MELVILLE, NY—You might think that the current efforts to repeal or reform the Affordable Care Act have nothing to do with real estate investing. However, health care reform is the last bridge that Congress needs to cross before they can turn their attention to comprehensive tax reform. Once Congress moves on to tax reform, there is the potential danger that IRC section 1031 tax deferred exchanges could be eliminated to pay for tax cuts and that could prove devastating to the real estate market. An IRC §1031 tax deferred exchange allows real estate investors to defer the capital gains tax they would normally recognize upon the sale of their business or investment property so long as they purchase real estate for an equal or greater value.

What we know as the modern era of 1031 exchanges started with the Tax Reform Act of 1986. However, exchanges of property, in one form or another, have been allowed since 1921—almost 100 years. Current efforts to repeal IRC §1031 began with the 2010 Volcker Report which advocated its elimination. In the intervening years both Democrats and Republicans found at least one area of common ground, with some members of each party calling for its elimination. President Obama floated a more business friendly plan in 2015 seeking to limit the capital gains tax deferral to $1 million instead of an outright repeal. More recently, in order to pass a “revenue neutral” tax plan, President Trump and the Republicans have explored the elimination of 1031 exchanges in order to “pay for” other tax cuts.

Glen Kunofsky, who is the top single-tenant net lease professional at Marcus & Millichap, and handles many 1031 transactions, said, “1031 has been an essential tool for real estate investors to go from management intensive ownership to non-management intensive real estate assets like net leased properties. Eliminating 1031 would be a major shift for real estate investors and would have a substantial impact on the market, values could be significantly impacted, and investors might opt to hold on to their existing property. There could also be a meaningful impact to the users of this real estate tool if developers are unable to capitalize upon a clear exit strategy, which the 1031 market currently provides.”