The second term of President Donald Trump brings significant implications for the future of 1031 exchanges, a key tool for real estate investors nationwide looking to defer capital gains taxes. With Trump favoring these tax-efficient real estate investing strategies, here’s a look into the benefits of 1031 exchanges and the potential ways investors can take advantage of this investment vehicle.
So, what is a 1031 exchange and why is it beneficial for real estate investors? A 1031 exchange, also known as a like-kind exchange, is a real estate investing strategy that allows investors to defer capital gains taxes on the sale of an investment property by reinvesting the proceeds into a like-kind property.
The outlook for 1031 exchanges
Trump, a former real estate developer, has long supported the 1031 exchange provision, even while it was under threat of elimination from the Tax Cuts and Jobs Act (TCJA). When the TCJA took effect in January 2018, 1031 exchanges were left largely untouched, but the act eliminated personal property exchanges. Trump’s administration is expected to maintain existing 1031 rules without significant changes.
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.
With Republicans taking the majority in the presidency, House and Senate, Democrat-driven proposals, such as a $500,000 cap on 1031 exchanges, are not expected to hold with the new administration. With no opposing party influence on upcoming tax legislation, the focus will likely shift to maintaining or strengthening the current tax incentives for real estate investors.
However, the Trump administration’s plans to impose tariffs may have indirect consequences for the real estate market. Economists warn that higher tariffs could lead to increased consumer prices and inflation. Rising inflation often triggers interest rate hikes by the Federal Reserve, which could dampen activity in the commercial real estate sector. While such challenges bolster arguments for retaining 1031 exchanges as a vital tax-deferral strategy, investors should stay alert to the broader economic ripple effects.
Benefits of 1031 exchanges for investors
Real estate investors stand to gain considerable advantages from the continuation of 1031 exchanges. By deferring capital gains taxes, investors can reinvest the full proceeds from a sale into new investment or business properties, compounding their purchasing power and accelerating portfolio growth.
For example, rather than paying up to 20% in federal capital gains taxes, plus potential state and local taxes, investors using a 1031 exchange can use their capital gains to invest in larger or more lucrative assets. This reinvestment strategy promotes diversification, passive income generation and long-term wealth accumulation.
Maintaining cash flow and minimizing tax liabilities become even more critical in a high-interest-rate environment. Given that the incoming administration supports tax-deferral strategies such as 1031 exchanges, investors may be more comfortable using these kinds of exchanges in real estate transactions.
Steps investors can take to capitalize on 1031 exchanges
Real estate investors should consider the following actionable strategies to leverage 1031 exchanges effectively:
1. Refresh your knowledge of 1031 rules
To avoid missteps, ensure you understand the core requirements of a 1031 exchange, including:
- The 45-day timeline to identify replacement properties
- The 180-day deadline to close on the new property
- Working with a qualified intermediary
Staying informed about the 1031 exchange rules can help you meet the deadlines and comply with all regulations. That’s critical because if you break the rules, you’ll be on the hook for capital gains taxes.
2. Identify backup properties
Given the challenges posed by inflation and rising interest rates, property availability and valuations may fluctuate, potentially affecting your primary choices. To mitigate these risks, it may be a good idea to identify multiple like-kind replacement properties within the 45-day identification period mandated by 1031 exchange rules.
This identification period begins the day the relinquished property is transferred and concludes at midnight on the 45th day. During this window, you can list several potential replacement properties without committing to purchasing all of them. Having backup options provides flexibility if unforeseen circumstances make your initial selections unviable, ensuring a smoother transaction process.
3. Advocate for 1031 exchanges locally
1031 Crowdfunding offers an online form for investors to contact their congressional representatives about supporting 1031 exchanges. By participating in such efforts, investors can help secure favorable legislative outcomes.
4. Explore Delaware statutory trusts (DSTs)
For those struggling to find suitable replacement properties, a Delaware statutory trust (DST) is a popular backup plan. DSTs allow investors to acquire fractional ownership in professionally managed properties while still qualifying as replacement property in a 1031 exchange. This option provides a streamlined, passive investment pathway while preserving tax-deferral benefits.
The probability of continued support for 1031 exchanges under the Trump administration provides a strong foundation for real estate investors to grow their portfolios without the immediate burden of capital gains taxes. While external factors such as tariffs and inflation may create headwinds, these challenges only underscore the importance of retaining this valuable tax provision.
Investors have promising opportunities under the current 1031 framework that will likely continue for the foreseeable future. As always, consulting a real estate and tax professional is essential to ensure informed decisions that align with and support your long-term financial goals.
Related Content
- ‘Boot’ in a 1031 Exchange: What It Is and How to Minimize Tax Implications
- 1031 Exchanges vs Opportunity Zones: Which Has the Edge?
- Three Tax-Smart Strategies for Real Estate Investing
- 11 Reasons to Consider a 1031 Exchange
- Can You 1031 Exchange into a REIT?
-
7 Things You Should Do Now if You Think Your Identity Was StolenIf you suspect your identity was stolen, there are several steps you can take to protect yourself, but make sure you take action fast.
-
Dow Hits New Intraday High: Stock Market TodayValue-hunters with big stakes in a particular component kept one of the main U.S. equity indexes in positive territory.
-
Dow Hits New Intraday High: Stock Market Today
Value-hunters with big stakes in a particular component kept one of the main U.S. equity indexes in positive territory.
-
Berkshire Buys the Dip on UnitedHealth Group Stock. Should You?Buffett & Co. picked up UnitedHealth stock on the cheap, with the embattled blue chip one of the newest holdings in the Berkshire Hathaway equity portfolio.
-
Mutual Funds Are About to Get the ETF Treatment. Here's What It Means for InvestorsThe SEC is expected to decide soon whether mutual funds from dozens of providers can be offered as ETF share classes.
-
Thanks to the OBBB, Now Could Be the Best Tax-Planning Window We've Had: 12 Things You Should KnowThe new tax legislation offers unique opportunities to make smart financial moves and save on taxes, especially for people nearing or in retirement with significant savings.
-
Market Rebounds Are Happening Fast: Should You Buy the Dips? A Financial Planner's GuideMarkets are bouncing back faster than ever. For some long-term investors, that could mark a compelling case for systematic investing during downturns.
-
Markets Weigh Earnings and Inflation: Stock Market TodayThe major U.S. indexes struggled Thursday amid a hot inflation reading and seasonal headwinds.
-
Social Security Turns 90 — Five Important Things to KnowSocial Security has become a cornerstone of the American retirement system and works to keep over 16 million retirees above the poverty line. Here are five key facts about the program as it turns 90.
-
Bullish, Deere and dLocal: Thursday's Biggest MoversBLSH stock is continuing its post-IPO climb, while Deere and dLocal are swinging post-earnings.
