The American Families Plan’s Threat to the 1031 Exchange Industry

Recently, the White House released the details of its American Families Plan, which includes a $500,000 cap on like-kind exchanges in order to pay for the proposal. In a recent communication from The Federal of Exchange Accommodators (FEA), the trade association for 1031 Exchange practitioners, the organization evaluated the American Families Plan’s impact on 1031 exchanges, as well as the real estate investment industry as a whole. Read the following analysis of the plan issued in an April 28th, 2021 FEA alert to all members.

President Biden has released the details of his $1.8 trillion American Families Plan, which includes a $500,000 cap on like-kind exchanges as a means to pay for the proposal.  We now have a direct threat to Section 1031.  According to the attached document released by the White House:

“The President would also end the special real estate tax break — that allows real estate investors to defer taxation when they exchange property — for gains greater than $500,000…”

FEA has been preparing for this threat for the past two years.  We have built a strong defense with the 1031 real estate coalition, updated economic studies, multiple congressional fundraisers and numerous meetings with congressional staff. We will continue to fight to preserve Section 1031 in full as Congress considers the American Families Plan.

Following are some things you can do to help with Section 1031 advocacy efforts:

  • Send a letter to Congress:  An UPDATED grassroots letter is available for you to send to your members of Congress urging them to preserve Section 1031.  You can access the letter on the take action page of the 1031taxreform.com website: Tell Congress: Section 1031 Like-Kind Exchanges Matter (1031taxreform.com)
  • Attend FEA’s May 6 (4pm ET) Webinar:  GAC Co-chairs and David Franasiak, partner with Williams & Jensen, will discuss FEA’s advocacy efforts, including key findings from the updated Ling & Petrova and EY economic studies.  The webinar will take place May 6 at 4pm ET/3pm CT/2pm MT/1pm PT.  You can register for the webinar here: https://us02web.zoom.us/webinar/register/WN_OSIAxKfMSeWTW12nGTE6BA
  • Talk with your contacts about preserving Section 1031.  Below is a comment on President Biden’s proposed cap that GAC co-chairs have given to members of the news media.  Please feel free to utilize these comments as you talk with your own contacts about President Biden’s proposal.

Comment from the FEA on President Biden’s proposed $500,000 cap on Section 1031:

The FEA opposes the Administration’s proposal to limit IRC Section 1031 like-kind exchange deferral to a maximum of $500,000 of gain, as a means to pay for the American Families Plan.  We view this proposal, which would effectively eliminate commercial real estate exchanges, as well as larger farm and ranch exchanges, as a misguided view of the actual purpose and benefits of like-kind exchanges.

Section 1031 encourages real estate transactional activity, and in doing so, is a powerful stimulator of the U.S. economy.  Section 1031 is not an unfair or abusive loophole.  It is broadly used by taxpayers ranging from middle class individuals exchanging rental houses and small apartment buildings, farmers, and small to mid-sized businesses, to larger taxpayers exchanging large commercial properties in major metropolitan areas.

Smaller exchanges create a stable inventory of decent, affordable housing for working families. Section 1031 encourages turnover and investment of fresh capital in these properties, improving neighborhoods and providing decent places to live. Studies have shown that 1031 buyers invest significantly more capital in replacement properties than do non-1031 buyers.

Higher valued commercial real estate exchanges are an important source of jobs for contractors, skilled and unskilled blue-collar workers, lenders, real estate brokers, Qualified Intermediaries, title insurers, escrow companies, surveyors, appraisers, architects, landscapers, building material suppliers and more. The income earned generates tax revenue and consumer spending, furthering the economic impact.

Recent research by EY has estimated that like-kind exchanges are expected to generate 568,000 jobs this year, including $27.5 billion of labor income and a total of $55.3 billion of value added to the US economy.  The economic impact of like-kind exchanges in their present form is a far better “pay-for” than eliminating this powerful stimulus.

  Thank you for your help in FEA’s advocacy efforts.

We need your help now by telling your representatives to protect Section 1031. By clicking here you can quickly submit a letter directly to your congressional representatives supporting 1031 exchanges.

Thank you for your support in helping preserve Section 1031.

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