Possible changes to the 1031 Rule

[Rick Reeder]

If you're on BP, you probably already know that real estate is a smart way to invest and build wealth. There are many reasons for this - real property will almost never fall to zero, cash-flowing assets that also appreciate are ideal for both income and wealth-building, and there are many tax advantages afforded to real estate investors that aren't available with investments like stocks and mutual funds. One of these tax advantages is currently at-risk: the 1031 exchange.

If you're not familiar, the 1031 exchange allows an investor to sell an investment property (or set of properties) and roll any gains they may have into a new investment without paying capital gains taxes on the money they've made in the first investment. These taxes are deferred until the second investment is sold without a 1031 -- unless the investment falls to your heirs as part of your estate. Then, in many cases (consult a tax advisor), the gains are wiped out and the cost basis is reset.

The Biden administration is proposing to cap this loophole at gains of $500,000 in order to make wealthy investors pay "their fair share". Whether you agree with this philosophy (or definition of wealthy) or not, this is something to be aware of if you own real estate investments that have done well. For example, if you invested in the Bay Area 20 years ago, you've almost certainly done exceedingly well. You may also think that this market has peaked and you want to move your money to a rising market (like Austin!) to continue your success.  If so, you'd likely want to keep an eye on this news. I would even argue that you may want to move proactively *now* to make your exchange.  Post your thoughts below!

[Bryan Noth]

@Rick Reeder I agree with @Cameron Tope I think this proposal will see significant push back and if it is adjusted then CPAs, attorneys, asset managers, and real estate investors will have to explore other avenues to delay or mitigate that tax impact.  Interesting they have chosen $500,000 which is the current current cap for capital gains exemption on the sale of a primary residence, for a legally married couples at least.