Pulse: How you’re advising investors on potential 1031 changes

Property investors rode a wild wave during the pandemic, with the short-term rental market stopping, then restarting, and property prices in many second home markets soaring. What does the future hold for new second-home owners and for managers of more robust property portfolios? We’ll explore that and more, all May long, at Inman.

As you might know, 1031 “like-kind” exchanges is on the chopping block again. So, considering President Biden’s proposal to eliminate 1031 exchanges for investors with annual incomes of $400,000 or more, last week, we reached out to our readers and asked what advice you’re giving to your clients.

Should investors continue with business as usual? Is 2021 the year to exchange? From recommending them to sell to urging them to speak with an accountant, here’s what you’re telling investors who’re wary of that bit of tax code change.

• I completed four 1031-exchange transactions. Most of my clients do not make $400,000, so it shouldn’t affect them.
• If you plan on exchanging in the next few years, 2021 is the year to exchange. You should also call your U.S. Senators and representatives to say this is a bad idea.
• I am advising my clients to still invest in 1031 properties.
• To avoid prying into their finances, I tell all my buyers considering using the 1031 exchange to see their accountant or wealth manager. I also suggest a 1031 exchange professional locally for them to call. I remind my buyers that I have my license in real estate and not in mortgages/investments/financial planning.
• The O’Biden proposed changes to 1031 are disturbing. More tax and spend policy by members of his cabinet and advisers.
• Money will move to adapt to the new $400,000 limit. A 20-unit building can have 20 separate PID numbers for 20 different transactions. SFR investing will increase. More lot splits and fractional transactions. 
• For mom-and-pop investors, the $400,000 annual income will only come into play if they don’t have a great team consisting of an excellent CPA, real estate attorney and Realtor. Still, I’m advising them to consider selling now if they think a change will impact them.
• Real estate folks have a current workaround at their fingertips — by selling and in the same year, buying another property and using the bonus depreciation (from a cost segregation study) in order to offset the capital gains on the sale. Keep in mind: Bonus depreciation begins to phase out in 2023 and is totally expired in 2027, so this would only be a short-term alternative solution.

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