Written by Thomas Hinson of Xchange Solutions, Inc.

Potential Threats to Section 1031

Last fall, former Chairman Senator Baucus (D-WY) of the Senate Finance Committee, submitted a draft tax reform proposal that discussed the possibility of eliminating 1031 exchanges. Taxable gains on personal property exchanges were to be mostly absorbed by the introduction of a pooling method for asset depreciation similar to Canada’s.  Like-Kind exchanges of real property were completely eliminated in the Baucus draft.

Earlier this year, Representative Dave Camp (R-MI), Chairman of the House Ways and Means Committee, followed up with his own ideas outlining comprehensive tax reform with the goal of reducing corporate tax rates to 25%.  This too proposed complete elimination of section 1031 from the Internal Revenue Code by January, 2015.

Quickly to follow we saw President Obama’s 2015 budget proposal limiting the amount of deferral for capital gains to $1 million per taxable year.

So What Does This Mean?

In my opinion, 1031 exchanges are not going away, but to insure this, your help is needed.  Let’s take a look at why this legislation is a stretch:

• Senate Finance Committee: New Leadership
  Before the end of 2013, but after Baucus submitted his proposed tax reform papers, Senator Baucus announced that he would not be running for re-election in 2015.  As luck would have it, Mr. Baucus is now the United States Ambassador to China, being replaced by Senator Wyden (D-OR) as Chairman of the Senate Finance Committee.  Senator Wyden quickly let the other members know he would introduce his own ideas that may or may not represent Senator Baucus’ proposal.  With the November elections shifting power to the Republican parties in both the House and the Senate, a new agenda will be introduced.
• House Ways & Means Committee: Lacking Broad Support
  The House also has very little interest in moving on a Bill that possibly would upset so many constituents.  U.S. businesses who participated in good faith along with elected Representatives by providing ideas that could drive comprehensive tax reform were all surprised when Rep. David Camp, unilaterally, moved the draft proposal out of Committee.  As luck would have it, Camp was not re-elected this past November.
• White House: Possible Lame Duck Situation
  Now that the Republicans have gained control of both the House and Senate, there won’t be enough support for reform.  Additionally, should President Obama wish to move on his agenda, he too is going to need significant support from the other side of the aisle.

Remember, a bill must first be introduced to the floor of the House by approval of the Committee, then voted on by Members of the House.  The same process is performed by the Senate.  Should both separate Bills receive enough votes to pass, then the House and Senate must reconcile a Bill to present to the President, who has the authority to sign OR veto at his discretion.

Tax reform is difficult.  Comprehensive tax reform is monumental.  We have a Congress who finds it arduous to agree on almost anything presented before them.  1031 like-kind exchanges, whether simultaneous or deferred, most likely, will not be on the chopping block in 2015 or for the next few years, at least not without a fight.

Too many employers, associations, service industries, congressmen and women, recognize 1031s are a vital tool in the US economy.

“What Can I Do to Help Prevent a Repeal of §1031?”

Laws are written and passed based on the type and amount of feedback Congress members receive about legislative proposals. Communicating with your Representatives and Senators is the most effective effort you can make to persuade lawmakers that these proposals should not advance. The campaign to prevent the repeal of IRC §1031 is dependent on educating lawmakers about the strong benefits of like-kind exchanges: they help taxpayers of all kinds, are not a loophole, and are a strong driver to the economy. Read more about the issue on the §1031 Repeal Issue page.

Contact Your Legislators

Write your representatives and senators using the FEA’s Online Advocacy Website. Using this tool, you can customize and send an emailed letter to Congress members.

Send an email to your Representatives and Senators.  This method is a fast and effective way to tell your lawmakers not to repeal §1031, a valuable economic tool.

After sending an email to Congress, consider other steps you can take help the campaign. Sending a personalized letter is a very convincing way to show lawmakers that this issue affects businesses and individual voters in real ways. Thoughtful, personalized constituent messages often have more influence with Congress than a large number of identical form messages.

Share Your Experiences with Like-Kind Exchanges

Have you benefited from §1031?  Sharing your experience can help educate and persuade Congress members that §1031 benefits real taxpayers and has a real effect on businesses across the country.

Don’t forget to include your contact information. Responses are most effective when the type, size, and city and state of the business are explicit, as legislators can see that a message came from a voter in their district.

Contact Stan Nowak regarding this and other Commercial Real Estate questions.

Visit Xchange Solutions, Inc. Here for more information about 1031 Exchanges.