Joe Biden Proposes Eliminating Real Estate Sales Exchanges to Fund New Social Programs | Citizens Against Government Waste

Joe Biden Proposes Eliminating Real Estate Sales Exchanges to Fund New Social Programs

The WasteWatcher

Owning property is significant part of the American dream.  This helps explain why real estate has been the most popular investment in the United States since 2013, according to an April 1-14, 2020 Gallup poll.  And since the start of the pandemic, real estate has become even more popular in relation to stocks and mutual funds, which have been in second place for the past seven years. 

While there are different rules for selling one’s primary residence and selling investment real estate, under most circumstances both kinds of sales will result in the payment of a short-term or long-term federal and state capital gains tax. In some situations, the sale of investment real estate through an “exchange” can lead to the deferral of capital gains taxes under Internal Revenue Code Section 1031.

For a property owner to qualify for a 1031 exchange, the two properties must be considered “like-kind”, i.e. they must be either for investment, used in a trade, or as a business.  Like- kind exchanges allow property owners to defer capital gains tax owed from the sale of the old property, so that more financial capital can be rolled into the new property.  The tax savings from these 1031 exchanges help property investors purchase better investment properties.  Without these exchanges, the costs of swapping these assets would increase significantly and significantly impact real estate investments. 

Presumptive Democrat nominee Joe Biden had promised to close tax loopholes to fund the Biden-Sanders Unity Tax Force’s generous social welfare programs.  To help expand child and elderly care programs, Biden wants to eliminate the 1031 exchanges.   He would also limit the ability of investors to offset their gains with real estate losses, another significant blow to the real estate industry.

However, removing the 1031 exchange tax deferral is contradictory to the Unity Task Force’s espoused goal of providing “more equitable access to tax provisions that help working families build wealth.”  Like-kind exchanges help all property-owning Americans build wealth and secure economic freedom.  Subjecting these activities to the capital gains tax, as well as eliminating the ability to offset losses, will wastefully squanders investors’ and reduce the value of businessowners’ capital.  More importantly, eliminating the 1031 exchanges will worsen wealth inequality in America by removing a powerful engine of wealth generation.

The long-term capital gains tax for the sale of property ranges between 15 to 20 percent, depending on the income of the owner.  If a business owner wants to sell a storefront building valued at $1,120,000 that was initially purchased for $560,000 10 years prior, the federal capital gains tax bill would fall between $84,000 to $112,000.  Under the Biden plan, the business owner would not be able to use that money for a down payment on better real estate under the 1031 exchange program.  This is particularly problematic when real estate values are under pressure during the pandemic.  

Businessowners who purchase office space gain an asset that helps them build equity as the property appreciates.  Without the 1031 exchanges, owning a storefront anywhere in the country becomes a liability to the property owner.  Businessowners would be penalized for moving their operations.  The onerous tax bill would force many businessowners to rent their premises from another property owner with no financial return on the rent paid to their landlord.  

The 1031 exchanges protect businessowners’ and investors’ financial capital and provides financial freedom when purchasing investment properties.  Eliminating the 1031 exchanges will suffocate the real estate investment market and its concomitant industries.  Joe Biden should maintain the 1031 exchanges as an indispensable protection for all Americans seeking to build wealth and secure their financial future.

--Trevor Lewis

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