Section 1031 of the tax code allows those who sell a real estate property and invest the proceeds in a different real estate property to postpone capital gains taxes. It is a great strategy for investors: with a 1031 exchange, after a sale of a property you can use 100% of the proceeds to buy a new building; without 1031, if you had to pay capital gains taxes, you would only be able to reinvest approximately 65% of the proceeds.

This provision dates back to the 1920s. Yet both Democrats and recently Republicans have talked about eliminating it. The provision is viewed as a loophole, and all loopholes are currently getting reviewed, as part of the overall package of decrease in tax rates. 1031 advocates insist that it is not a loophole, and that it merely provides tax deferral, not tax exclusion. Of course its advocates fail to mention that if the property is held until death, then a step up in capital gains taxes will apply and heirs will not have to pay any capital gains taxes at all. Furthermore, by investing in a higher value property, investors receive a benefit of increased depreciation deduction. Therefore, this provision is a great boon to real estate investors.

By some estimates, a repeal of this provision could raise nearly $41 billion in additional tax revenue within 10 years. However, a repeal would affect approximately 30% of the $400 billion annual real estate transaction volume. As a result, a lot of investors would simply hold on to their properties rather than sell and pay taxes.

For now, the provision stays. So if you are thinking of selling your investment property, don’t assume that you will be stuck with a high capital gains tax bill. Talk to a qualified professional about methods of minimizing your taxes legally.

 Disclaimer: This article only offers general information.  Each situation is unique. It is always helpful to talk to a specialized attorney, to figure out your various options and ramifications of actions.  As every case has subtle differences, please do not use this article for legal advice. Only a signed engagement letter will create an attorney-client relationship.