Debt Ceiling and 1031's

I've seen a few articles mention how changes to the 1031 tax exchange law has been pushed by the Biden Administration. It's also coming up as a Republican talking point. So far, no one from the Real Estate community has been squawking about this, but perhaps because it's not yet a certain thing. What say you?

(Article was the first one I could grab...)

It's not a real talking point for us in the RE community because most of us are not actually RE investors. We're mostly homeowners, so 1031 doesn't really affect us.

As for the cap, is this aggregated amount annually, or is it lifetime?

Either way, personally, I'm all for it. First of all, when you sell your primary residence, the tax exclusion is only $250k/$500k, so that is a cap as well. Then it's only fair that a 1031 would have a cap as well.

Secondly, 1031 exchange is really a loop hole to get out of paying taxes on capital gain. Basically, you could do a 1031 exchange and 2 years later you can convert that new home into a primary residence, and after another 2 years you could sell that new home as a primary residence. No taxes owed. Or you could just turn around and sell the second home immediately for little or no gain, or slight loss. No taxes owed either.

I am also all for it. There are plenty of posters/lurkers here with rental properties however. Some are "buy and hold forever", other's... not so much. Any potential change in 1031 tax avoidance rules could be one of the reasons a "rush to the exits" might occur for those rental unit owners who don't want to keep their properties forever.

sgip said:

I am also all for it. There are plenty of posters/lurkers here with rental properties however. Some are "buy and hold forever", other's... not so much. Any potential change in 1031 tax avoidance rules could be one of the reasons a "rush to the exits" might occur for those rental unit owners who don't want to keep their properties forever.

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And this would supply more inventory. I call that the right policy at the right time.

There is also depreciation recapture that needs to be factored in.

OCtoSV said:

And this would supply more inventory. I call that the right policy at the right time.

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Would it though? A person doing a 1031 usually purchases more properties when they do the exchange. Ie. Sell 1 property with a large gain and purchase multiple replacements. If everyone rushed to the exits, this would lead to a surge in prices for replacement properties..

True enough. There would be a surge in prices for replacement properties - but not necessarily in California. Also we don't know yet if this would be a gradual phase out, or an immediate end of 1031 tax benefits. In each case, the resulting change in behaviors would be markedly different. If gradual, there would be time to assess what to do. If immediate, it might spur a rush to the exits. Hard to know what might occur given how little concrete information is out there.

sgip said:

I am also all for it. There are plenty of posters/lurkers here with rental properties however. Some are "buy and hold forever", other's... not so much. Any potential change in 1031 tax avoidance rules could be one of the reasons a "rush to the exits" might occur for those rental unit owners who don't want to keep their properties forever.

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Considering the high mortgage rates right now, I wouldn't think it's a wise move to do a 1031 at this point. So I don't think a "rush to the exits" would actually happen.

CalBears96 said:

Considering the high mortgage rates right now, I wouldn't think it's a wise move to do a 1031 at this point. So I don't think a "rush to the exits" would actually happen.

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Typically 1031 exchange are less sensitive to higher interest rates than non-1031 exchange buyers because they typically come in with large down payments or even pay cash, from my personal experience being on both sides of 1031 exchange transactions.

Unrelated but 250/500k hasn’t factored in inflation has it? Also I feel the numbers should be different depending on the avg price of real estate in a given state. Those thresholds can be reached very easily in some states over others.

The government rarely increase deductions for inflation as its less money for them. The raise the wage limit every year without a doubt for wages subject to social security taxes!