What a lot of people fail to realize is that Section 1031 of the Internal Revenue Code encourages investment by letting sellers postpone paying capital gains taxes through a series of exchanges. It is not that these entities forgo paying taxes, but rather defer them. Taxes only come due when there a group sells a property and does not reinvest those proceeds into another purchase or purchases.
If Congress follows through with modifying or all together dismissing the popular tax accounting regulation known as a 1031 tax-free exchange it would have a drastic impact not only on the real estate market but also all of the ancillary trades (contractors, skilled blue-collar workers, lenders, real estate brokers, title insurers, surveyors, appraisers, architects…) Part of Biden’s American Families Plan would end the tax break for gains greater than $500,000’ which would account for a large majority of transactions. He is saying it is to help finance child and elder care.
In the event this nonsense advances it will drastically affect markets at just about every level, however it will truly squeeze small investor groups. The irony in all of this is that when a property sells it typically gets assessed at a higher value, thus increasing the tax revenue for schools and other services. I could see a scenario where investors sit on properties because they will no longer be incentives to sell and reinvest. Because of this, it will drastically slow the deal velocity. If you would like your voice to be heard, please sign the petition!