Real estate investors will want to take note of the proposed caps on deferred gains from 1031 exchanges that are included in the Biden administration’s recently issued Fiscal Year (FY) 2023 Budget tax proposals. IRS Code Section 1031 exchanges, also commonly referred to as “like-kind” exchanges, allow taxpayers to defer capital gains tax on the sale of allowable property held for use in a trade or business or for investment by reinvesting the sale proceeds in other like-kind property. While under current tax law, there is no cap on the amount a taxpayer can defer in a given year, the proposal would limit deferred 1031 exchange gains to an annual aggregate amount of $500,000 for each taxpayer ($1,000,000 for married taxpayers filing a joint return). Section 1031 exchange gains exceeding these amounts would be recognized as gain by the taxpayer for the subject year. 1031 exchange limitations were previously proposed, but not approved, in connection with the Federal budgets for FY 2021 and 2022.

If enacted, the limitations would become effective on January 1, 2023. Investors planning to exchange property under Section 1031 may want to immediately consider the possibility of these proposed limitations in order to meet the current 1031 exchange timeframes for identifying and exchanging properties prior to the end of 2022. A number of real estate industry groups have voiced opposition to these limitations, citing that the proposal’s goal of generating additional IRS revenue will negatively affect real estate values and be offset by investors continuing to hold existing property portfolios in place.