Joe Biden went after one of the real estate industry’s favorite tax benefits Tuesday when he proposed funding a child- and elderly-care spending platform by closing off a loophole used by property investors.
The presumptive Democratic presidential nominee proposed eliminating 1031 “like-kind” exchanges for investors with annual incomes greater than $400,000, as part of his plan to finance $775 billion in government spending over the next 10 years on child care and care for the elderly.
But real-estate industry experts noted efforts to eliminate 1031 exchanges have been made before. The reason the tax benefit still stands, they said, is because lawmakers recognize its positive impact on the economy.
“They’ve talked about getting rid of 1031s for years, so I’m not surprised it would be in the Biden plan,” said Stuart Saft, head of the real estate department at law firm Holland & Knight. “Whenever Congress looked at these things, it’s been preserved.”
Saft stressed that eliminating the exchange at a time when the real estate industry is reeling from the coronavirus would be a major blow to the struggling economy.
“It would just pull the rug out from underneath a very huge part of the economy,” he said.
Biden said that his proposal, which would also limit investors’ ability to offset their income tax bills from real estate losses, would add millions of “shovel-ready” jobs to the economy – particularly for women and minorities.
“The way we pay for it is by rolling back unproductive tax cuts: some of the $2 trillion tax cut the president put through,” he said during a speech in Delaware Tuesday. “Closing loopholes. Unproductive tax cuts for high-income real estate investors while ensuring high-income earners pay their tax bills.”
Like-kind exchanges have been part of the U.S. Internal Revenue Code since 1921. They allow real estate investors to defer capital-gains taxes when they sell properties by directing the proceeds into new investments, usually within a few months after the sale.
But more than just deferring taxes, investors continually roll the gains into new properties, often in perpetuity – effectively eliminating those tax liabilities.
“In real estate, unlike in stocks and securities where you pay tax on your trading gains, you can just keep rolling over, so people do this for decades and decades,” Stephen Land of law firm Duval & Stachenfeld said in 2016. Michael Packman, a wealth-management advisor, described the tactic as “swap ’till you drop.” In 2016, he estimated that 1031 exchanges nationally exceed $100 billion in property sales annually.
The 1031s have been targeted before. Most recently, Republican House members had proposed eliminating the benefit in the lead-up to the 2017 tax reform bill – which President Donald Trump passed with the benefit intact.
Trump, as a prominent real estate investor, stands to benefit personally from 1031s. He is reportedly looking to sell his stake in a pair of office towers in Manhattan and San Francisco – properties he purchased after realizing a huge gain in 2005 on a Manhattan development site known as Lincoln Yards.
Yet despite efforts to eliminate 1031 exchanges, lobbyists for the real estate industry in Washington have been effective in preserving them.
Jeffrey DeBoer, head of the Washington, D.C.-based Real Estate Roundtable industry group, said one key trait of 1031 exchanges is that they allow investors to own real estate with less debt.
“As a result, exchanges allow cash-strapped minority, women and veteran-owned businesses to grow their business by temporarily deferring tax on the reinvested proceeds,” he said. “Like-kind exchanges are particularly important during economic downturns when access to capital is less certain.”
DeBoer added that the Roundtable views Congressional review of like-kind exchanges as reasonable and appropriate, and that the group will support “sensible reforms.”
Francis Greenburger, head of Time Equities, said that 1031 exchanges are “critical to the economic function of the real estate markets” and said efforts to cut them come from a lack of understanding about their economic benefits.
“Somebody who’s talking about eliminating these doesn’t fully comprehend why this is a good thing,” he said. “They’re just looking at it superficially.”
Contact Rich Bockmann at [email protected] or 908-415-5229.