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Monitoring the Future of 1031 Exchanges

While working with Coldwell Banker Commercial, I have access to professionals in the field who keep me updated on political and real estate trends. Those who use 1031 Exchanges may want to pay attention to what I learned from Jim Gillespie, an expert in the Commercial Real Estate field. There are proposed changes to the current income tax laws that might eliminate the option for a 1031 tax-deferred exchange.

For those who don’t live and breathe this, what is a 1031 Exchange?

The Internal Revenue Code Section 1031(a)(1) states: No gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment, if such property is exchanged solely for property of like-kind which is to be held either for productive use in a trade or business or for investment. The tax-deferred exchange was originally created here in the U.S. back in 1921, and its primary stated purposes were to avoid unfair taxation of ongoing investments in property, and to encourage active reinvestment.

A quick history lesson from Jim:

When you look back at the history of our nation, from the time of our Founding Fathers all the way up through the passage of the Revenue Act of 1913, (apart from raising money to fight the Civil War), there had never been any personal or corporate income tax levied in our country, as this is the way our Founding Fathers had intended it. But after the passage of the Revenue Act of 1913, government soon began raising income tax rates dramatically, as powerful special interest groups began lobbying to get more of our money. So, in 1921, a law was passed allowing tax-deferred exchanges, because people believed that trading one real estate investment for another should not be taxed in the exact same manner.

Jim alerted me to an article from the IPX1031® Investment Property Exchange Services, Inc., entitled “The Republican Blueprint for Tax Reform Poses Threats to Sec. 1031 and Real Estate,” (https://www.ipx1031.com/?s=Republican+blueprint&x=0&y=0). The article discusses how provisions for maintaining Section 1031 exchanges within the new tax law have not been provided for within the Blueprint. In addition, the article discusses how the deductibility of interest payments and property taxes on investment property may be going away, too.

When members of Congress have been asked about the Section 1031 omission, their response has been, “With the income tax rate low enough and with immediate expensing for business equipment and real estate improvements, do we still need Section 1031?” My concerns are that without Section 1031 people will just hold onto their property.

Section 1031 Exchanges have continued up until the present day, but now powerful special interest groups are lobbying once again to remove the provision for tax-deferred exchanges from the tax code. As a component within this lobby, there are people on Wall Street who want to see tax-deferred exchanges go away, because they apply to real estate transactions and not to trading securities, where the investors in these securities should pay capital gains tax on their profits whenever they’re sold.

I am strongly in favor of keeping this option available to all of us. Visit www.1031TaxReform.com to keep updated on this issue.

Alex Rhoten is principal broker at Coldwell Banker Commercial Mountain West Real Estate. www.CBCRE.com.