Basics of the Kaptur-Sanders Bill and 1031 Exchanges

Commercial real estate interest groups are descending upon D.C. in the hopes of protecting 1031 exchanges. Leaders in D.C. like Congresswoman Marcy Kaptur and Democratic presidential hopeful Bernie Sanders are aiming to repeal the provision that allows for deferred capital gains taxes in order to help fund pensions for retirees.

In June, the duo proposed the “Keep Our Pension Promises Act of 2015”, the overarching goal of which is to reverse legislation passed towards the end of the most recent Congressional session. The legislation they are targeting to overturn allows trustees of some multi-employer pension plans with financial issues to limit benefits paid out to widows, widowers, and retirees. In order to help fill in the financial gap, legislators are looking for other opportunities, and 1031 exchanges have been highlighted on the radar.

Proposed changes would include revising the section of the tax code related to 1031 exchanges, which currently allows investors to defer capital gains taxes when one piece of property is sold and the funds are used to acquire additional like-kind properties.

The suggestion is not out of line with the kind of focus the Obama administration has already given to what are viewed as tax “loopholes”. In fact, the administration has suggested eliminating programs seen as loopholes in order to pay for government programs and help manage reductions in the deficit. The proposed budget for 2016 suggested by Obama would cap the deferral of capital gains taxes at $1 million per year per taxpayer. The legislation mentioned above would attempt about the same reach, limiting the gain amount that could be protected from taxes in real estate exchanges to $1 million per year per taxpayer (while also accounting for inflation).

Those in the real estate industry have reacted relatively quickly to the perceived attack on 1031 exchanges, as many who work within the industry recognize the value of 1031 exchanges for promoting real estate investment. Especially after the hard hit the real estate industry took in the recent housing crisis and recession, experts in the industry are concerned that progress could stall out if 1031 benefits are limited. Industry leaders and lobbyists believe that their most important job at the present time is to educate legislators about how 1031 exchanges are actually used and how fundamental they are to the recovery and general health of the real estate market. Research is still being conducted to determine the potential negative impacts of major changes for 1031 exchanges.

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