House Republican Blueprint for Tax Reform
The House Republican Blueprint for Tax Reform, titled “A Better Way” proposes sweeping changes to the tax code. The proposal pairs 100% immediate expensing with unlimited loss carryforward for all tangible and depreciable personal property assets and real estate improvements, except land. The proposal would eliminate the business interest expense deduction. The proposal does not explicitly repeal nor preserve Section 1031 like-kind exchanges.
Summary of the Blueprint Proposals
The Blueprint flattens and lowers tax rates for families and individuals, implements reduced and progressive tax rates on capital gains, dividends, and interest income. Taxpayers would be able to file taxes on a postcard. The tax system would move to a consumption-based approach, focusing on business cash flow.
The proposal eliminates the alternative minimum tax, estate tax, and generation-skipping transfer tax. Pass-through entities would fall under a new business tax rate for small businesses. Overall, the tax rate for small businesses would fall to 25%.
The document proposes full and immediate write-off for the business assets of sole proprietorships, pass throughs, and c-corporations, effectively lowering the overall corporate rate to 20%. Individual tax rates are proposed at 12%, 25%, and 33%. Capital gains would be receive a 50% exclusion, making the effective capital gains rate 6%, 12.5%, and 16.5%. Also addressed are simplifications for international tax rules, filing for families, and changes at the IRS.
Republican members of the House Ways and Means Committee believe the proposal will create jobs and growth, simplify the tax code, and refocus the IRS on taxpayers.
Section 1031 and the Blueprint
Section 1031 is an important complement to the Blueprint and would support many taxpayers who would otherwise be negatively impacted by the proposal. Section 1031 allows taxpayers to make good business decisions based on the needs of their businesses, without worry of negative tax consequences.
There is concern that some policy makers may feel that the combination of lower rates and expensing would make Section 1031 exchanges unnecessary. However, the proposal does not provide an equivalent substitute for Section 1031 like-kind exchanges.At a minimum, Section 1031 should be preserved for land and other non-covered assets.
Taxpayers Would Be Disadvantaged Without Section 1031
Elimination of Section 1031 in favor of immediate expensing would have significant effects on many taxpayers and the U.S. economy.
- Elimination of Section 1031 would create a disincentive to sell commercial, investment, and agricultural real property. A chilling “lock-in” effect on the real estate market would lead to economic contraction. Real estate owners would hold onto properties longer, due to the increased tax burden on sale of a property. Immediate expensing of improvements does not remove the lock-in effect on land. Section 1031 is necessary to remove the lock-in effect.
- Many taxpayers use Section 1031 to preserve their life savings invested in real estate. Faced with a reduction in the value of their investments through capital gains, they are likely to forego sales.
- Without Section 1031, Businesses would have no tax-deferral mechanism for asset sales and replacement purchases that bridge two tax years. Business cash flow would be impaired for many businesses, including seasonal and small businesses.
- Fewer environmentally sensitive lands would be saved. Without Section 1031, the economics of conservation easements would not work for most farmers and ranchers.
- Small businesses would be handicapped against larger businesses with more access to capital.
Special Considerations for Land
Land represents approximately 30% of the value of commercial improved properties, and 80% to 100% of agricultural land investments. Sec. 1031 provides incentive for capital formation for landowners, who would be particularly disadvantaged if they had neither the option of a tax-deferred exchange nor expense deductions for land acquisition and interest on related debt.
Impact on the Economy and Taxpayers
Section 1031 helps a broad range of taxpayers at all levels to expand businesses and invest for the future, with a significant positive impact on economic growth. Like-kind exchanges contribute significantly to American jobs, investment, tax revenue, and the health of the U.S. economy. Economic studies found that limiting or repealing §1031 would cause economic contraction and job loss. Read more about the positive economic impact of Section 1031 here.
Elimination of like-kind exchanges would be a disadvantage to farmers, ranchers, owners of commercial real estate and other investors, and would have negative effects on job growth and the U.S. economy.
Like-kind exchanges stimulate economic activity in the real estate, manufacturing, equipment and vehicle rental and leasing, and construction industries, make the economics work for conservation easements, increase state, local and federal tax revenue, and improve the U.S. economy.
- Section 1031 Should Remain in the Tax Code
- Section 1031 Complements the House Republican Blueprint
- The Economic Impact of Section 1031 and Economic Studies
- Official “A Better Way” web site of House Speaker Paul Ryan – abetterway.speaker.gov
- House Ways and Means Committee tax reform web site – waysandmeans.house.gov/taxreform
The Tax Reform Act of 2014 Discussion Draft
The “Tax Reform Act of 2014 Discussion Draft,” which called for a total repeal of §1031 like-kind exchanges, was circulated in February 2014 by the House of Representatives Committee on Ways and Means. Committee Chairman Dave Camp (R-Mich.) introduced the draft as a bill, H.R. 1, in December 2014, at the end of the 113th Congress (2013-2014). The bill, introduced with no co-sponsors, made no changes to the discussion draft and expired.