President Joe Biden’s recent tax proposal includes a $500,000 limit on the amount of deferred gain from Section 1031 like-kind exchanges. If the proposal becomes part of the official package that moves through Congress, it could present adverse consequences for communities and their economic development, according to Evan Liddiard, director of federal taxation for the National Association of REALTORS®. Liddiard was a speaker at the Commercial Federal Policy Meeting at the virtual 2021 REALTORS Legislative Meetings on Thursday.
Section 1031 allows investors to defer paying capital gains taxes on the exchange of one investment property for another if the replacement property is of like kind. Biden had proposed doing away with Section 1031 like-kind exchanges during his campaign.
“We’ve been watching this for months now,” said Liddiard. “We’re not panicking, because we still have a long way to go before the proposal moves anywhere.” That said, the NAR and other members of the Real Estate Like-Kind Coalition are redoubling their efforts to inform members of Congress about the mistake that would result from limiting like-kind exchanges. The organizations have already “had many discussions about the issue with members of Congress, especially on the Ways and Means Committee and the Finance Committee,” he added.
“We keep telling them that most 1031 deals are for mom and pops,” Liddiard explained. “Their reaction has been, ‘Then we’ll limit them to $500,000.‘ They think that’s going to be the answer. But it’s the big deals—the ones over that amount and many more times that amount—that have the potential to create the most jobs and do the most transformational work in cities and communities.”
The prospect that this move could lead to more draconian changes also concerns Liddiard. “There’s always the ‘camel’s nose under the tent’ idea,” he said. “They put a $500,000 cap on it this year. Next year they come back and lower it again. Then finally they take it away altogether.”
In addition to meeting with representatives and senators, the NAR is requesting examples from members about the benefits of 1031s, Liddiard said. “We’re even creating an electronic input sheet on our website so that people can identify a 1031 they think should be highlighted as an example that can change a neighborhood or a community—create jobs and growth. We’ll take the examples to Congress to fight the myths surrounding 1031s and show why 1031s need to be preserved and celebrated.”
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