On April 28, 2021, the White House released a fact sheet describing tax proposals in the American Families Plan, and like-kind exchange appears to be in the crosshairs. While details are scant and the Plan is far from final, taxpayers who use or plan to use like-kind exchanges of real estate should be paying attention.
The Biden Administration has periodically signaled that it views like-kind exchange skeptically. During the 2016 presidential campaign, the Biden campaign released the Biden Plan for Mobilizing American Talent and Heart to Create a 21st Century Caregiving and Education Workforce, and Bloomberg news quoted campaign officials stating that the plan would eliminate like-kind exchange. As the government looks for new sources of revenue without taxing lower income earners, the Administration incorporated that concept in the American Families Plan, stating that it would end deferral for gains greater than $500,000 for like-kind exchange. The information released thus far does not specify whether all taxpayers would get to defer up to $500,000 of gain, or whether transactions resulting in greater than $500,000 of gain would not qualify for deferral under section 1031. It also remains to be seen when the change would be implemented.
The American Families Plan includes another proposal to eliminate stepped-up basis for gains in excess of $1 million ($2.5 million per couple when combined with the section 121 exclusion of gain from the sale of a principal residence). This change would restrict a common estate planning technique in which taxpayers continually defer gains using like-kind exchange, and then inheritors get a stepped-up basis and the tax on deferred gains never becomes due (the somewhat cavalierly-named ‘swap-til-you-drop’ concept).
At the moment, the American Families Plan is only a proposal and no one can say whether these provisions will survive to the final version, how they will change, or even whether the legislation will pass into law. But as like-kind exchange faces its second major challenge in as many administrations, it is clear lawmakers on both sides view trimming section 1031 as a possible source of revenue. Taxpayers relying on like-kind exchange to defer gains should consider making their exchanges sooner rather than later, and taxpayers using the stepped-up basis for estate planning should start thinking about alternative strategies in the event like-kind exchange becomes restricted. As always, RSM continues to monitor developments and will provide more analysis as more information becomes available.