Biden Budget Proposes End To 1031 Exchanges, Carried Interest Tax Break
President Joe Biden's proposal for the next federal budget includes a number of tax increases as well as a plan to eliminate two tax advantages for real estate: the 1031 exchange and the carried-interest tax break.
In a statement released by the White House on Thursday, 1031s were called “sweetheart deals.” Also known as like-kind exchanges, 1031s are a popular mechanism in the tax code that allows postponement of paying taxes on real estate gains by investing in a similar property.
"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 statement said. "This amounts to an indefinite interest-free loan from the government. Real estate is the only asset that gets this sweetheart deal."
The administration posits that getting rid of 1031s would bring in an additional $19B to the federal budget.
This isn't the first time that scrapping 1031 exchanges has been proposed; the Obama administration also mooted it. Those efforts didn't mean the end of 1031s, though their scope was narrowed by the tax cut signed in late 2017 by then-President Donald Trump.
Before 2017, the 1031 exchange mechanism was used to defer taxes on a wide array of property, including machines and collectibles. The tax cut that year restricted 1031s to real estate.
As for carried interest, “the loophole allows wealthy investment managers to pay a 20% rate on the pay they receive for managing fund assets, instead of the 37% rate that comparable wage earners pay,” the White House statement says. “The budget would finally close this loophole, saving $6 billion.”
Carried interest has also done time on the chopping block, but always survived.
The Biden budget is only a proposal and its particulars would need to survive challenges in Congress. But, as written, it proposes a 25% minimum income tax on the top 0.01% of earners, which would presumably impact a number of real estate billionaires.
Biden also called on Congress to hike the income tax rate to 39.6% for individuals making more than $400K a year, or $450K for couples, up from the current 37%. It also calls for boosting the U.S. corporate income tax rate to 28%, up from the current 21%. That would still be lower than the pre-2017 rate of 35% for corporations.
