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
-
The AI Doctor Coming to Read Your Test ResultsThe Kiplinger Letter There’s big opportunity for AI tools that analyze CAT scans, MRIs and other medical images. But there are also big challenges that human clinicians and tech companies will have to overcome.
-
The Best Places for LGBTQ People to Retire AbroadLGBTQ people can safely retire abroad, but they must know a country’s laws and level of support — going beyond the usual retirement considerations.
-
Best Places for LGBTQ People to Retire Abroad
LGBTQ people can safely retire abroad, but they must know a country’s laws and level of support — going beyond the usual retirement considerations.
-
Financial Planning's Paradox: Balancing Riches and True WealthWhile enough money is important for financial security, it does not guarantee fulfillment. How can retirees and financial advisers keep their eye on the ball?
-
A Confident Retirement Starts With These Four StrategiesWork your way around income gaps, tax gaffes and Social Security insecurity with some thoughtful planning and analysis.
-
6 Luxury Waterfront Homes for Sale Around the USFrom private peninsulas to lakes, bayous and beyond, Kiplinger's "Listed" series brings you another selection of dream homes for sale on the waterfront.
-
Six Reasons to Disinherit Someone and How to Do ItWhether you're navigating a second marriage, dealing with an estranged relative or leaving your assets to charity, there are reasons to disinherit someone. Here's how.
-
Should You Still Wait Until 70 to Claim Social Security?Delaying Social Security until age 70 will increase your benefits. But with shortages ahead, and talk of cuts, is there a case for claiming sooner?
-
Retirement Planning for Couples: How to Plan to Be So Happy TogetherPlanning for retirement as a couple is a team sport that takes open communication, thoughtful planning and a solid financial strategy.
-
Market Turmoil: What History Tells Us About Current VolatilityThis up-and-down uncertainty is nerve-racking, but a look back at previous downturns shows that the markets are resilient. Here's how to ride out the turmoil.
