Proposed Repeal of IRC Sec. 1031 – the Latest Chapter
Approximately 1 minute reading time. As many of you know, some members of Congress are assessing whether to repeal Section 1031 of the U. S. Internal Revenue Code, which allows sellers to defer capital-gains taxes by reinvesting the gain on the sale in other properties, in order to finance a possible tax rate cut.
Chairman Kevin Brady (Rep. of Texas) of the House Ways and Means Committee has proposed replacing Sec. 1031 with immediate expensing. Immediate expensing works like bonus depreciation: instead of amortizing the real estate improvements over a long depreciation schedule (typically 27.5 or 39 years), you get to deduct the full value of the building in the initial year. This creates a tax loss that can be carried forward indefinitely, until it is eventually used up.
However, the issue is whether this would be a fair trade-off. For example, this proposal has excluded the expensing of the land. Such an exclusion would greatly limit this deduction, particularly for real estate purchases with a higher land value. Chairman Brady has recently said that he would consider allowing an interest deductibility for land precisely because it couldn't be expensed. So it's possible – though not guaranteed – that there may be some modest tax benefits available for the land value of the real property.
The biggest question is how these changes will impact the market. Does a replacement of the tried and true (and fully understood) like-kind exchange with this immediate expense provision result in taxpayers simply holding onto the property, or finding other ways (or investments) to defer income? Only time will tell.
- Charles F. Schultz JD, CPA
Tax Partner, FGMK, LLC