Tax reform - 1031 exchanges and the housing market (Updated 2018)

Friday, January 05, 2018

President Donald Trump, the House and the Senate leaders have just completely finalized and passed the final draft of the "Tax Cut and Jobs Act" of 2017. There has been much speculation on whether tax reforms would come to pass, or how substantial they would be. This is one of the biggest tax cuts in history since Reagan according to the White House.

President Trump's plan cuts taxes for some middle-income and high-income families and reduce taxes for businesses of all sizes. The proposal also causes a significant growth in the standard deduction, which decreases an individual’s taxable income, and removes some common tax deductions such as those used to offset medical costs or state and local taxes.

“President Trump's plan cuts taxes for some middle-income and high-income families and reduces taxes for businesses of all sizes. ”

A summary of some important changes you will see on the new tax plan is below:

  1. President Trump's plan would decrease the high tax rates for people with a high income from 39.6% to 37%. The corporate tax rate will go from 35% to 21% percent in 2018.

  2. Rather than the current deduction of $30k, President Trump's plan would decrease tax cuts to $24k for middle-class couples.

  3. The plan would repeal state and local tax deduction. Tax deductions for mortgage interest, charitable contributions, and retirement savings would stay the same.

  4. The plan would start a territorial tax system that excludes foreign earnings from US tax.

Changes to 1031 tax exchange rules?

1031 exchanges remain an option for investors--although they are now limited to real estate only.  This is good news!  1031 exchanges have a beneficial effect on the market in general.

iOwning a home becomes more affordable with local and state tax incentives. It can also become more affordable when mortgage interest is reduced. Investors help grow communities through buying and selling properties with 1031 like-kind exchanges. They help keep the money flowing. 1031 like-kind exchanges and other tax cuts could be in trouble if all the proposed changes happen. (Read about how "like-kind" exchanges may be limited to just real estate in 2018.) Current homeowners depend on certain tax incentives when purchasing or selling a home. This could even cause prospective homebuyers to have to push their dream to own a home further away. Brown added to his statement that, “Realtors® support tax reform, and it’s encouraging to see leaders in Washington doing their part to get there. We believe tax rates should come down to the degree that sound fiscal policy allows, and simplifying the tax code will help ensure fairness and transparency for individual taxpayers. It’s a goal we share with the authors of this tax plan, but getting there by eliminating the incentives for homeownership is the wrong approach.”


Syracuse University shows benefits of 1031 tax exchanges

The Whitman School of Business makes a compelling case for the benefits of Section 1031 of the tax code in their study "The Economic Impact of Repealing or Limiting Section 1031 Like-Kind Exchanges in Real Estate."  After studying more than 1.6 million transactions over 18 years among the facts they uncovered:

  1.   1.  1031 exchanges increase the velocity of real estate transactions--making a more economically responsive economy.
  2.   2.   Because taxes are deferred, a majority of real estate investors use the available capital to invest in renovations, which, in turn, spur the local economy.
  3.   3.   Researchers forecast that property owners would need to raise rents on residential properties by nearly 12 % to create a rate of return similar to the return available currently.
  4.   4.  Ultimately, the authors of the study discovered that taxes were not deferred indefinitely, but when investors finally "cashed out,"  they paid substantially more taxes due to the increase in value of the property and recaptured depreciation.
  6. To learn more about how 1031 exchanges work, Read Katy's Story
  8. We will continue to post updates here as we learn more about the tax plan.


Defer your taxes with a 1031 exchange

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