An End to 1031 Exchanges?

A recent WealthManagement article considers the multi-sided impact that Biden’s proposed narrowing of the “1031 like-kind exchange rule” could have to a variety of users of the tax break, from the ultra-rich to the small investor to family farmers.

Critics say 1031 exchanges no longer serve their original purpose, and changing the tax code could result in “19.6 billion in tax revenue over 10 years.” Real estate professionals see it differently, stating this change would “decrease the number of transactions, squelch economic activity and reduce property values.”

Stan’s Viewpoint

I find it interesting that whenever these tax-related—let’s call them exceptions—are discussed, they focus on the benefits that accrue to the ultra-rich. It also is interesting that these anomalies were enacted to benefit or, as in the case of the Alternative Minimum Tax (AMT), to penalize a specific, small group, but over time, they have the unintended consequence of impacting a broader segment of the public.

The problem is that any one change in the tax law opens up another Pandora’s box.

For example, there are many smaller investors and business owners who would get hurt by Biden’s proposed change to the tax code. Okay, so they phase out the provision above a certain gain amount and income level, but once the door is open, that floor will get lower over time while the folks in Washington simultaneously realize the new code didn’t raise the amount of money they needed. 

Unanswered Questions

Also, can you really eliminate this exception without consideration of capital gains and estate taxes since they all impact the buy-sell-exchange strategy? On top of that, is it fair to tax gains on properties, particularly those that have been held for a long time, without adjusting the basis for inflation? 

In my opinion, Washington has a master’s degree in passing laws with unintended consequences and unrealized benefits.