If you’re a serious real estate investor, you probably know all about tax-deferred Section 1031 like-kind exchanges. A properly structured Section 1031 exchange allows you to swap one piece of real estate property for another without paying any federal income tax — even if the property you’re unloading is greatly appreciated.
This longstanding tax break has contributed to the making of many fortunes. However, consider these two things:
No. 1. Democratic presidential candidate Joe Biden’s proposed tax plan would eliminate the Section 1031 exchange privilege.
No. 2. The IRS recently issued new regulations that define what constitutes real property to determine eligibility for Section 1031 like-kind exchanges. But those regulations won’t do you any good if your ability to make a Section 1031 exchange is eliminated, and you fail to get your exchange done before that happens. So, you might have to move fast to take advantage of the Section 1031 exchange break before a Biden tax plan could potentially take it away.
In this column, I’ll address both of these considerations after first covering some necessary background information. Here goes.
TCJA eliminated Section 1031 treatment for personal property exchanges but not for real property swaps
The Tax Cuts and Jobs Act (TCJA) permanently eliminated tax-favored Section 1031 treatment for exchanges of personal property that are completed after 12/31/17.
Thankfully, tax-favored Section 1031 treatment is still available for properly structured like-kind exchanges of real property. For today, anyway. As has always been the case, Section 1031 treatment is only allowed for exchanges of like-kind property that’s held for business or investment purposes…