This tax change would reshape the entire real estate industry

President Biden wants to eliminate 1031 exchanges, which allow real estate investors to defer gains on property deals.

President Biden’s new tax proposal is making waves:

  • A new income tax rate of 39.6% for the top 1% of earners
  • A new capital gains tax rate of 39.6% for the top 0.3% of taxpayers ($1m+ in annual earnings)
  • An increase in IRS audits of those who earn $400k+

But another change would completely reshape real estate…

The tax loophole in question is known as ‘1031 exchanges’

As explained by The Wall Street Journal, this part of the tax code has existed since 1921 and allows investors to defer taxes on real estate gains, as long as the proceeds are revinested in other properties within 6 months.

In theory, property taxes could be deferred indefinitely. The majority of 1031 exchanges are done by wealthy individuals, often pooling funds together to purchase apartment buildings or commercial real estate.

How much is it worth?

Congress estimates that the loophole would save real estate investors $41B+ between 2020 and 2024.

The Biden proposal would eliminate 1031 exchanges

Supporters of the tax code say that deferred taxes are a source of funds for job creation and investment in local communities.

Organizations representing farms and Asian-American hotel owners are among those lobbying against Biden’s tax change, per the WSJ.

It’s too soon to tell how much of these tax proposals will become reality — but investors of all types are bracing for huge changes.

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