to say, because there is not a lot of published opinion on this issue by qualified economists.