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White House – Treasury

The President’s FY 2017 Budget Proposal Seeks to Modify Like-Kind Exchange Rules for All Real and Personal Property and Restrict Some Eligibility

February 2016

Analytical Perspectives, the Obama Administration’s FY 2017 Budget Proposal, proposes changes to IRC Section 1031. The proposal limits the annual deferral of capital gain on like-kind exchanges to $1 million dollars per taxpayer per year. The budget proposal limits the deferral of capital gain on exchanges of all real and personal property, which is a change from previous budget proposals. Similar to previous proposals by the Obama Administration, the Budget excludes art and collectibles from eligibility.

Download Analytical Perspectives, Budget of the United States Government, Fiscal Year 2017

FY2017 Budget excerpt LKE
The FY 2017 Federal Budget Proposal calls for limitation to IRC Section 1031 like-kind exchange rules, and affects all real and personal property.

General Explanation of the Administration’s Fiscal Year 2017 Revenue Proposals

The General Explanations of the Administration’s Fiscal Year 2017 Revenue Proposals, published by the U.S. Department of Treasury, provides this further explanation:

Excerpt:
MODIFY LIKE-KIND EXCHANGE RULES

Current Law

When capital assets are sold or exchanged, capital gain or loss is generally recognized. Under section 1031, however, no gain or loss is recognized when business or investment property is exchanged for “like-kind” business or investment property. As a result, the tax on capital gain is deferred until a later realization event, provided that certain requirements are met. The “like-kind” standard under section 1031, which focuses on the legal character of the property, allows for deferral of tax on the exchange of improved and unimproved real estate. Certain properties, including stocks, bonds, notes or other securities or evidences of indebtedness are excluded from nonrecognition treatment under section 1031. Exchanges of art and collectibles for investment are eligible for deferral of gain under section 1031.

Reasons for Change

There is little justification for allowing deferral of the capital gain on the exchange of eligible property or art and collectibles. Historically, section 1031 deferral has been justified on the basis that valuing exchanged property is difficult. However, for the exchange of one property for another of equal value to occur, taxpayers must be able to value the properties. In addition, many, if not most, exchanges affected by this proposal are facilitated by qualified intermediaries who help satisfy the exchange requirement by selling the exchanged property and acquiring the replacement property. These complex three-party exchanges were not contemplated when the provision was enacted. They highlight the fact that valuation of exchanged property is not the hurdle it was when the provision was originally enacted. Further, the ability to exchange unimproved real estate for improved real estate encourages “permanent deferral” by allowing taxpayers to continue the cycle of tax deferred exchanges.

Proposal

The proposal would limit the amount of capital gain deferred under section 1031 to $1 million (indexed for inflation) per taxpayer per taxable year. The proposal limits the amount of capital gain that qualifies for deferral while preserving the ability of small businesses to generally continue current practices and maintain their investment in capital. In addition, art and collectibles would no longer be eligible for like-kind exchanges. Treasury would be granted regulatory authority necessary to implement the provision, including rules for aggregating multiple properties exchanged by related parties.

The provision would be effective for like-kind exchanges completed after December 31, 2016.

References

  • Analytical Perspectives, Budget of the United States Government, Fiscal Year 2017
  • General Explanations of the Administration’s Fiscal Year 2017 Revenue Proposals

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Section 1031 Complements Tax Reform, Adds to Growth

IRC Section 1031 like-kind exchanges help a taxpayers at all levels expand their businesses and invest for the future, with a significant positive impact on economic growth. Like-kind exchanges are used widely in the real estate, transportation, agriculture, conservation, equipment leasing, rental vehicle and construction industries. Section 1031 contributes significantly to American jobs, investment, tax revenue, and the health of the U.S. economy.

Section 1031 complements expected tax reform proposals, such as the House Republican Blueprint, and should be retained in its present form. Economic studies found that limiting or repealing like-kind exchanges would result in economic contraction and job loss.

About LKEs

Like-kind exchanges swap property, defer tax, and allow businesses and investors to manage capital. Taxes are eventually paid.

Benefits

Like-kind exchanges promote growth in local communities, federal revenue, and the U.S. economy.

Repeal Issues

Repeal legislation would cause damage to the economy, hurting investors, retirees, renters and other groups.

Economic Studies

Recent analyses of millions of real estate transactions show widespread use of like-kind exchanges by a broad base of taxpayers.

Resources

Find informational handouts and videos in Supporter Resources.
Or, look through our library of official letters and whitepapers.

Take Action

Members of Congress depend on stories from their constituents. Tell your legislators about how like-kind exchanges have worked for you.

Federation of Exchange Accommodators
Lynn Harkin, CAE, Executive Director
Federation of Exchange Accommodators
1255 SW Prairie Trail Parkway
Ankeny, IA 50023
Email: director@1031.org
Phone: 515-244-6515
Fax: 515-334-1174
www.1031.org

Williams & Jensen
701 8th Street, N.W.
Washington, DC 20001
Phone: 202-659-8201
Fax: 202-659-5249
www.williamsandjensen.com

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