Proposed LimitsAs it stands, when completing a like-kind exchange, most taxes are deferred until the time you sell, which is typically many years later, and there is no limit to the number of times you exchange. The flexibility of this section of the tax code makes it very popular with business owners and investors as it’s a legal way to reduce taxes on the sale and allows for greater capital to reinvest.
Under Biden’s new proposal, the 1031 exchange would be limited to the smallest real estate transactions. The proposal allows you to defer up to $500,000 in gains for single taxpayers or $1 million for married couples.
Small Businesses Are Left with the BillIf a small business owns its building, much of the owner’s net worth is likely tied up in the property.
For example, let’s say that restaurant owner Bill owns his building. He bought the building years ago for $100,000, and it is now worth $750,000. Bill would like to relocate his business to a new neighborhood where he could do more business using a like-kind exchange.
Corporations Can Easily Avoid Capital GainsSo, how is big business impacted by this change? The short answer is they aren’t.
Instead of using like-kind exchanges, corporations use stocks as a tool to prey on smaller businesses. Every day, corporations acquire small companies and their property using stocks, which means they don’t have to pay taxes.
This is another example of how big business continues to take advantage of tax laws while Biden proposes changes that largely impact small businesses.
Many people, including President Biden, believe that the 1031 exchange is a loophole, but it’s not. It’s a legal opportunity provided by Congress that can and should be used to further the economy. Limiting the like-kind exchange would not only have a big impact on small businesses, but also the liquidity of the real estate market.
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