Biden Budget Once Again Threatens Section 1031

Section 1031 is again a target in the FY2023 budget proposal recently released by President Joe Biden. The proposal effectively eliminates Section 1031 by placing a $500,000 cap for each taxpayer ($1 million in the case of married couples) on deferred gain from like-kind exchanges. It is the same cap that President Biden included in his FY2022 budget.

The passage of this budget with the capping of like-kind exchanges would adversely impact the overall economy because larger investors are critical to acquiring, renovating and repurposing commercial real estate (particularly retail, hotel and office space) in a post-pandemic economy. This cap would likely cause investors to hold on to their property in expectation that the tax code would change in the future.

The administration published that capping 1031 at $500,000 would raise $1.95 billion per year. However, according to a May 2021 study by Ernst & Young, taxes paid and related to businesses using like-kind exchanges were 1st projected to produce $7.8 billion for the IRS last year,. The FY2023 proposal would be effective for exchanges completed in taxable years beginning after December 31, 2022.