The Biden administration has proposed implementing limits on the Section 1031 exchange program that gives real estate investors the opportunity to defer payment of capital gains taxes on like-kind exchanges of real property.
Under the proposal, the amount of capital gains tax that could be deferred under the Section 1031 program would be capped at $500,000 for individual filers and $1 million for joint returns.
Democrats have also proposed raising the capital gains tax above those thresholds from 23.8% to 43.4%. Currently, taxpayers can defer an unlimited amount of capital gains tax if they exchange qualifying real property for another qualifying real property asset.
We asked two professors and authors of ALM’s Tax Facts with opposing political viewpoints to share their opinions about capping the Section 1031 deferral amount.
Below is a summary of the debate that ensued between the two professors.
Bloink: Capping the amount that can be deferred under Section 1031 at $500,000 for single filers and $1 million for joint returns makes complete sense. When ordinary taxpayers sell their primary residence, which is usually their most valuable capital asset, their tax-free deferred gain is limited to $250,000 for single filers and $500,000 for joint returns. Why should super-wealthy taxpayers who have the resources to manipulate the tax system benefit from an unlimited deferral?
Byrnes: Capping the 1031 deferral amount would cause negative consequences that the Biden administration obviously hasn’t fully considered. These proposed limits would make real estate investment significantly less attractive at a time where the commercial real estate market is still reeling in the wake of the COVID-19 pandemic — endangering the jobs of countless Americans whose positions depend on a robust commercial real estate market.