Does President Trump's new tax plan threaten 1031 exchanges?

Question

There have been many rumors from various sources recently about limiting the 1031 tax-deferred exchange. Now we see that the President wants to eliminate all tax deductions, except for mortgage interest and charitable contributions. His plan also says they want to remove any tax deductions which benefit primarily the rich. Reading between the lines, I think this spells doom for the 1031 tax-deferred exchange.

Now I'm not rich, but I have made use of the 1031 tax-deferred exchange and my investment plan relies on it to limit capital gain taxes and depreciation recapture and provide for my heirs. The 1031 increases real estate investment activity which is a good thing for the entire country, not just a few rich investors. The jobs and capital flow which result from building, buying and selling real estate stimulate the entire economy, especially during the last decade when it really needed stimulation which didn't come from government spending. You may argue that tax cuts ARE government spending, but this is illogical to me, because the earnings are the investor's to begin with, not the government's and the government doesn't earn anything. And it's not a particularly good steward of our tax dollars either, if you ask me.

Going one step further, the Fed's zero-interest rate policy (ZIRP) has penalized savers and bond investors by denying them a real return. If someone was looking for an alternative investment providing a reasonable rate of return which was safe and kept pace with inflation, real estate was the only game in town. Now the government just can't stand all this potential tax money they are missing out on. They want their "fair share" and this policy adds insult to injury to creative investors who are seeking to safeguard their savings in alternative investments.

If you're interested in saving the 1031 tax-deferred exchange from government raiders, I urge all of you to browse to http://www.savethe1031.org/ so that you can quickly and easily make your wishes known to your elected representatives.

Thank you and good investing,B

Priyanshu Adathakkar · Answer

The tax reform blueprint that Republicans in the House are working on and which stands a good chance of being the main vehicle for any tax reform effort that gets taken up in the House.

The blueprint does not specifically repeal 1031 like-kind exchanges. However, the committee is considering eliminating the provision.  The blueprint would allow owners to deduct 100 percent of the cost of new business assets, including buildings (but not land) in the first year of ownership. Rep. Kevin Brady (R-Texas) along with Rep. Peter Roskam (R-Ill.), chair of the tax policy subcommittee of the Ways & Means Committee, has said that the accelerated expensing could go a long way to offsetting the 1031 exchange as an investment incentive.

Account Closed · Answer

When one loophole closes, another one opens.

Mike Dymski · Answer

I know you are focused on the 1031 but the most important proposal for most BP members could be the 15% proposed tax rate for pass-though entities.

Bruce W. · Answer

Thanks Priyanshu, but that doesn't really help. Here's a direct quote from this page:

"We are going to eliminate most of the tax breaks that mainly benefit high-income individuals.  Home ownership, charitable giving, and retirement savings will be protected – but other tax benefits will be eliminated."

That clearly says that the mortgage interest tax deduction for homeowners is protected in the new plan and much of NAR's release seems to miss this fact.

I'm glad NAR is active here, but am mostly concerned with the 1031, which is only mentioned in passing in NAR's release.

Priyanshu Adathakkar · Answer

@Bruce W. Below is a press release by theNational Association of Realtors® this will give you some insight on what is going on.

WASHINGTON (April 26, 2017) – Major reforms are needed to lower tax rates and simplify the tax code, but that shouldn’t come at the expense of current and prospective homeowners. That’s according to National Association of Realtors® President William E. Brown, a second-generation Realtor® from Alamo, California and founder of Investment Properties.

Brown said that while the President’s tax proposal released today is well-intentioned, it’s a non-starter for homeowners and real estate professionals who see the benefits of housing and real estate investment at work every day. By doubling the standard deduction and repealing the state and local tax deduction, the plan would effectively nullify the current tax benefits of owning a home for the vast majority of tax filers. In light of the plan’s release, Brown issued the following statement:

“For over a century, America has committed itself to homeownership with targeted tax incentives that help lower- and middle-class families purchase what is likely their largest asset. No surprise, real estate now accounts for over 19 percent of America’s gross domestic product, or more than $3 trillion in investment.

“But for roughly 75 million homeowners across the country, their home is more than just a number. It represents their ambitions, their nest egg, and the place where memories are made with family and friends.

“Targeted tax incentives are in place to help people get there. The mortgage interest deduction and the state and local tax deduction make homeownership more affordable, while 1031 like-kind exchanges help investors keep inventory on the market and money flowing to local communities.

“Those tax incentives are at risk in the tax plan released today. Current homeowners could very well see their home’s value plummet and their equity evaporate if tax reform nullifies or eliminates the tax incentives they depend upon, while prospective homebuyers will see that dream pushed further out of reach. As it stands, homeowners already pay between 80 and 90 percent of U.S. federal income tax. Without tax incentives for homeownership, those numbers could rise even further. And while we appreciate the Administration’s stated commitment to protecting homeownership, this plan does anything but.”

“Homeowners put their hard-earned money on the line to make an investment in themselves and their communities, and it’s on them to protect that investment. Common sense says owning a home isn’t the same as renting one, and American’s tax code shouldn’t treat those activities the same either.

“Realtors® support tax reform, and it’s encouraging to see leaders in Washington doing their part to get there. We believe tax rates should come down to the degree that sound fiscal policy allows, and simplifying the tax code will help ensure fairness and transparency for individual taxpayers. It’s a goal we share with the authors of this tax plan, but getting there by eliminating the incentives for homeownership is the wrong approach. We look forward to working with leaders in Congress and the administration to reform the tax code, while preserving America’s long-held commitment to homeownership.”

The National Association of Realtors®, “The Voice for Real Estate,” is America’s largest trade association, representing 1.2 million members involved in all aspects of the residential and commercial real estate industries.

Michael Hayworth · Answer

Lower taxes overall would eliminate the need for 1031s. And anything that requires a "qualified intermediary" should be eliminated from the tax code. That's typical government over-complicated bullshit.

Does President Trump's new tax plan threaten 1031 exchanges?

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