Real Estate News

What is a 1031 tax exchange?:

According to the Internal Revenue Service, whenever you sell business or investment real estate property and you have a gain, you generally have to pay tax on the gain at the time of sale. IRC Section 1031 provides an exception and allows you to postpone paying tax on the gain if you reinvest the proceeds in similar property as part of a qualifying like-kind exchange. Gain deferred in a like-kind exchange under IRC Section 1031 is tax-deferred, but it is not tax-free.  The exchange can include like-kind property exclusively or it can include like-kind property along with cash, liabilities and property that are not like-kind. Both properties must be similar enough to qualify as "like-kind." Like-kind property is property of the same nature, character or class. Quality or grade does not matter. Most real estate will be like-kind to other real estate.

Many large real estate residential property owners buy and sell large portfolios of units don't paying any taxes on the gain and wind up merging portfolios and defering taxes indefinitely.

So, do you think this tax law will ever be eliminated?  Probably not.

Reasons:  This probably will never will be done for two basic reasons: (1) hedge funds and other large multi-family and single-family ownership interests pay alot of money to both Democrat and Republican politicians' campaigns, and (2) these same groups have heavy lobbying efforts to put pressure on Congress to continue the tax deferment incentive to "avoid de-stabilization of rental housing in the US" and some other valid investment reasons.

Solution:  Through presidential executive order,  immediately eliminate any current or immediately preceding 1031 tax exchange deferment of capital gains for those owners (with a controlling interest of at least 25%) of real estate with more than 100 units of either multi family or single family residential units....unless...within 90 days they offer 20% of their inventory and within 180 days maintain at least 90% of that offered inventory as “workforce housing” for those whose income falls at or below US median household income (not the prevailing rate of their individual market).  For example, a multi-family complex of 250 apartments must open up 50 of those apartments within 90 days of law as "affordable housing" options and lease at least 45 (i.e., 90%) within 180 days of effective date of law.

What may this action accomplish?

(1) It will immediately open tens of thousands of residence up to those who can least afford it.

(2) it will stop the games that hedge funds and large property owners have of constantly trading higher and higher priced residential units tax free through the 1031 tax exchange "loophole".

(3) Tax revenue from those institutions who don't comply will fund subsidies to the affordable housing efforts in cities and states.

(4) Modify the total ROI on portfolios in the short run, but over the long run, portfolio managers will compensate through streamlined property maintenance and higher rental rates for those 80% who don't qualify for affordable housing.

Update (5-4-2021 - How Biden’s real estate tax plan may hit smaller property investors

Update (5-4-2021 - Biden Targets $41 Billion Tax Break for Rich Real Estate Investors