What is the fundamental issue behind Section 1031?
Since 1921, U.S. tax law has recognized that the exchange of one investment or business-use property for another of like-kind results in no change in the economic position of the taxpayer, and therefore, should not result in the immediate imposition of income tax. The like-kind exchange rules permit the deferral of taxes, so long as the taxpayer satisfies numerous requirements and consummates both a sale and purchase of replacement property within 180 days. Real estate investors and commercial real estate practitioners place a very high priority on retaining the current like-kind exchange rules.
I am a real estate professional. What does Like-Kind Exchange mean for my business?
The exchange rules often provide a real estate professional with an opportunity to facilitate two transactions: the sale of the relinquished property and the purchase of the replacement property. Any curtailment of the exchange rules will make both pieces of exchange transactions more difficult to conclude and would mean that many transactions would not take place. The like-kind exchange technique is among the most important of all tax provisions for real estate investors and commercial real estate professionals.
NAR Policy on Like-Kind Exchange
NAR opposes any change that would undermine the deferral mechanisms associated with exchanges or lead to fewer transactions.
The like-kind exchange technique is fundamental to the real estate investment sector. The current law provides investors with a great deal of flexibility in managing their real estate portfolio. Real estate is essentially an illiquid asset that requires substantial commitments of cash. Flexibility is needed in order to assure the free movement of property and capital. This, in turn, results in economic growth and job creation.
Legislative/Regulatory Status/Outlook on Section 1031
During the presidential campaign of 2020, then-candidate Joe Biden’s campaign listed the section 1031 like-kind exchange as an unwarranted loophole that largely benefits higher-income taxpayers and indicated that if elected, he would repeal it.
In early 2021, the Biden White House recommended to Congress that the tax deferral from like-kind exchanges be limited to $500,000 per taxpayer per year in order to help offset the cost of his infrastructure proposals. While this may seem like a large amount to many, such a limit would greatly diminish the use of section 1031 and seriously damage the real estate sector of the economy.
NAR is working with other interested stakeholders to oppose the repeal or limitation of the like-kind exchange provision and to educate Members of Congress and their staffs on the importance of this provision to the economy. For example, NAR is a leading member of a large coalition devoted to preserving the 1031 like-kind exchange. This group has funded two separated studies on the impact that repealing or limiting Section 1031 would have on the economy and on the real estate sector. Moreover, the coalition continues to have meetings with Members of Congress to explain the importance of tax-deferred exchanges in their states and districts. Also, NAR lobbyists continually stress the importance of keeping 1031 intact when meeting with Members and staff on other issues.
While the legislation that once was considered for inclusion of the limit on like-kind exchanges (the Build Back Better bill) is currently bogged down in Congress, it no longer appears that 1031 faces the level of danger it did in early 2021. However, NAR has not let down its guard and is watching the situation very closely.
Federal Taxation Committee
Commercial Federal Policy Committee
None at this time.
Letters to Congress
NAR Federal Issues Tracker
NAR Library & Archives has already done the research for you. References (formerly Field Guides) offer links to articles, eBooks, websites, statistics, and more to provide a comprehensive overview of perspectives. EBSCO articles (E) are available only to NAR members and require the member's nar.realtor login.
1031 Exchanges: The Basics
The Process of a 1031 Tax-Deferred Exchange Explained (Bloomberg Tax, May 12, 2022)
“The replacement property must be of equal or greater value than the relinquished property and all cash equity from the sale must be reinvested to have no tax on the sale of the relinquished property. If the exchanger buys a property of lesser value, the difference of the two property values is subject to capital gains tax and unrecaptured depreciation tax.”
A Guide to 1031 Property Exchanges (The Balance, Apr. 12, 2022)
“To qualify for a 1031 exchange, you must follow two timelines: You must provide your intermediary with a description of your replacement property within 45 days of the sale of the relinquished property.
"You must close on the purchase of the replacement property within 180 days of the date of the initial sale or of the income tax due date for the year in which it occurred, whichever is earlier.”
What is a 1031 Exchange? Know the Rules (Investopedia, Jul. 19, 2022)
1031 Like-Kind exchanges, often used to “trade” one real estate property to defer capital gains taxes, have many rules. With many moving parts, there are special rules for depreciable properties, a 45-day rule, a 180-day rule, a reverse exchange and various other rules for second properties, vacation homes etc.
Rules, Forms, & Guidelines From the IRS
The following links provide instructions and tips for IRS tax forms relating to 1031 Like-Kind Exchanges.
Like-Kind Exchanges – Real Estate Tax Tips (United States Internal Revenue Service, Nov. 10, 2022)
What is IRS Form 8824: Like-Kind Exchange (TurboTax, Oct. 18, 2022)
About Form 8824, Like-Kind Exchanges (United States Internal Revenue Service, Aug. 26, 2022)
1031 Exchanges for REALTORS®
Inflation Reduction Act Passes with no Changes to 1031 Exchanges (PR Newswire, Sep. 8, 2022)
“The decision not to enact new limits on 1031 exchanges was celebrated by real estate investors and industry experts who opposed President Biden's initial proposals to eliminate, and later limit gain deferral under section 1031. The proposal would have capped the amount of capital gains taxpayers could defer at $500,000 (or $1 million in the case of married individuals filing a joint return) for each sale of investment property. Any gains in excess of $500,000 (or $1 million, as the case may be) would have had to be recognized by the taxpayer in the year the real property was sold.”
The 1031 Like-Kind Exchange Is a Key Tool for Investing in Diverse and Inclusive Communities (National Association of REALTORS®, May 6, 2021)
“David Doig, President and CEO of Neighborhood Initiatives developed a national grocery story in the food desert of a Chicago’s Southside Bronzeville neighborhood. The site was formerly the demolished Ida B. Wells Public Housing Complex where it remained a vacant lot for more than 15 years. David’s company developed a Mariano’s grocery store in its place and then a New York investment group purchased the new development through a 1031 like-kind exchange. This outside capital infused a rebirth of jobs, housing, and commerce into the community.”
Like-Kind Exchange Transactions of REALTORS® in 2016-2019 (National Association of REALTORS®, Sep. 4, 2020)
This report, published midway through 2020, details the use of like-kind exchanges among REALTORS® from 2016-2019. It highlights the changes that occurred to the 1031 in with The Tax Cuts and Jobs Act of 2017. According to the report, a “majority of properties that were sold in like-kind exchange were held by small investors and that additional capital was invested in the property acquired nine times out of ten.”
Delaware Statutory Trusts (DSTs)
3 Reasons Delaware Family Trusts Are Here to Stay (Kiplinger, Oct. 27, 2022)
“One of the most fundamental forces helping protect the 1031 exchange market is demographics. According to expert researcher and data analyst Jonathan Jones of Construction Coverage, Baby Boomers hold more real estate wealth than any other generation in history. Born 1946 through 1964, Baby Boomers have an influence on all things real estate that cannot be overstated.”
Delaware Statutory Trust (The Balance, Dec. 27, 2021)
“DST investors may benefit from a professionally managed, potentially institutional-quality property. The underlying property could be a 500-unit apartment building, a 100,000 square-foot medical office property, or a shopping center leased to investment-grade tenants. Most DST investments are assets that your run-of-the-mill, small- to mid-sized accredited investors could not otherwise afford. However, by pooling money with other investors, they can acquire this type of asset.”
What is a Delaware Statutory Trust in a 1031 Like-Kind Exchange (The Motley Fool, Apr. 16, 2021)
Delaware Statutory Trusts, which were created over 30 years ago, are way to take part in a 1031 Exchange without being the sole owner of a property. In some ways, this practice is akin to what we now call “crowdfunding” and is available for both residential and commercial real estate. Once you invest, you are a partial owner of both the equity and the debt.
Preferred Structure: As a Form of Fractional Investment, DSTs Have Become Popular as a Replacement for 1031 Exchanges (Wealth Management Real Estate, Apr. 1, 2021) E
Delaware Statuary Trusts have become increasingly popular in recent months. Lending DST sponsor, Capital Square Realty, has reported that the first three months of 2021 saw a huge increase in DST activity, helping them have their “strongest year ever.” At least part of this success can be ascribed to the growing amount of accredited investors – baby boomers. As baby boomers continue to age into retirement, they often are looking for new properties and passive income, the perfect situation for DSTs.
Guide to 1031 Exchanges: Basics, Resources & Intermediaries (BiggerPockets.com)—Quick overview of how 1031 exchanges work, with links to recommended resources and a list of qualified intermediaries.
Federation of Exchange Accomodators (FEA)—Professional organization for exchange specialists. Includes directory of exchange companies & specialists around the U.S.
eBooks & Other Resources
Our eBooks collection contains a plethora of both audio and electronic books for learning a diversity of foreign languages and cultural etiquette standards. Below you will find a sampling of materials available; to identify additional materials visit our Library Catalog Advanced Search page and search for Subject: International or Subject: Foreign.
How to Invest in Real Estate And Pay Little or No Taxes: Use Tax Smart Loopholes to Boost Your Profits By 40% (eBook)
The Tax-Free Exchange Loophole: How Real Estate Investors Can Profit from the 1031 Exchange (eBook)
Books, Videos, Research Reports & More
As a member benefit, the following resources and more are available for loan through the NAR Library. Items will be mailed directly to you or made available for pickup at the REALTOR® Building in Chicago.
Building Wealth Through 1031 Exchanges (Exchange Facilitator, LLC, 2006)
1031 Exchanges: How They Work (Professional Exchange Accommodators, LLC, 2005)
The Tax-Free Exchange Loophole (Wiley, 2005)
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