Without altering section 1031 of the Internal Revenue Code, the Inflation Reduction Act was approved by Congress and signed by President Joe Biden on August 16, 2022. The 1031 exchange, a common technique used by property owners to defer paying capital gains taxes on real estate investment property, is governed by the tax code.
“Naturally, this is good news, says Kevin M. Levine, Partner and Executive Vice President at Peak 1031 Exchange (www.peakexchange.com), “but real estate professionals must remain watchful. IRC Section 1031 could possibly be threatened once more in the future given today’s constantly shifting social and political climate.”
Real estate investors and industry professionals who rejected President Biden’s original proposals to eliminate and later limit gain deferral under section 1031 applauded the decision not to implement new limits on 1031 exchanges. For each sale of investment property, the proposal would have limited the number of capital gains that taxpayers could defer to $500,000 (or $1 million in the case of married persons filing a joint return). The taxpayer would have had to declare any gains over $500,000 (or $1 million, as the case may be) in the year the real estate was sold.
Real estate investors, consumers, and the US economy can continue to profit financially from 1031 exchanges by maintaining Section 1031 of the Tax Code. Businesses that create income as a consequence of 1031 exchanges were estimated to have generated over $7.8 billion in tax revenue last year, in addition to encouraging and rewarding real estate investment, according to a May 2021 report by Ernst & Young.
Real estate investors, escrow professionals, licensed intermediates, lenders, attorneys, and appraisers are some ancillary parties engaged in the 1031 exchange process. According to the Ernst & Young report, 1031 exchange-related enterprises generated 568,000 jobs, $27.5 billion in labor income, and $55.3 billion in additional GDP in 2021 alone.