In the president’s budget plan for 2024, Biden is calling for an end to what the IRS calls a like-kind exchange, or a 1031 exchange, as it is commonly known among real estate professionals. The strategy allows sellers to postpone paying taxes on any capital gains — or the money they made in addition to their original investment — by using those funds to buy a similar property elsewhere immediately.
If investors continue to own any properties purchased using the like-kind exchange, they won’t have to pay taxes on their equity gain. This is the issue the Biden administration identified in the fact sheet that was released with the proposed budget.
“This loophole lets real estate investors – but not investors in any other asset – put off paying tax on profits from deals indefinitely as long as they keep investing in real estate,” the fact sheet said. “This amounts to an indefinite interest-free loan from the government. Real estate is the only asset that gets this sweetheart deal.” The fact sheet said closing the loophole would add $19 billion to the budget.
This isn’t the first time that the president has targeted the 1031 exchange. In 2020, Biden’s “caring economy” plan sought to close the 1031 exchange to raise funds for programs like universal preschool and a childcare tax credit. Last year, the president proposed capping the gains that investors could defer to $500,000 for a single taxpayer or $1 million for married tax filers.
The proposed 2024 budget needs to be approved by both the Senate and the House of Representatives and will likely face fierce opposition.