Inflation Reduction Act passes with no changes to 1031 exchanges

Industry experts at California-based Peak 1031 Exchange applauds lawmakers for preserving popular real estate investment tool

The Inflation Reduction Act was passed by Congress and signed into law by President Biden on August 16, 2022 without any changes to section 1031 of the Internal Revenue Code. The tax statute governs 1031 exchanges, a popular method used by property owners to defer capital gains taxes on real estate investment property.

“This is, of course, welcome news.” says Kevin M. Levine, Partner and Executive Vice President at Peak 1031 Exchange (www.peakexchange.com) “However, it is important that real estate professionals stay vigilant on this issue. In today’s ever-changing social and political landscape, IRC Section 1031 could easily come under threat again in the future.”

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.

In preserving section 1031 of the tax code, real estate investors, consumers, and the US economy as a whole can continue to reap the economic benefits of 1031 exchanges. In addition to encouraging and incentivizing real estate investment, bbusinesses that generate income as a result of 1031 exchanges were estimated to have produced approximately $7.8 billion in tax revenue last year, according to a May 2021 study by Ernst & Young.

There are numerous ancillary parties involved throughout the 1031 exchange process, including real estate investors, escrow specialists, qualified intermediaries, lenders, attorneys, and appraisers. In total, the Ernst & Young study estimated that businesses related to 1031 exchanges produced 568,000 jobs, create $27.5 billion of labor income and add $55.3 billion to GDP in 2021 alone.

(As featured in Yahoo Finance and Markets Insider.)