Biden Administration Tax Proposal Threatens Fabric of Real Estate Market
1031s are critical to a healthy real estate market. A tax hungry Biden proposal, if enacted, would be penny wise and many, many pounds foolish!
As many know, the Biden Administration’s tax proposals place 1031 Exchanges in the cross-hairs in its determination to confiscate more wealth from the public so it may redistribute it through political policy and trickle-down government rather than the organic economy doing it on its own.
EY released its 2021 study, “Economic Contribution of Like-Kind Exchanges”
Per the release from 1031 Builds America:
”The study measures the direct impact on taxpayers engaged in like-kind exchanges and the ancillary stream of indirect economic activity spawned by exchanges that involves suppliers to exchanging taxpayers and related consumer spending from income generated by employees and other businesses within the supply chain."
Tax policy is never neutral. As Alan Greenspan observed, “Whatever you tax, you get less of”. The study puts into stark terms the massive costs of taxing 1031s as proposed.
My own economic opinion considering this information is that 1031s provide great incentive for fluidity in the marketplace of real estate. It permits languishing property in need of investment to switch hands to do so, and encourages investors to risk capital for mid and long term potential rewards of risking that capital to improve real estate in areas that are in need of serious economic investment. This has been going on for decades, since the 1920s. No government required.
Eliminating or severely restricting 1031s will not only fail to raise the tax revenue projected since investors will simply hold onto assets rather than be taxed. It will have severe downstream knock-on effects to both the economy and related tax collection as the marketplace freezes in place, with investors disincentivized to risk capital to make property improvements, while freezing out future new development from investors whose return calculation will all include a massive capital loss due to taxation.
If you’re an investor or industry professional interested in letting Congress know about your views on 1031s, you can easily do so via 1031 Builds America’s website by clicking here.
Johannes Ernharth, AIFA® is Mid-Atlantic Regional Director of Asset Strategy, a Private Wealth Management firm whose advisors take a fiduciary-driven, goal-oriented approach to with their clients. He specializes in 1031 Exchanges and potential replacement property strategies.