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A commercial real estate investment and development firm specializing in build-to-suit, ground-up development, and redevelopment of retail projects across the United States.
How the Abolishment of Section 1031 Exchanges Can Change Real Estate
What is Section 1031, you may ask?
IRS Section 1031 provides real estate investors an opportunity to defer tax on the financial gain of the sale of a property if they roll the proceeds directly into a like-kind investment property within 180 days. By replacing one property with another, this promotes economic activity giving investors incentive to continue investing their profits rather than pocketing the gains.
1031 exchanges are essential to those in the world of real estate, as they allow flexibility to move from one investment to another and thus, increase their basis. The flexibility granted through 1031 exchanges benefit business owners as they continue to acquire more property and gain more experience.
Implications of Change:
However, the United States’ current presidential administration argues that 1031 exchanges disproportionately benefit the wealthy.
The new proposition seeks to abolish 1031 exchanges on real estate profits of more than $400,000.
In an industry already hit hard (and still actively recovering) from the COVID-19 pandemic, an abolishment of 1031 exchanges, a powerful and positive force, could have dangerous consequences to real estate businesses, both large and small.
Ridding real estate of 1031 exchanges will result in less activity in real estate, in particular, commercial real estate. Without 1031, people may not be as apt to sell their properties, thus limiting inventory.
Additionally, there could be more vacancies (like ghost town strip malls) which would ultimately affect communities, as well. These repercussions could be disastrous to the business; with less transactions, there would be less monetary circulations which affects the economy of real estate
Conclusion:
A slash to Section 1031 exchanges could shake the world of real estate, causing ripples through the industry and dismantling the hard work real estate investors put into their occupation.