While the world is still reeling from a global pandemic, the real estate market has become quite unpredictable: Many markets across the United States are seeing supply slow to a trickle, while the demand has become so high that homes are being sold for well over their asking price. While most agree that this trend is unsustainable, there’s another event that has many real estate investors and speculators wondering about the road ahead. 1031 exchanges – the tax loophole that allows real estate investors to circumvent capital gains taxes – might be eliminated under the Biden administration. If you’re wondering what this might mean for you, you should speak with a Springfield business lawyer.
President Biden has expressed support numerous times for eliminating 1031 exchanges in an effort to shore up tax revenue for early childhood education and other benefits for families. Many real estate and business leaders believe that doing so could have significant effects on the health of the economy.
What is a 1031 Exchange and How Does it Work?
1031 exchanges allow real estate owners to defer paying taxes on the sale of a property when the proceeds of that sale are used to purchase another property. The idea behind it is that because the owner is investing the money elsewhere, then the economic benefits of taxing it aren’t significant enough to warrant being done. 1031 exchanges allow property owners to leverage their tax liability into a new property, which can also reap economic benefits for their investment and the local market surrounding it. Theoretically, an investor could purchase and sell properties over and over again using 1031 exchanges and avoid taxes on their real estate gains altogether.
Completing a 1031 exchange is a little tricky: After the sale of your property, you have 45 days with which to identify a new property and up to 180 days to close on the replacement property for the 1031 exchange to go forward.
The Proposed Changes
1031 exchanges are only applicable on real estate gains over $500,000, and its elimination would directly benefit Biden’s $1.8 trillion American Families Plan to fund early education and direct payments to people with children. Many investors say that doing so would be a tremendous blow to state and local governments who benefit from the sale of real property. Research demonstrates 1031 exchanges directly support an estimated 568,000 jobs while generating over $55 billion annually. That same study cites that 1031 exchanges also prevent properties from being underutilized and underinvested – which means that eliminating them altogether could represent a fallout for investors.
Talk to a Springfield Business Lawyer Today About Your Situation
If you’re a real estate investor considering your next move, you may benefit from insights into the future of 1031 exchanges. While it’s not entirely clear what will happen next, being prepared will help you navigate the road ahead. Contact a Springfield business lawyer today to explore your options.