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Are Current Tax Reform Efforts Targeting Section 1031?

With tax reform on the front burner of the new administration, investors large and small are obviously thinking about the fate of section #1031. While the future of 1031 exchanges has been the subject of much debate in recent years, no administration has moved forward with dramatic revisions – or elimination – of this popular section of the tax code.

Will that change in 2017? Perhaps. While the current Republican blueprint for tax reform – dubbed “A Better Way” – makes no direct mention of section 1031, it does propose to allow investors to immediately expense new business and investment assets. This includes buildings but not land. This gives investors the opportunity to fully depreciate the property after the first year, rather than waiting the 27.5 to 39 years that is the current rule.

And while this change would theoretically allow investors to offset taxes with immediate write-offs, it won’t help all investors. Since immediate expensing ignores land value, it puts an onerous burden on those who, for example, exchange agriculture and ranching land, exchanges where nearly all the value of the property comes from the land itself. Likewise, other investors may face similar challenges.

The proposed change would also force property owners to engage in a near-constant cycle of trading up to avoid losing profit to capital gains and recapture taxes. For those exchanging properties similar in value, profits from appreciation would likely be eaten up by taxes.

Likewise, for exchanges that span two tax years, investors would also be stuck paying taxes in year one and starting year two with less to invest. Current Republical proposals include no carry back provision of expensing loss in year two (the year of the replacement purchase.

So what can investors who feel strongly about preserving section 1031 do? It starts with some grass roots activism in the form of contacting their local congressmen and senators. With a Republican-controlled House and Senate, opposition to elimination – either direct or indirect – of section 1031 requires vocal opposition.

If a 1031 exchange is in your future, visit our website to learn more about these powerful tax deferral tools and our qualified intermediary and replacement property locator services.

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