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Section 1031 Is Changing: What Is Next For Tax Deferred Real Estate Exchanges?


Depending on which factors you pay attention to, investing in real estate is either one of the riskiest or one of the least risky investments you can make.  On the one hand, there is always demand for real estate, and the real estate market always recovers after setbacks.  It is unlikely to tank irreversibly, unlike, for example, the typewriter repair industry.  On the other hand, the market fluctuations are not for the faint of heart.  All investments involve a tax burden, but real estate taxes are especially expensive, and your tax burden on the same real estate property can change substantially from year to year.  Deciding when to buy or sell is part of the fun or part of the stress, depending on your perspective.  The Biden administration has proposed a change to Section 1031 of the Internal Revenue Code; this change will limit the circumstances where real estate investors can benefit from tax deferred real estate exchanges.  A Washington DC real estate lawyer can help you make the best decisions about real estate investments and comply with real estate tax regulations before and after the changes take effect.

The Proposed Changes to Section 1031 of the Internal Revenue Code

Section 1031 of the Internal Revenue Code governs tax deferred like kind real estate exchanges.  The text of section 1031 as of 2021 makes it possible for real estate investors to defer the gains on their real estate sales indefinitely, meaning that many years go by before they are responsible for paying taxes on the gains from their real estate sales.  Section 1031 makes real estate investing affordable, especially for individuals and small businesses.  Without it, the tax burden would defer many investors who can only afford to make small or medium-sized investments.

The new version of Section 1031, which is set to go into effect at the beginning of 2022, would only allow deferral of taxes on real estate exchanges where the gains are less than $500,000.  That means that many real estate properties that sold this year would not have qualified for tax deferral if the new rules had been in place in 2021.

How Will the New Changes Affect Your Real Estate Investing Decisions?

If you are working on a real estate deal, and you were counting on the current Section 1031 tax deferral, you have several options.  You might be able to separate the gains across several parties, with each receiving less than $500,000, and thus being eligible for the new version of the Section 1031 tax deferral.  The ways to accomplish this include condominium, joint tenancy, and limited liability companies (LLCs).  Section 721 exchanges and Qualified Opportunity Zone Funds are other ways that real estate investors can lower their tax burden, although the details of these also change from one year to another.

Contact Us Today for Help

A Washington DC real estate lawyer can help you keep up with the frequent changes to real estate tax laws.  Contact Tobin O’Connor Concino P.C. for help.



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