Exchanger Beware: Biden's Proposed Tax Plan Implodes 1031 Exchanges ... and more!

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The Tax Plan proposed by Democratic presidential candidate Joe Biden would eliminate 1031 exchanges for investors who have ordinary annual income of $400,000 or more. If one assumes this $400,000 cap includes the gain from the actual sale of real property, in addition to a taxpayer's ordinary income earned, the lion's share of real estate investment property sales would not qualify for 1031 exchange tax treatment. Even if this assumption‑‑that all earned income would not be combined with the 1031 exchange property gain‑‑the bulk of most real estate sales would likely exceed the $400,000 gain amount.

Partnerships, like S corps and C corporations that hold real estate investments, would be prohibited from 1031 exchange tax treatment under Biden's proposed tax plan, as current IRS regulations require that the deed title holder is the only entity which can participate in a 1031 exchange. Individual members of a partnership, or shareholders of an S corporation, cannot do individual exchanges for themselves. Significant tax liabilities would result for these entities or their pass‑through individuals, such as partners and S corporation shareholders. For C corporations, Biden's tax proposal increases their tax rate from 21 to 28 percent.

Additionally, Biden's proposed long‑term capital gain tax rate would be increased to 39.6 percent, virtually DOUBLING the current 20% rate. This effectively makes long term capital gain rates equal to ordinary tax rates in his proposal. Adding the state tax rate, depending on where the real estate property is located, a rate of 50 percent or more is conceivable for any investment real estate property sales.

And considering the current COVID‑19 virus shutdown and aftermath, combined with Biden's proposed tax increase of the capital gains tax rate and the elimination of 1031 exchanges, the current crippled commercial real estate market could result in the further reduction of cap rates and would cause a major disruption in our real estate market.

If that's not scary enough, another change in the Biden tax proposal is the elimination of the step‑up basis for any and all assets acquired from a decedent. If your deceased ancestor participated in a 1031 exchange or held commercial real estate long term that results in a low depreciable base, a significant amount of the asset's value would be taxed to you, the beneficiary. Under current tax regulations, when the decedent's property is passed to a beneficiary taxpayer, the value of the property is the fair market value at the date of the decedent's death. In addition, the beneficiary taxpayer is also treated as having held the property acquired for more than a year, ensuring the long‑term capital gain treatment for any property disposed of before the decedent's first anniversary of death. None of these current tax regulations would survive under the proposed Biden tax plan.

In light of Biden's tax plan, is it time for you to review your real estate holdings and get them in order? In your analysis of your current asset holdings, should you consider a 1031 exchange transaction in the near future to consolidate or improve your real estate holding's returns?

Contact the 1031 Exchange Experts at to discuss your possible 1031 exchange strategies. Or if you have questions about your options, you can also call us nationwide, toll‑free, at 866‑694‑0204.

Our qualified exchange consultants stand ready to assist you.

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