Like-kind exchanges to be limited under Biden’s tax proposals

Lynn Mucenski Keck | Forbes

Biden’s Green Book was released on May 28, 2021 and provided further detail and effective dates surrounding his tax proposals. While many anticipated that high net worth taxpayers would be targeted to pay additional taxes, limitation on like-kind exchanges coupled with increased tax rates on long-term capital gains could cause the 2022 tax bill of high-income real estate professionals to skyrocket. 

Like-kind exchanges, also referred to as 1031 exchanges, have been in the tax code since 1921 and have allowed for taxpayers to exchange property that is similar and defer the recognition of gain. The justification surrounding the deferral of gain is that a taxpayer who enters into the exchange is merely changing their investment vehicle.  Based on the mechanics of the provision, the taxpayer’s gain that would have been recognized had they sold the property outright is embedded in the property received. In other words, the asset appreciation on the exchange is not eliminated, but merely deferred until a later point in time when the taxpayer eventually sells the property received in the exchange. 

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