1031 Back in the News with the Release of the FY 2023 Budget - REDUCTION OF BENEFITS

At the end of March, President Biden released his FY2023 budget, and it again proposes a $500,000 cap on deferred gain from like-kind exchanges. The following information about like-kind exchanges is in the "General Explanations of the Administration’s Fiscal Year 2023 Revenue Proposals." It is the same information included in last year's budget and the full details can be accessed here (General-Explanations-FY2023.pdf):

REPEAL DEFERRAL OF GAIN FROM LIKE-KIND EXCHANGES

Current Law

Currently, owners of appreciated real property used in a trade or business or held for investment can defer gain on the exchange of the property for real property of a “like-kind.” As a result, the tax on the gain is deferred until a later recognition event, provided that certain requirements are met.

Reasons for Change

The proposal would treat the exchanges of real property used in a trade or business (or held for investment) similarly to sales of real property, resulting in fewer distortions.

The change would raise revenue while increasing the progressivity of the tax system. It would also align the treatment of real property with other types of property.

Proposal

The proposal would allow the deferral of gain up to an aggregate amount of $500,000 for each taxpayer ($1 million in the case of married individuals filing a joint return) each year for real property exchanges that are like-kind. Any gains from like-kind exchanges in excess of $500,000 (or $1 million in the case of married individuals filing a joint return) a year would be recognized by the taxpayer in the year the taxpayer transfers the real property subject to the exchange.

The proposal would be effective for exchanges completed in taxable years beginning after December 31, 2022.

Last year, the Federation of Exchange Accommodators in conjunction with coalition partners commissioned two economic studies showing the economic value of 1031 exchanges.

Among other findings, these studies conclude:

• §1031 exchanges will support 710,000 jobs and $35.3-44.1 billion of labor income in the United States during 2021.

• Like-kind exchanges will generate between $70.8-$88.5 billion in value-added in the United States in 2021.

• Taxpayers engaged in like-kind exchanges (LKEs), along with suppliers and related consumer spending will generate approximately $7.8 billion in federal, state, and local taxes during 2021.

-Of that, $4.965 billion is federal, and $2.805 billion is generated at the state and local levels.

-Additionally, an average of $6 billion per year of additional income taxes are paid due to foregone depreciation on the replacement property acquired in the exchange.

• Eliminating LKEs would create a lock-in effect resulting in fewer transactions and price declines. Without the ability to exchange, taxpayers would continue to hold on to sub-optimal assets which in turn would exact a cost on the economy - properties would be more highly leveraged and owners would spend less on capital improvements.

For Alternative tax deferral options that do not limit the amount of tax deferral like the proposed changes to the 1031 exhange please contact Adam Ausloos 414-269-2600 adam@defernow.com to learn about tax planning solutions.