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Impact of the Tax Cuts and Jobs Act of 2017 (TCJA) on 1031 Exchanges

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During much of 2017, there was a growing concern among many real estate investors that efforts to reform taxes would result in a loss of 1031 Exchange benefits. This belief was fueled by comments from both Republicans and Democrats who were expressing that the 1031 Exchange had turned into a tax loophole for wealthy and was no longer providing a net positive benefit to the economy. Many politicians on both sides of the aisle were expressing the need to bring in more tax revenues from winding down 1031 tax deferrals.

Supporters of the 1031 Exchange cited research showing that if the exchange was eliminated there could be a short-term drop in investment property values ranging from 4.66% to 8%. This reduction would more than offset projected added tax collections of less than $500M per year for the Treasury.

In the final legislation enacted on December 22, 2017, a significant portion of the 1031 Exchange tax code pertaining to real property survived – much to the great relief of not only real estate investors, but to the large number of real estate professionals who support the industry including qualified intermediaries, accountants, lawyers, real estate agents, among others.

Not fairing as well, the portion of the 1031 Exchange relating to personal and business property, e.g., machines, equipment, furnishings, airplanes, art, collectibles, and intangibles — was eliminated. A brief panic set into some industry sectors that relied on these tax benefits, but the overall feared consequences were blunted by other provisions of the Act that permitted accelerated expensing of many items that under the previous provisions were only allowed to be depreciated over a longer time period. The TCJA made substantial changes to depreciation and expense deductions that are outside of the scope of this book to summarize. In general, the overall impact of these changes has been viewed to be favorable for real estate investors – although there is much complexity that will likely require the resources of a qualified tax advisor to interpret and implement on behalf of their clients.

In contrast to the previous major tax reform which was introduced in 1986 after almost two years of back and forth negotiation, the 2017 tax reform was completed in about 22 days. Many CPAs and tax advisors are still scratching their heads to interpret sections of the new reform, and it is likely that further updates will be issued to clarify. As always, readers should rely on the advice of their tax advisors to best determine how TCJA may impact their situation.