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September 7, 2021

How Proposed Changes to 1031 Exchanges Could Impact Real Estate Investors

When buying and selling properties, a 1031 exchange is a commonly used tax strategy for real estate investors. A 1031 exchange, also known as a “like-kind exchange” allows investors to roll the profits of real estate transactions into future property purchases while deferring the capital gains on the transactions. Many investors continuously avoid recognizing capital gain income by reinvesting proceeds into successive replacement properties. Because of this, 1031 exchanges have been credited with increasing investment in real estate and allowing small businesses and investors to grow their businesses. Pending legislation may cause changes to this tax strategy.

What could change with 1031 exchanges?

Under President Biden’s tax proposals, the 1031 exchange would be modified to eliminate the ability to defer certain tax payments on property investment gains of over $500,000.

Who would be impacted by the 1031 exchange changes?

The proposed changes would impact both large and small real estate investors. However, it’s more likely that smaller-scale investors would not be as affected by the potential change since the tax deferral would continue to be allowed for property gains below $500,000.

How would the 1031 exchange changes affect real estate investors?

If enacted, the change could impact the real estate industry in several ways, including:

  • Landlords may try to recoup the cost of the additional tax bill by raising rent prices.
  • In attempts to reduce gains, there will need to be more analysis to determine what expenses can decrease gains.
  • Investors may try to divide their properties into smaller portions to create a series of smaller exchanges that would not exceed the $500,000 gain threshold.
  • There could be a potential decrease in real estate transactions and the rate at which they occur.
  • Investors may accelerate the rate of completing exchanges prior to any tax law changes to capital gain rates and 1031 exchanges.
  • There could be an increase in installment sales due to capital gain rate uncertainty.

While further details of the proposed tax changes are still unclear and it’s not possible to determine whether the changes will pass, it’s important for real estate investors to be informed and start planning for potential impacts. Learn how Anders works with the real estate industry.

Our advisors are closely following the tax law proposals and legislation changes and will continue to publish insights to keep you informed. To discuss how we can best assist you and the associated fees, contact an Anders advisor below.

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