Why the Attack on 1031 Exchanges Is Likely to Fail (Again)
President Biden proposed the same cap on capital gains taxes last year, and it went nowhere. This year will probably be the same, but just in case, here’s what you can do.


I tend to avoid politics and political discussion for the same reason I avoid discussing religion, sex or which Texas football team I prefer. There’s no reason to alienate or offend a healthy percentage of my readers with my opinions on matters outside my expertise!
Nevertheless, it happens from time to time that politicians say and do things that do fall within my purview. And the recent release of the president’s proposed budget for next year certainly qualifies.
So let’s dig in…

Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
As you may know, the Biden administration recently released its proposed budget for fiscal year 2025. Buried within the $7.3 trillion budget is a provision that would limit capital gains tax deferrals under Section 1031 of the Internal Revenue Code to an aggregated $500,000 per taxpayer annually. While there are currently no statutory limits on capital gains tax deferral, the president’s proposal would mean that real estate investors could defer only a maximum of $500,000 in capital gains taxes ($1 million for couples filing jointly) through 1031 exchanges each year. Any gains above that amount would be fully taxable.
Section 1031 has been in place since the early 1900s and is an important tool for investors seeking to preserve and grow their wealth. The proposed change would be devastating to real estate investors, to the real estate market in general and to the American economy as a whole. And yet, it has taken me a while to address it, for one important reason: I am unconcerned about its prospects of ever becoming law.
Dead on arrival
Let’s be clear: The proposal certainly warrants concern and an aggressive response from the real estate community and investors. And it will certainly get one — just as it did last year when Biden’s proposed budget for 2024 included the exact same proposal. And just like last year, the proposal (and most of the budget with it) will be deemed “dead on arrival” by Congress, including some members of the president’s own party.
To understand why this might be, and why a president would float an idea with virtually no chance of gaining traction, it’s important to understand the process of the federal budget as a whole. The U.S. Constitution grants the U.S. Congress — not the president — the so-called “power of the purse,” or the ability to tax its citizens and spend public money. So Congress can certainly take the president’s budget proposal under consideration. Or they can do what they usually do: hold hearings, debate priorities and ultimately produce a budget whose resemblance to the president’s is entirely coincidental.
It's all politics
The president’s proposed budget is basically symbolic, which begs the question: Why bother producing one at all, much less expend the thousands of hours that go into its production? The answer, in a word: politics.
The president’s budget proposal is a political document, not a practical one. Lacking the force of law, it nevertheless is effective at signaling the administration’s priorities, appeasing various constituencies and, at its most effective, setting the terms of the public debate on certain subjects. Presidents often include items in their budgets that have virtually no chance at becoming law, but that do achieve the goals of energizing their base of voters and possibly forcing their opponents to take unpopular votes, especially in an election year.
This practice is always pilloried as wasteful by the president’s opponents, but it’s clearly a bipartisan tradition. Tracing back through the budget proposal of presidents from the past several decades, it becomes apparent that these “zombie” ideas have a consistent feature:
- President Trump proposed billions for a border wall with Mexico, which served as an effective political rallying cry, if not a serious budget proposal (as it was never going to be accepted, much less funded, by his Democratic opponents).
- President Obama annually proposed a “Buffett Rule” millionaires’ tax, endorsed by Warren Buffett himself, which stood no chance of success, but which enabled him to paint Republicans as “defenders of the rich.”
- President George W. Bush championed the concept of partially privatizing Social Security, an idea that went nowhere in Congress but signaled his conservative bona fides to his supporters.
- President Clinton included a provision to study an internet sales tax in his final budget, a poison pill for the GOP, but a bouquet at the feet of the brick-and-mortar retailers who were important Democratic constituents.
Political positioning
All of these proposals shared the same status as opening moves in a long negotiation process at best and pure political positioning (as opposed to an attempt at serious policymaking) at worst.
Which brings us back to Biden’s proposed $500,000 cap on like-kind exchanges in his 2025 fiscal-year budget. The provision would be an unqualified disaster for the real estate market — if enacted, of course.
A 2015 study by Ernst & Young examined the idea of repealing Section 1031 entirely and determined that the cost to the American economy would be over $13.1 billion. A subsequent study by two professors in 2020 concluded that the cost would be closer to $20 billion and would effectively create a “lock-in effect,” resulting in fewer transactions and, ultimately, industrywide price declines.
Not a realistic policy goal
However, once we understand the symbolic nature of presidential budget proposals, it becomes clear that the suggestion of a 1031 cap serves primarily as an opportunity to signal progressive tax priorities, not as a realistic policy goal. The chances of the 1031 cap becoming law are slim to none, just as they were when it was proposed and ignored by Congress last year. But by proposing it again this year, Biden addresses the goal of telling his progressive base that he is still trying to crack down on “loopholes for the rich,” even while moderate members of his own party will distance themselves from the proposal and tout their defense of middle-class homeowners.
They know what we know
Limiting or repealing 1031 exchanges would blast a hole in real estate values, hurt the economy and ironically reduce tax collections over time by depressing activity. Even the more limited $500,000 cap (as opposed to full repeal) would do immense damage because the vast majority of the 1031 exchange dollar volume comes from a small number of high-value transactions that would be largely gutted. Many investors would simply freeze in place, unwilling to sell appreciated assets, removing a huge chunk of supply from the market. We would also see a steep drop in demand and new investment because the after-tax returns on real estate would fall sharply. Inevitably, property values and rents would decline.
So what should you do now?
- Don't make any panic moves or radical changes to your investment plans at this stage. There is a high probability that this provision will not pass congressional muster, just as it didn't last year.
- Stay informed and get involved. Subscribe to my weekly newsletter and watch this space for news of any movement toward enacting this harmful proposal. Contact your representatives in Congress to voice your concerns.
- Should the proposal show signs of gaining any traction, it might be prudent to consider expediting any planned 1031 exchanges in anticipation of potential future legislative changes. However, it's essential to avoid making rash or poorly thought-out decisions. As of now, there are no indications pointing toward restrictions or limits on 1031 exchanges, let alone their complete elimination.
As always, consult your tax advisers and legal counsel about your specific situation before making major initiatives. Everyone's circumstances are different.
Related Content
- It’s Not Too Late to Defer 2023 Capital Gains Taxes
- Can You 1031 Exchange into a REIT?
- 1031 Exchanges: A Matter of Life and Death?
- 11 Reasons to Consider a 1031 Exchange
- Can I 1031 into a Qualified Opportunity Zone?
Get Kiplinger Today newsletter — free
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.

Daniel Goodwin is a Kiplinger contributor on various financial planning topics and has also been featured in U.S. News and World Report, FOX 26 News, Business Management Daily and BankRate Inc. He is the author of the book "Live Smart - Retire Rich" and is the Masterclass Instructor of a 1031 DST Masterclass at www.Provident1031.com. Daniel regularly gives back to his community by serving as a mentor at the Sam Houston State University College of Business. He is the Chief Investment Strategist at Provident Wealth Advisors, a Registered Investment Advisory firm in The Woodlands, Texas. Daniel's professional licenses include Series 65, 6, 63 and 22. Daniel’s gift is making the complex simple and encouraging families to take actionable steps today to pursue their financial goals of tomorrow.
-
Stock Market Today: Stocks Stable as Inflation, Tariff Fears Ebb
Constructive trade war talks and improving consumer expectations are a healthy combination for financial markets.
-
What Trump’s 'Big Beautiful Bill' Means for Your Utility Bills
If passed, the 'Big Beautiful Bill' could make home energy upgrades more expensive and raise monthly costs. Here's how much more you might pay and how to prepare.
-
Eight Estate Planning Steps to Protect Your Loved Ones (and Your Legacy)
Two-thirds of Americans don't have an estate plan. If you're one of them, these are the essential steps to take now to prevent problems for your family later.
-
The Six Pros This Adviser Says You Need to Sell Your Business
Selling your business isn't as simple as getting the best price and walking away. These are the six professionals you'll need to get a deal across the finish line.
-
The Three C's to Financial Success: A Financial Planner's Guide to Build Wealth
Consistency, commitment and confidence in your chosen strategy are more critical to your financial success than finding the 'perfect' financial plan.
-
A Financial Adviser's Guide to Solving Your Retirement Puzzle: Five Key Pieces
If retirement's a puzzle you're struggling with, try answering these five questions. The answers will guide you toward a solution.
-
You're Close to Retirement and Cashed Out: How Do You Get Back In?
If you've been scared into an all-cash position, it's wise to consider reinvesting your money in the markets. Here's how a financial planner recommends you can get back in the saddle.
-
After the Disaster: An Expert's Guide to Deciding Whether to Rebuild or Relocate
Homeowners hit by disaster must weigh the emotional desire to rebuild against the financial realities of insurance coverage, unexpected costs and future risk.
-
A Financial Expert's Tips for Lending Money to Family and Friends
What starts as a lifeline can turn into a minefield if the borrower ghosts the lender. Following these three steps can help you avoid family feuds over funds.
-
What the HECM? Combine It With a QLAC and See What Happens
Combining a reverse mortgage known as a HECM with a QLAC (qualifying longevity annuity contract) can provide longevity protection, tax savings and liquidity for unplanned expenses.