There always seems to be something to talk about as it relates to taxes. Tax liability for real estate investors and individual homeowners is continually changing, especially when there is a change in government.
This time is no different.
I’ve written a few times about a 1031 exchange, which is a way to defer the capital gains on the profits from the sale of property by “exchanging” the property. Basically, this allows you to reinvest the proceeds from your original property and subsequently defer the capital gains if another property is purchased within six months of the sale. This tax benefit is, however, only eligible for either investment or second home properties, not for a primary residence.
During the last tax overhaul in 2017, some of the benefits of the 1031 exchange were rolled back. Properties could be exchanged for “like-kind” properties including artwork and valuable collectibles, however, that part of the law was amended to allow for only real estate to be recognized as an exchange.
The 1031 exchange has traditionally been used by corporations, small real estate investors and individuals alike. Real estate investors take the position that exchanges encourage businesses to expand and create jobs. Individuals use the exchange as a way to roll over their second home properties into larger family homes and then pass them on to their heirs without paying the capital gains accrued over the years. In fact, most 1031 exchanges are done by individuals rather than corporations.
Now as part of the Biden administration’s proposed new economic plan there will be a further reduction to the benefits of the 1031 exchanges. The proposal would abolish 1031 exchanges on real estate profits of more than $500,000. This would probably eliminate the benefit to corporations to use the exchanges, but still allow benefits for individuals and small investors. As always, everyone’s tax liability and positions need to be reviewed by professionals in the field.
There is no question that this has been a tax loophole since 1921 and this isn’t the first time the federal government has had its eye on it. I do, however, question how much benefit there will be left for individuals and small investors if the price of properties continues to skyrocket.
And, while we’re talking property values, there was an Emerging Housing Market Index published at the end of April by The WSJ/Realtor.com organization. The index ranks the 300 biggest metro areas in the U.S. based on economic health and lifestyle data, including unemployment rate, wages, commute time and small-business loans.
Out of the top 50 metro areas, the only one in the state of Florida was the North Port-Sarasota-Bradenton region, coming in at number 47. It’s an interesting list to look at if you follow real estate trends and how they may have changed in the past year. Coeur D’Alene in Idaho came in first, followed by Austin, Texas and Springfield, Ohio. The only areas in the northeast were two upstate New York regions – Rochester and Buffalo – and one in New Jersey, in Trenton. The index points to the metro areas where homebuyers are seeking an appreciating housing market and appealing lifestyle with amenities.
Keep your eye on the new proposed economic plan by the federal government. There may be other proposals tucked in the legislation that could affect the real estate market. Also, keep your eye on the emerging markets around the country. COVID-19 has changed many things this past year and real estate is definitely at the forefront. Stay safe.
