In the past few years, there has been a lot of speculation about the future of 1031 exchanges and whether they will go away entirely. What many do not realize is that 1031 exchanges have been around for almost 100 years, ever since 1921, and many people have taken advantage of its ways to delay paying capital gains taxes by re-investing profits from sales towards other real estate.
However, many people believe that soon 1031 exchanges will completely go away, especially since section 1031 of the Internal Revenue Code was recently amended so that only real estate can be used in a 1031 exchange in the Tax Cuts and Jobs Act. Since real estate is the most common use of 1031 exchange, this change does not limit 1031 exchanges as much as a full cut would.
Some consider 1031 exchanges to have limited economic benefit and think that they should be cut in order to pay for lower tax rates. Others consider 1031 exchanges a vital part of the economy. They believe that if people have to pay capital gains taxes immediately, then they’ll be less likely to purchase new properties, slowing the market down, and halting economic development. Most within the real estate industry believe it will have a detrimental effect if 1031 exchanges were abandoned, and they have fought hard to keep them in place.
At this point, given the gridlock at the federal government, it is unlikely that more tax reform is passed or that 1031 exchanges will go away. It’s been rumored for many years, but still hasn’t occurred. In the meantime, if you are worried about losing the benefit, the best approach is to move forward with your exchange as future tax code changes won’t be retroactively applied to 1031 exchanges that have already occurred.