Obama’s 2015 budget proposes a $1M cap on section 1031 like-kind exchanges of real estate.
Currently, when a capital asset is sold or exchanged, a capital gain or loss is generally recognized. Internal Revenue Code Section 1031 provides an exception to defer recognition of capital gains when business or investment property is exchanged for “like-kind” business or investment property. Many different types of property held for productive use in a trade or business, or for investment, may qualify for tax-deferred treatment under Section 1031. Section 1031, however, does not cover all types of business or investment property – gain from the sale of inventory, partnership interests, stocks, bonds, notes or securities cannot be deferred. Additionally, property used primarily for personal use, like a primary residence or a second home or vacation home, does not qualify for like-kind exchange treatment.
Obama’s 2015 budget proposes to limit the amount of capital gain deferred under section 1031 to $1,000,000 per taxpayer per taxable year for the exchange of real property. The provision could be effective for like-kind exchanges completed after December 31, 2014.
Like-kind exchanges are reported on form 8824. In 2010, approximately 241,587 8824 forms were filed with the IRS, which were broken down as follows: 158,299 individuals, 64,401 corporations, and 18,887 partnerships.
The proposed provision is expected to generate $18.3 billion of additional tax revenue over a ten year period. Obama’s proposal references outdated tax policy that no longer justifies the deferral of capital gain as well as the fact the rule “encourages ‘permanent deferral’ by allowing taxpayers to continue the cycle of tax deferred exchanges.