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- The 1031 exchange is a popular tactic that allows home sellers to avoid paying taxes.
- How it works: Money made from the sale of a property has to be quickly reinvested into another one.
- President Joe Biden’s new budget pans it as an “indefinite interest-free loan from the government.”
The Biden administration has signaled a renewed effort to get rid of a popular loophole that real-estate investors have long used to avoid paying taxes after the sale of a property.
In the president’s budget plan for 2024, released Thursday, Biden is calling for an end to what the IRS calls a like-kind exchange, or a 1031 exchange or 1031 transfer 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 immediately buy a similar property elsewhere.
As long as investors continues to own any properties purchased using the like-kind exchange, they won’t have to pay the taxes on their equity gain. This is the problem, the Biden administration said in a fact sheet about the 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.”
Closing the loophole would add $19 billion to the budget, the fact sheet said.
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 other 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.
Biden’s previous threats to end the 1031 exchange were met with stiff resistance from the real-estate industry and were never passed.
The proposed 2024 budget needs to be approved by a Democratic Senate and Republican House of Representatives and will likely face fierce opposition. As Insider’s Juliana Kaplan and Ayelet Sheffey wrote, the administration’s budget is more a list of priorities than proposals that will actually see the light of the day.