Bill Overview
Title: 1031 Exchange Improvement Act
Description: This bill revises the tax rule allowing deferral of gain for like kind exchanges of commercial property. (That rule provides that no gain or loss shall be recognized on the exchange of real property held for productive use in a trade or business or for investment if such real property is exchanged solely for real property of like kind.) Specifically, the bill eliminates the requirement that a substitute property be identified within 45 days of the sale of the original property.
Sponsors: Sen. Lee, Mike [R-UT]
Target Audience
Population: Individuals and entities involved in commercial real estate transactions using 1031 exchanges
Estimated Size: 200000
- Section 1031 of the IRC is commonly used by real estate investors and businesses who deal in commercial properties to defer taxes.
- Prior to the bill, the tight 45-day timeframe to identify a replacement property adds pressure on parties engaged in exchanges, possibly leading to hasty decisions or failure to fully utilize the benefits.
- The extended timeframe reduces urgency and stress for all parties involved, possibly increasing the use of such 1031 exchanges.
- Globally, real estate investors and businesses who operate internationally and utilize U.S. tax rules could also benefit.
- The change could attract more foreign investment in U.S. commercial properties as it eases the operational process.
Reasoning
- The policy primarily affects real estate investors and commercial property managers involved in 1031 exchanges. These individuals would likely benefit from the flexibility the policy introduces.
- The budget constraint implies that a limited number of people can benefit directly, as the policy may primarily impact those with substantial commercial real estate investments that participate in 1031 exchanges.
- Despite this, the target population is quite specific, which means the impact could be significant for those directly involved, while having little to no effect on those outside this industry.
- There is a possibility for increased foreign investment due to smoother processes, but that lies within a broader secondary effect rather than immediate individual impact.
- The extended timeframe reduces the risk of suboptimal decision making during exchanges, likely increasing long-term wellbeing for involved parties.
- Interviews were chosen from diverse backgrounds and regions to reflect the varied stakes individuals might have regarding commercial property and 1031 exchanges.
Simulated Interviews
Real Estate Investor (New York, NY)
Age: 45 | Gender: male
Wellbeing Before Policy: 8
Duration of Impact: 20.0 years
Commonness: 8/20
Statement of Opinion:
- The change in the identification period is a godsend. It gives us more time to find the right investment and has the potential to improve returns significantly.
Wellbeing Over Time (With vs Without Policy)
| Year | With Policy | Without Policy |
|---|---|---|
| Year 1 | 8 | 8 |
| Year 2 | 9 | 8 |
| Year 3 | 9 | 8 |
| Year 5 | 9 | 8 |
| Year 10 | 10 | 9 |
| Year 20 | 10 | 9 |
Commercial Property Manager (San Francisco, CA)
Age: 52 | Gender: female
Wellbeing Before Policy: 7
Duration of Impact: 10.0 years
Commonness: 7/20
Statement of Opinion:
- This policy change eases a lot of stress associated with property management upgrades. We don't have to rush through our decisions now.
Wellbeing Over Time (With vs Without Policy)
| Year | With Policy | Without Policy |
|---|---|---|
| Year 1 | 7 | 7 |
| Year 2 | 8 | 7 |
| Year 3 | 8 | 7 |
| Year 5 | 9 | 7 |
| Year 10 | 9 | 7 |
| Year 20 | 9 | 7 |
Real Estate Developer (Miami, FL)
Age: 35 | Gender: male
Wellbeing Before Policy: 8
Duration of Impact: 20.0 years
Commonness: 5/20
Statement of Opinion:
- We often juggle multiple exchanges, and an extended identification period will definitely improve our strategic positioning.
Wellbeing Over Time (With vs Without Policy)
| Year | With Policy | Without Policy |
|---|---|---|
| Year 1 | 9 | 8 |
| Year 2 | 9 | 8 |
| Year 3 | 9 | 8 |
| Year 5 | 10 | 8 |
| Year 10 | 10 | 9 |
| Year 20 | 10 | 9 |
Tax Advisor (Chicago, IL)
Age: 60 | Gender: female
Wellbeing Before Policy: 7
Duration of Impact: 5.0 years
Commonness: 10/20
Statement of Opinion:
- This change could simplify the advice I give my clients, making the exchange process more manageable for them.
Wellbeing Over Time (With vs Without Policy)
| Year | With Policy | Without Policy |
|---|---|---|
| Year 1 | 7 | 7 |
| Year 2 | 7 | 7 |
| Year 3 | 7 | 7 |
| Year 5 | 8 | 7 |
| Year 10 | 8 | 7 |
| Year 20 | 8 | 7 |
Foreign Real Estate Investor (Los Angeles, CA)
Age: 42 | Gender: female
Wellbeing Before Policy: 8
Duration of Impact: 15.0 years
Commonness: 4/20
Statement of Opinion:
- The smoother process will attract more international investors, easing our entry and operations in the US market.
Wellbeing Over Time (With vs Without Policy)
| Year | With Policy | Without Policy |
|---|---|---|
| Year 1 | 8 | 8 |
| Year 2 | 8 | 8 |
| Year 3 | 9 | 8 |
| Year 5 | 9 | 8 |
| Year 10 | 9 | 8 |
| Year 20 | 9 | 8 |
Commercial Realtor (Austin, TX)
Age: 50 | Gender: male
Wellbeing Before Policy: 9
Duration of Impact: 20.0 years
Commonness: 6/20
Statement of Opinion:
- This bill improves operational efficiency, making it easier to close bigger deals with confidence.
Wellbeing Over Time (With vs Without Policy)
| Year | With Policy | Without Policy |
|---|---|---|
| Year 1 | 9 | 9 |
| Year 2 | 9 | 9 |
| Year 3 | 10 | 9 |
| Year 5 | 10 | 9 |
| Year 10 | 10 | 9 |
| Year 20 | 10 | 9 |
Independent Real Estate Broker (Denver, CO)
Age: 47 | Gender: female
Wellbeing Before Policy: 6
Duration of Impact: 10.0 years
Commonness: 10/20
Statement of Opinion:
- Having more time will definitely help prevent rushed dealings that could potentially reduce profitability.
Wellbeing Over Time (With vs Without Policy)
| Year | With Policy | Without Policy |
|---|---|---|
| Year 1 | 6 | 6 |
| Year 2 | 7 | 6 |
| Year 3 | 7 | 6 |
| Year 5 | 8 | 6 |
| Year 10 | 8 | 7 |
| Year 20 | 8 | 7 |
Retired Real Estate Investor (Phoenix, AZ)
Age: 63 | Gender: male
Wellbeing Before Policy: 5
Duration of Impact: 5.0 years
Commonness: 12/20
Statement of Opinion:
- The change might not directly affect me now, but it's a beneficial step for upcoming investors that I advise.
Wellbeing Over Time (With vs Without Policy)
| Year | With Policy | Without Policy |
|---|---|---|
| Year 1 | 5 | 5 |
| Year 2 | 6 | 5 |
| Year 3 | 6 | 5 |
| Year 5 | 6 | 5 |
| Year 10 | 7 | 5 |
| Year 20 | 7 | 5 |
Real Estate Lawyer (Seattle, WA)
Age: 55 | Gender: female
Wellbeing Before Policy: 7
Duration of Impact: 10.0 years
Commonness: 11/20
Statement of Opinion:
- Easing the timeline can reduce disputes over missed deadlines, a common issue I handle.
Wellbeing Over Time (With vs Without Policy)
| Year | With Policy | Without Policy |
|---|---|---|
| Year 1 | 7 | 7 |
| Year 2 | 7 | 7 |
| Year 3 | 8 | 7 |
| Year 5 | 8 | 7 |
| Year 10 | 8 | 7 |
| Year 20 | 8 | 7 |
Commercial Real Estate Analyst (Dallas, TX)
Age: 30 | Gender: male
Wellbeing Before Policy: 6
Duration of Impact: 15.0 years
Commonness: 9/20
Statement of Opinion:
- It's going to help streamline the evaluation process, providing more room to bargain and analyze trends effectively.
Wellbeing Over Time (With vs Without Policy)
| Year | With Policy | Without Policy |
|---|---|---|
| Year 1 | 6 | 6 |
| Year 2 | 7 | 6 |
| Year 3 | 7 | 6 |
| Year 5 | 8 | 6 |
| Year 10 | 8 | 6 |
| Year 20 | 8 | 6 |
Cost Estimates
Year 1: $2500000000 (Low: $2000000000, High: $3000000000)
Year 2: $2500000000 (Low: $2000000000, High: $3000000000)
Year 3: $2500000000 (Low: $2000000000, High: $3000000000)
Year 5: $2500000000 (Low: $2000000000, High: $3000000000)
Year 10: $2500000000 (Low: $2000000000, High: $3000000000)
Year 100: $2500000000 (Low: $2000000000, High: $3000000000)
Key Considerations
- Increased use of like-kind exchanges may defer significant tax revenues for the federal government annually.
- Real estate market conditions are volatile and can substantially alter the anticipated financial effects.
- Regulatory responses or changes in tax code might be needed if deferred impacts grow concerningly high.
- Monitoring the effect of this policy change on real estate pricing and investment patterns is critical.