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The 2025 Federal Budget and 1031: How do we Protect Like-Kind Exchanges?

10th Apr 2024
The Biden Administration’s proposed budget includes language that could threaten IRC Section 1031.

For more than 100 years, Internal Revenue Code Section 1031 has allowed taxpayers to build wealth through the deferral of capital gains taxes on the sale of property held for business and investment purposes. Section 1031 like-kind exchanges are an integral part of many individuals’ retirement and estate planning strategies as they work toward better lives for themselves and their children.

In recent years, 1031 has been vital for those looking to take control of their financial futures. With volatile markets, the COVID-19 pandemic, inflation, interest rate hikes, and changing business environments all putting pressure on investors, a 1031 exchange can be a way for those smaller investors seeking economic mobility to push through the larger market forces that have kept so many dreams at bay.

Unfortunately, not everyone understands the benefits of 1031 for individuals and for the country as a whole, which is why Section 1031 has repeatedly been under threat. With the release of the proposed 2025 budget, 1031 is again in danger, and for the sake of the investors who stand to lose out, we need to fight for it. Here’s what we know right now and what we intend to do about it.

What the 2025 budget proposal says about 1031

On March 11, 2024, the Office of Management and Budget (OMB) released its Budget of the U.S. Government For Fiscal Year 2025, a document that includes the Budget Message of the President and information on the administration’s priorities and proposed initiatives for next year’s budget.

Among these priorities is a section entitled, “Cutting the Deficit By Expanding America’s Productive Capacity and Promoting Tax Fairness” (p. 44), which included a promise that the budget “saves billions of dollars by closing other tax loopholes that overwhelmingly benefit the rich and the largest, most profitable corporations.”

Among the loopholes in question is “the so-called ‘like-kind exchange loophole’ that lets real estate investors defer tax indefinitely.” This refers to IRC Section 1031, as explained in greater detail in the Treasury Department’s Green Book, “General Explanations of the Administration’s Fiscal Year 2025 Revenue Proposals.”

Under the heading of “close loopholes” (p. 137), the document states that it would “repeal deferral of gain from like-kind exchanges” and instead “would treat the exchanges of real property used in a trade or business (or held for investment) similarly to sales of real property, resulting in fewer distortions.”

While this may sound like the plan is to completely eliminate 1031 as was proposed in 2024, the document goes into further detail on the exact changes proposed:

The proposal would allow the deferral of gain up to an aggregate amount of $500,000 for each taxpayer ($1 million in the case of married individuals filing a joint return) each year for real property exchanges that are like-kind. Any gains from like-kind exchanges in excess of $500,000 (or $1 million in the case of married individuals filing a joint return) in a year would be recognized by the taxpayer in the year the taxpayer transfers the real property subject to the exchange.

The proposal would be effective for exchanges completed in taxable years beginning after December 31, 2024.

This is similar to what was proposed for the 2023 budget. As we stated at the time, this could lead to lower tax revenues and harm the economy at a time when the real estate sector is in a period of uncertainty. The Biden Administration has targeted 1031 before, but now more than ever, it is important to understand why these proposals are ill-advised and based largely on misconceptions.

Why is 1031 under threat?

The Green Book claims “The change would raise revenue while increasing the progressivity of the tax system.” But research has shown that this is only the case in the short term – in the long-term, ending 1031 would reduce government tax revenues.

As we’ve covered previously, an important study showed that “the taxes paid from an exchange followed by a sale are 19% higher than from two ordinary sales without a 1031 exchange.” By allowing taxpayers to reinvest their sales proceeds, they generate more wealth, which not only boosts the economy, but leads to higher tax revenues in the future. Repealing 1031 may generate more tax revenues now, but it would hurt us down the line.

The Green Book also states that the proposal “would also align the treatment of real property with other types of property.” This is misleading: only since 2017 has 1031 applied solely to real property. Before that, many other types of business or investment property could be exchanged. To say that all types of property should be treated the same is an argument for expanding 1031 to its former state just as much as it is an argument for eliminating 1031.

Section 1031 provides many other benefits for Americans besides the societal benefits of a more active economy and higher long-term tax revenues. While the 2025 budget claims it intends to close “tax loopholes that overwhelmingly benefit the rich,” it’s a fallacy to suggest Section 1031 is only for the wealthy.

A 1031 exchange can be a useful component of a retirement planning strategy, and can benefit small businesses as they grow. Biden’s budget discusses helping small businesses (see p. 131), failing to recognize that while these proposed investments may help small businesses, altering 1031 could hinder their growth.

When previous budgets threatened 1031, numerous advocates pointed out how changing this part of the tax code could harm the U.S. economy. But because of these persistent misconceptions, 1031 is threatened yet again. Here’s what we plan to do about it.

How we can protect Section 1031

As the nation’s most trusted 1031 exchange accommodator, we at JTC take our position as leaders in the 1031 industry seriously. We’ve pioneered best practices for Qualified Intermediaries to improve security and transparency throughout the exchange process. We also help exchangers understand how to properly perform an exchange and what to look for in a QI so they can protect themselves and their investments.

Our educational efforts don’t stop with investors – we also need to educate our elected representatives on the societal benefits of retaining Section 1031 in its current form. JTC has representation on the Government Affairs Committee with the Federation of Exchange Accommodators (FEA) and will be in Washington, D.C. for the Day on the Hill, where we’ll be educating our country’s leaders on the importance of 1031.

In the meantime, investors can get in touch with their Congressional representatives to ensure elected officials understand Section 1031 and the public support it has. There are also ways you can prepare yourself for the possibility of changes to the tax code. Be sure to sign up for our News & Insights newsletter so that if reforms are passed, you’ll be among the first to know. And if you have further questions about the 2025 budget and how it may affect your investing strategy, contact your JTC representative today.

Sign up for JTC’s 1031 News & Insights newsletter here.

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