ELIMINATION OF 1031 EXCHANGES WOULD HAVE A SUBSTANTIAL EFFECT ON REAL ESTATE INVESTORS

May 4

On April 28, 2021, President Biden announced the “American Families Plan” (“Plan”), which, if passed, could dramatically impact the real estate investment industry. In particular, the Plan would sharply curb Internal Revenue Code Section 1031 (“1031”). The Plan proposes to eliminate 1031 exchanges for real estate investors in cases where the gains are more than $500,000.

1031 exchanges, or “like-kind” exchanges,” allow for the purchase of an investment property while deferring capital gains taxes by using those sale proceeds to buy another property. Investors, big and small, are permitted to perpetually roll over capital gains into successive properties. Instead of cashing out from a sale, the purchaser may reinvest the sale proceeds into another property. It allows investors to nimbly move market-to-market or industry-to-industry in an effort to find a more promising investment.

For an investor to do a 1031 exchange in California, the property to be purchased must be a business or investment property of equal or greater value to the property being sold, be of “like-kind,” the buyer and seller of the two properties must be the same taxpayer, and the exchange must be completed within the prescribed 1031 exchange timeline. The IRS defines “like-kind” as properties that are “of the same nature or character, even if they differ in grade or quality.” This is often interpreted very broadly; i.e., both properties being commercial in nature typically passes “like-kind” muster. The 1031 exchange timeline requires that the 1031 exchange be completed within 180 days from the close date of the relinquished property.

The proposed Plan eliminating certain 1031 exchanges would impact real estate investing across several sectors. The Plan is intended to target the wealthy and large corporations. The effect, however, may disparately impact individuals. The Joint Committee on Taxation estimates that this year, corporations benefit from 1031 exchanges at around $2.3 billion whereas individuals are estimated to gain $5.7 billion. There is concern that the modification or outright elimination of 1031 would result in investors holding onto investment properties, which in turn could decrease supply.

There is no date set yet as to when, if at all, these changes might take effect. Given the potential threat of eliminating 1031 exchanges, we encourage our commercial real estate owners to review their portfolios and consider recourse to balance it as soon as possible. Counsels at the Blake Law Firm are well versed in 1031 exchanges and are happy to consult with prospective investors – commercial or residential – on 1031 exchanges in general or the implications of the Plan on future 1031 exchanges.

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Andrew Hall

Attorney Andrew Hall has over 10 years of experience handling complex real estate, business, and litigation matters throughout California and Washington. Andrew has vast experience with a wide range of clients – from residential to commercial property owners, landlords to tenants, real estate agents to brokers, title to escrow companies, hard money lenders to banking institutions. Andrew has handled cases ranging from administrative disputes, to unlawful detainers, to bankruptcies, to litigation, leaving his clients with the confidence that he can handle all of their needs from soup to nuts.

Andrew is committed to exploring efficient and cost-effective resolutions for his clients, whether that be through informal conversations with parties or attorneys, mediations, or settlement conferences. However, when litigation is inevitable, Andrew has counseled his clients through all stages of a dispute, including arbitrations, court trials, jury trials, and appeals at both the State and Federal Court levels.

Andrew resides in Carlsbad with his wife Lauren, son Nolan (7), and daughter Madeline (5). Andrew is actively involved with the Magdalena Ecke Family YMCA, where he can often be found on the weekends cheering Madeline on in any variety of youth sports or with Nolan participating in the Y’s Adventure Guides Program. Andrew enjoys playing golf, tennis, softball and good barbeque.

Andrew is committed to identifying his client’s goals and employing his big firm experience with small firm attention to help his clients achieve those goals.