A 1031 Exchange allows investors to defer capital gains taxes on any exchange of like-kind properties for business or investment purposes.
In an effort to reduce U.S. corporate taxes from the current 35% to a 25% rate, Congress is looking at what are called "revenue offsets" (ie. eliminating an existing tax benefit) to "pay for" tax reform without directly increasing tax rates in other areas of the code. Due to the Joint Committee on Taxation's (JCT) increased tax expenditure figures for Section 1031 exchanges (loss of $98.6 billion over next 10 years) the 1031 exchange became a part of the tax reform discussion. Consequently, the 1031 like-kind exchange is being threatened.
Making the case for keeping 1031s....
Ernst and Young macroeconomic study, The Economic Impact of Repealing Like-Kind Exchange Rules, reveals the repeal of Section 1031 results in less federal revenue, would shrink the economy, discourage investment and is at cross-purposes with tax reform. Study shows an estimated reduction in the overall GDP of $61-$131 billion over 10 years if 1031s were eliminated. Repeal would also subject many businesses to highter tax burdens, result in longer holding periods, greater reliance on debt financing and less efficient deployment of capital.
The House Blueprint also proposes eliminating the deduction of business interest expenses and also eliminates deducting state/local property taxes. This proposal would likely hurt real estate because many investment properties will not cash flow without being able to deduct mortgage interest and taxes.
Trump and the House GOP Blueprint both propose simplifying from today's 7 brackets to 3 brackets:12%, 25%, and 33%.
President Trump proposes a 15% corporate tax rate and a maximum 20% capital gain tax rate.
The GOP House Blueprint proposes:
a)20% corporate tax rate
b) 50% exclusion on capital gains at three new tax rates of 6%, 12.5%, and 16.5% (1/2 of the three new proposed ordinary income rates).
Don't forget: The state will still be collecting its taxes from 9.3%-13.3%.
A final fact you should know if you are investing in property. Current inventory levels are low. Therefore, you may be challenged in meeting the 45 day ID period. A good idea may be to find the replacement property first.