Analysis | What Is the Like-Kind Exchange Rule That Biden Wants Dead

1. What’s the like-kind exchange rule?

It’s a provision in the tax code enabling a property investor to avoid capital gains taxes on sales in certain circumstances. If the investor rolls the proceeds of a real estate sale into a future property purchase of equal or greater value, the profits are exempt from taxation. Kushner Cos., the real estate firm once run by Trump’s son-in-law and adviser Jared Kushner, has been a beneficiary of the strategy. In 2017, the company bought a New Jersey apartment complex with the proceeds from a Toledo, Ohio property sale using a like-kind exchange, Bloomberg reported.

2. What’s its history?

The rule regulating a like-kind exchange — sometimes referred to as a “1031” exchange for its tax code designation — has existed in the tax code for many decades. Until recently, the exemption applied to an array of assets, including things such as industrial equipment and rental cars. Congress eliminated the provision for most industries in the Tax Cuts and Jobs Act of 2017, the Trump administration’s signature legislation, but left it open for real estate.

3. How important is it to the industry?

The exemption is projected to save property investors $51 billion between 2019 and 2023, according to Congress’s Joint Committee on Taxation. It’s not the only benefit in the tax code that primarily favors property investors. Real estate developers can claim write-offs for losses on borrowed money. They also get to claim depreciation on buildings, which, unlike farm equipment or factory machinery, generally increase in value. During a televised debate during the 2016 presidential race, Trump said he used depreciation to reduce his tax bill.

4. Why is Biden targeting the rule?

The next presidential administration will be looking for ways to raise revenue to fill budget holes created by the pandemic-induced economic slowdown. Biden says he wants to use proceeds from eliminating the rule on childcare and elderly services. Targeting this particular loophole also gives Biden an opportunity to try to embarrass Trump for avoiding taxes.

5. What do property investors say?

They say that like-kind exchanges improve liquidity in the market and that eliminating the benefit would reduce the number of transactions that could generate tax revenue. They point out that the industry is already reeling from the fallout of the coronavirus pandemic, which has shuttered hotels and shopping malls and led property owners to skip payments on billions of dollars of debt.

©2020 Bloomberg L.P.

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