Joe Biden wants to trash the 1031 exchange

Rental Property Investor · Southern California · Member since 2018 · 3 posts · 24 votes

What do you all think about Joe Biden's tax plan and the elimination of the 1031 exchange?

Moderator Note: This post turned into a political discussion, which is not allowed per our rules. This thread has been locked. Please continue the conversation - minus the politics - in this thread: https://www.biggerpockets.com/forums/432/topics/856690-biden-introduces-plan-to-increase-taxes-on-real-estate-investors?highlight_post=5030763&page=1#p5030763.

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Carl C.

Investor · New York City, NY · Member since 2014 · 289 posts · 374 votes

I wouldn't say the government's financial problems are solely related to to Demoract's policies. The current administration and Republican senate has been reckless with their spending to date. I thought they were supposed to care about financial conservatism and fiscal responsibility but that has not proven true at all. It isn't just one party that's the problem here.

Yes, losing 1031 exchanges would certainly hurt some of us but from a larger societal perspective you could ask what benefit does the American public get from allowing 1031 exchanges (devils advocate here). They are a nice benefit to an investor but I bet people will continue to invest in real estate even if it goes away.

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Steve Morris
Real Estate Broker · Portland, OR · Member since 2019 · 4k+ posts · 2k+ votes
6y
What do you all think about Joe Biden's tax plan and the elimination of the 1031 exchange?
Think if he gets elected and the Senate goes D, anyone with money is screwed. The standard D platform is as many new taxes as possible to fund their dreams.
Heck in Portland, we now have a $250M/year tax on the "rich" for the 4K homeless or so = $60K/homeless. Won't make a d*** difference.
The local transit authority gets $1.65B annual budget for 90M fares/year (it's stayed at 90M fares/year for 15 years). That's $18/fare or if you do roundtrips $9000/rider/year. No changes otherwise, since they want to expand the light rail further.
Anyways, standard govt BS, give us more money and we'll fix stuff.
aka "The only reason it's not working is because we haven't spent enough yet" which can never be a losing prop. Kinda like Lucy holding the football for Charlie Brown - Yet we never learn.
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Carl C.
Investor · New York City, NY · Member since 2014 · 289 posts · 374 votes
6y
I wouldn't say the government's financial problems are solely related to to Demoract's policies. The current administration and Republican senate has been reckless with their spending to date. I thought they were supposed to care about financial conservatism and fiscal responsibility but that has not proven true at all. It isn't just one party that's the problem here.
Yes, losing 1031 exchanges would certainly hurt some of us but from a larger societal perspective you could ask what benefit does the American public get from allowing 1031 exchanges (devils advocate here). They are a nice benefit to an investor but I bet people will continue to invest in real estate even if it goes away.
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Darius Ogloza
Investor · Marin County California · Member since 2018 · 1k+ posts · 2k+ votes
6y
There are reasons why the common law traditionally abhored all restraints against the alienation of property. Policies that deter the sale and/or transfer of assets (whether real or paper) tend to cause economic stagnation. The 1031 benefits society because is provides grease to the economic wheels. A relatively modest - 10%-20% - reduction in the number of transactions is likely to have substantial adverse economic effects (think of all the middlemen as well as of the principals to these deals). Why sell any appreciated residential asset in a heavily taxed transaction when you can use HELOC's or other similar tools to extract/use equity when you need to do so?
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Anthony GaydenPro Member
Rental Property Investor · Omaha, NE · Member since 2014 · 2k+ posts · 3k+ votes
6y
If you are curious what the real estate market would look like without 1031 exchanges take a look north to Canada. No one can deny that the 1031 exchange has greatly benefited real estate investors here. There are other ways though to make money and not have to pay capital gains taxes. The most common would be to refinance properties and draw out equity.
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Steve Morris
Real Estate Broker · Portland, OR · Member since 2019 · 4k+ posts · 2k+ votes
6y
you could ask what benefit does the American public get from allowing 1031 exchanges
They encourage sellers to remain in the real estate business and help with pricing growth and create wealth. More investment in real estate creates more demand for new construction and replacement of blight.
All politicians love to spend, George Bush NEVER said no to a spending bill.
Now if they actually used tax increases to make schools better or infrastruture, I might be interested. However, govt has a poor record of actually using the money as promised.
OR got $1B of Obama stimulus and it went to GenFunds of which 20% went to infrastructure. The rem, god knows, but probably the pub emp retirement fund since that is way deep in the hole.
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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
6y
Originally posted by @Steve Morris:
you could ask what benefit does the American public get from allowing 1031 exchanges
They encourage sellers to remain in the real estate business and help with pricing growth and create wealth. More investment in real estate creates more demand for new construction and replacement of blight.
All politicians love to spend, George Bush NEVER said no to a spending bill.
Now if they actually used tax increases to make schools better or infrastruture, I might be interested. However, govt has a poor record of actually using the money as promised.
OR got $1B of Obama stimulus and it went to GenFunds of which 20% went to infrastructure. The rem, god knows, but probably the pub emp retirement fund since that is way deep in the hole.
also upon sale would you not have to recapture depreciation ??? so you have the tax and the recapture ?? at least as it relates to those in the rental property business which is probably 97% of this site's audience.

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Steve Morris
Real Estate Broker · Portland, OR · Member since 2019 · 4k+ posts · 2k+ votes
6y
also upon sale would you not have to recapture depreciation ??? so you have the tax and the recapture ?? at least as it relates to those in the rental property business which is probably 97% of this site's audience.
Well, if you didn't do a 1031, yes.
I"m just saying he asked the benefit of 1031s to society. It basically adds in inflation which encourages more construction which keeps a cap on rents.
If less people buy, less building and we're back to the old-fashioned method of watching rents rise. Just like NYC and SFO, the 2 largest rent-control markets.
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Joe SplitrockPro Member
Moderator
Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
6y
Biden has also stated he plans to remove "stepped up basis" rules for inherited property. In other words, there would be no way to escape capital gains taxes.
Removing the "real estate loopholes" is one of his stated high priorities, so nice to know we are on his crap list, haha.
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Darius Ogloza
Investor · Marin County California · Member since 2018 · 1k+ posts · 2k+ votes
6y
"Biden has also stated he plans to remove "stepped up basis" rules for inherited property."
OK. So I have no incentive to sell in my lifetime. My kids have no incentive to sell in theirs. Same for the grandkids. Lands stays in families forever. Leave it to Joe Biden to come up with a formula to get us back to the middle ages.

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Justin Thorpe
Member since 2020 · 437 posts · 675 votes
6y
I think the only issue that matters between now and election is Covid. If the case count drops and normalization begins, Trump gains a (huge) advantage. If it does not, then Biden has the big advantage even if comes with doing nothing but killing time in the basement.
1031, cap gain tax increases, more disincentives for the investor class!! None of that is good. But I’ll take lower Covid cases and a definitive path to recovery any day. I think smart investors will figure out ways to make a buck even if Biden wins.
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Colleen F.Pro Member
Investor · Narragansett, RI · Member since 2013 · 8k+ posts · 4k+ votes
6y
The stepped up basis isn't just beneficial to investors. It is also beneficial to the middle class. The biggest part of inheritance for the middle class is often the family home although reverse mortgages are changing that. When mom and dad die and leave the house to the kids that will result in a big chunk to the government, that is almost an inheritance tax in itself. I wonder how that will interact with reverse mortgages.
Also what about businesses in general. I can see alot opposing this change outside real estate. The family farm, resturaunts, all businesses that have some value in real estate. That said is this kind of change likely to pass under the radar? , that is probably the big question.
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Tim G.
Rental Property Investor · San Diego, CA · Member since 2011 · 1k+ posts · 1k+ votes
6y
Someone has to pay for the $1.4 BILLION just given to the Catholic church in PPP loans.
Property owners have long been forgotten. This shouldn't come as a surprise.
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Derrick Dill
Investor · Hawaiian Gardens, CA · Member since 2015 · 308 posts · 386 votes
6y
National debt was 14 trillion in all the years up to 2016. Its up to 25 trillion now (and counting). We'll have to pay that back somehow, and it'll be in the form of taxes. Can't keep kicking the can down the road for your children and grandchildren to deal with
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Danny Grey
Investor · La Jolla, CA · Member since 2016 · 66 posts · 169 votes
6y
Originally posted by @Derrick Dill:
National debt was 14 trillion in all the years up to 2016. Its up to 25 trillion now (and counting). We'll have to pay that back somehow, and it'll be in the form of taxes. Can't keep kicking the can down the road for your children and grandchildren to deal with

The only way that money will ever be paid back is in the event of severe hyperinflation.

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Darius Ogloza
Investor · Marin County California · Member since 2018 · 1k+ posts · 2k+ votes
6y
It's a hard case to make that killing the 1031 exchange rule and the step up basis is going to result in greater government revenues. Fewer transactions generally means less income to tax.
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Derrick Dill
Investor · Hawaiian Gardens, CA · Member since 2015 · 308 posts · 386 votes
6y
@Danny Grey
Like I mentioned in other post, we added 10 trillion+ to our debt, that went to corporations/businesses/people. Infusing that much directly inflates. Gave trillions in PPP grants, stimulus checks to people, and super unemployment. Free $ causes inflation.
If we don't want to pay off the debts, fine. Most of our debt is to China, and our children will keep paying off interest to our Chinese overlords
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Celia Moore
Specialist · Portland, OR · Member since 2020 · 97 posts · 109 votes
6y
Since 1921, like-kind exchanges have stimulated capital investment in the United States by allowing funds to be fully reinvested in the enterprise. These investments benefit not only the taxpayers making the like-kind exchanges, but also generate jobs and taxable revenue for unrelated businesses upstream and downstream from the exchange transaction, such as real estate brokers, title and property insurers, escrow / settlement agents, lenders, appraisers, surveyors, attorneys, inspectors, contractors, building supply vendors and more.
Eliminating or limiting like-kind exchanges in the best of times would have a negative economic impact, increasing the cost of capital, slowing the rate of investment, increasing asset holding periods, and reducing real estate transactional activity. In the face of the current COVID-19 pandemic, recession and economic upheaval, the contractionary impact on the U.S. economy and real estate industry would be severe...
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Nicole Heasley Beitenman
Investor · Youngstown, OH · Member since 2017 · 2k+ posts · 2k+ votes
6y
Originally posted by @Darius Ogloza:
"Biden has also stated he plans to remove "stepped up basis" rules for inherited property."
OK. So I have no incentive to sell in my lifetime. My kids have no incentive to sell in theirs. Same for the grandkids. Lands stays in families forever. Leave it to Joe Biden to come up with a formula to get us back to the middle ages.

That's a bit extreme. Biden takes it away, another Republican comes along in 4, 8, 12 years and puts it back.

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Darius Ogloza
Investor · Marin County California · Member since 2018 · 1k+ posts · 2k+ votes
6y
Guilty! Sometimes a little reductio ad absurdum helps illustrate the point, though.
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Nicole Heasley Beitenman
Investor · Youngstown, OH · Member since 2017 · 2k+ posts · 2k+ votes
6y
Originally posted by @Justin Thorpe:
I think the only issue that matters between now and election is Covid. If the case count drops and normalization begins, Trump gains a (huge) advantage. If it does not, then Biden has the big advantage even if comes with doing nothing but killing time in the basement.
1031, cap gain tax increases, more disincentives for the investor class!! None of that is good. But I’ll take lower Covid cases and a definitive path to recovery any day. I think smart investors will figure out ways to make a buck even if Biden wins.

I don't know if Covid is the ONLY issue that matter, but I do agree it's going to push people to look the other way while a whole lot of other important issues get swept under the rug. I'm with you; there are a lot of other way more important issues than the 1031 to consider. Those who continue to thrive will be the ones who figure out ways to pivot.

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Brian G.
Rental Property Investor · Los Angeles, CA · Member since 2013 · 1k+ posts · 1k+ votes
6y
@James Tedrow limiting incentive to succeed is bad for any business, our economy in general and our country as a whole. We are a capitalist free market society which incentivizes success and rewards hard work, integrity and diligence in the market place over time. This has helped create more opportunity for all people in the US than any other time/place in history. This is a big part of why so many people want to come to the US. Freedom and opportunity.
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Greg O'BrienBusiness Member
Accountant · Boston, MA · Member since 2019 · 386 posts · 336 votes
6y
As a tax planner we are already getting inquires to look at worst case scenarios, mainly if these large tax changes happen. Wealthier clients are doing proactive estate planning to avoid some of Biden’s proposals. You’ll see a big uptick this fall as well. C corps are crossing their fingers as they’d be facing a 15% plus rate hike.
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Jai Reddy
Edmond, OK · Member since 2012 · 456 posts · 270 votes
6y
@Carl Carlson
Even third-world countries (India), allow some fashion of exchanges to postpone avoid payment of capital gains. Why?
Thankfully, many politicians rely on economists who are smarter than you or in framing economic policy and incentives for growth.
For us simpletons, the biggest impact 1031 Exchanges give to the American economy is that - THE GOVERNMENT GETS TO TAX THE COMPOUNDED VALUE OF OUR COLLECTIVE REAL ESTATE INVESTMENTS AS WE SELL INDIVIDUAL RE. A RISING TIDE LIFTS ALL BOATS
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Jason Collins
Rental Property Investor · Sarasota, FL · Member since 2018 · 46 posts · 76 votes
6y
@James Tedrow
Elimination of 1031 exchanges combined with COVID-19 should send commercial real estate into a nice death spiral.
With the exponentially growing national debt and inevitable taxation to follow I have started seriously looking into international commercial and multi family for the first time.
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Brian G.
Rental Property Investor · Los Angeles, CA · Member since 2013 · 1k+ posts · 1k+ votes
6y
@Greg O'Brien wow, really? Is there any logic behind this potential 15% tax increase on C corps? Who typically uses that type of entity?
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