What a potential repeal of the 1031 exchange means for real estate investors
1031 or like-kind real estate exchanges have been part of investment and estate planning since 1921. Originally passed to stimulate economic growth, the 1031 exchange is now the bread and butter for large-scale investors as well as those who rely on investment properties to fund their retirement. One in four Baby Boomers own one or more investment property and 1031 transaction volume exceeds $100 billion annually according to Forbes Magazine.
The Biden administration has proposed eliminating the 1031 exchange tax exemption for investors with annual incomes over $400,000 to fund government spending on childcare and elderly healthcare. This is not the first time 1031s have been on the chopping block. Thankfully, 1031s continue to survive the threat of repeal because lawmakers understand its positive impact on the economy. However, because eliminating the exchange could “deal a one-two punch to real estate values,” real estate analysts expect to see a rush to obtain and finalize investment property deals by year end.
Determining a long-term effect on the commercial real estate department won’t be possible until we see the fine print and lawmakers are a long way from that point. Congress has heard from a coalition of 17 real estate associations urging lawmakers not to change the long-standing exchange rules that support the industry.
Others suggest that even in the event of a repeal, investors have options. “The-net lease space is awash with liquidity right now and the investor base has expanded greatly in the last 12 months,” a JLL exec was quoted by CoStar. “I think JLL can confidently say that the market can absorb and adapt to the 1031 repeal if it ever materializes.”
NAI Cascade Partner and Broker Walt Ramage weighs in, “Without 1031 exchanges, I think we would see far more seller-financed transactions. Owners of commercial real estate can still rely on steady income from debt service in their retirement. That debt service is of course at a higher point than traditional financing though and will push prices.”
With a congress controlled by the current administration’s party, the threat is real but the outcome is yet to be seen.