Brian Johnson: 1031 Tax Deferred Exchange Safe For Now | Business

For a year now, the real estate investment community has feared, among other things, that the 1031 Tax-deferred exchange could be on the chopping block under a Democratic administration.

First, a quick introduction to 1031 Exchanges. The tax-deferred exchange, as defined in Article 1031 of the Tax Code, allows an owner to sell his investment property and defer the taxes that would normally be due at the time of this sale.

To be fully eligible, an owner must: (a) acquire a “like-for-like” replacement property that will be held for investment purposes or used productively in a trade or business, (b) purchase a replacement property of equal or greater value, (c) reinvest all of the equity in the replacement property, and (d) obtain equal or greater debt on the replacement property.

Debt can be replaced with additional cash, but equity cannot be replaced with additional debt. In addition, the exchanger cannot receive money or other benefits of the proceeds of the sale during the exchange.

When the Biden administration took office, there was a lot of talk about removing the 1031 trading system in an effort to raise additional taxes. This would affect a large number of small family investors who have purchased investment property as a means of creating wealth for their families.

If the exchange option were eliminated, any appreciation in the value of the investment property would have been imposed on the sale. There would be no way to defer those taxes further through reinvestment. This would lead to a drop in the number of sales each year and a drop in property values, as the demand for investment properties would have dried up overnight.

Throughout the summer and into the fall, negotiations took place to decide the final form of the multibillion dollar economic plan. Politicians have spent weeks getting things done on and off the table, and it wasn’t until the last week that the final framework fell into place.

Members of House Ways and Means Committee recently sent letters to their constituents letting them know that Section 1031 of the Tax Code was safe. While the bill has yet to be finalized and voted on, we can rest assured that the tax-deferred swap is safe, at least for now.

Brian Johnson is the new president of the Santa Barbara Association of Realtors. He is a licensed California real estate agent and the Managing Director of Radius Commercial Real Estate. Brian handles all types of commercial real estate transactions, but has a particular focus on multi-family investments. He can be reached at 805.879.9631 or [email protected]

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