Real estate tax benefit under Section 1031 could be ending

On Behalf of | Jun 18, 2021 | Real estate litigation |

Real estate investors in Ohio are seeking to profit on their investment and keep as much money as possible shielded from taxes. This is a wise decision and it is perfectly legal. One way in which this is frequently done is through Section 1031. Known as a like-kind exchange rule, it essentially allows people to purchase property, sell it and use the proceeds from that sale to buy a new property within six months while deferring taxes on whatever was gained by the sale. It is legal to repeat this process over and over – a strategy used by investors throughout the nation. However, its availability might be changing and those who have used it should be aware of that possibility and consider their options.

Understanding 1031 and knowing what changes might mean

The initial intent of 1031 was to help farmers. As with many laws, people try to find ways to use them to their advantage and that happened with 1031. Government experts believe that if the loophole is closed, it will increase tax revenue by nearly $20 billion within a decade. Those who are involved in real estate think that it might reduce how many transactions are completed and damage the economy while lowering property values. Some real estate brokers assert that their businesses would be ruined if this came to pass.

An argument to keep 1031 is that it is not only wealthy people who use it, but retirees, lower-level investors and people who own rental properties. Farmers are also claiming that they will be negatively impacted by the proposed change. Many farmers use this option to upgrade their property without worrying about tax implications. There are suggestions that as much as $500,000 could remain tax free even if 1031 is done away with. Previous presidential administrations that sought to reduce the use of 1031 were met with staunch opposition and it never came to pass. The latest changes to the tax code in 2017 eliminated 1031 for sales and purchases of equipment and art, lending credence to the argument that it can be discarded without overt damage to individuals and the economy.

Legal ramifications are prevalent with real estate transactions

Real estate can be lucrative, but it is also complex. Whether there is real estate litigation or a person is concerned about such issues as Section 1031, zoning, leasing, valuation and more, it is wise to have professional guidance throughout the process. Although the closing of the 1031 loophole is only in its discussion stage, it is beneficial to understand and be prepared for how it might impact a person’s future. Having assistance with these and other real estate concerns is imperative.