Are 1031 Exchanges Going Away with Tax Reform in 2014?

Read more about Legislative activity regarding the proposed elimination of Section 1031 from the Internal Revenue Code.
1031 Exchanges in 2014 Tax Reform

Potential Threats to Section 1031

Last fall, former Chairman Senator Baucus (D-WY) of the Senate Finance Committee, submitted a draft tax reform proposal that discussed the possibility of eliminating 1031 exchanges. Taxable gains on personal property exchanges were to be mostly absorbed by the introduction of a pooling method for asset depreciation similar to Canada’s. Like-kind exchanges of real property were completely eliminated in the Baucus draft.

Earlier this year, Representative Dave Camp (R-MI), Chairman of the House Ways and Means Committee, followed up with his own ideas outlining comprehensive tax reform with the goal of reducing corporate tax rates to 25%.  This too proposed complete elimination of section 1031 from the Internal Revenue Code (IRC). The comprehensive set of tax laws created by the Internal Revenue Service (IRS). This code was enacted as Title 26 of the United States Code by Congress, and is sometimes also referred to as the Internal Revenue Title. The code is organized according to topic, and covers all relevant rules pertaining to income, gift, estate, sales, payroll and excise taxes. Internal Revenue Code by January, 2015.

Quickly to follow we saw President Obama’s 2015 budget proposal limiting the amount of deferral for capital gains to $1 million per taxable year.

So, what does this mean?  

In my opinion, 1031 tax deferred exchanges are not going away this year nor will they be eliminated in the next several years.  Why?  Well let’s look at the drivers responsible for tax reform. 

  • Senate Finance Committee: Uncertainty in Leadership
    Before the end of 2013, but after Baucus submitted his proposed tax reform papers, Senator Baucus announced that he would not be running for re-election in 2015.  Senator Wyden (D-OR) stepped into the role as Chairman of the Senate Finance Committee and quickly let the other members know he would introduce his own ideas that may or may not represent Senator Baucus’ proposal.  A lot will depend on the upcoming elections this November. Should the Republicans retake the Senate, leadership of the Committee will switch and a new agenda most likely will be introduced.
  • House Ways & Means Committee: Lacking Broad Support
    Introduction of Camp’s tax reform came without broad support.  Not only did Camp fail to gain support from his own committee members, the House also has very little interest in moving on a Bill that possibly would upset so many constituents.  U.S. businesses who participated in good faith along with elected Representatives by providing ideas that could drive comprehensive tax reform were all surprised when Camp, unilaterally, moved the draft proposal out of Committee.  Representative Camp announced earlier this year that he too will not be seeking reelection, however, he committed to keep working on tax reform.
  • White House: Possible Lame Duck Situation
    There is a strong possibility that the Republicans gain control of both the House and Senate this coming November. Should the Senate change control, it won’t be enough to push reform through without bipartisan support.  Additionally, should President Obama wish to move on his agenda, he too is going to need significant support from the other side of the aisle.

Remember, a bill must first be introduced to the floor of the House by approval of the Committee, then voted on by Members of the House.  The same process is performed by the Senate.  Should both separate Bills receive enough votes to pass, then the House and Senate must reconcile a Bill to present to the President, who has the authority to sign OR veto at his discretion. 

Tax reform is difficult.  Comprehensive tax reform is monumental.  We have a Congress who finds it arduous to agree on almost anything presented before them.  1031 like-kind exchanges, whether simultaneous or deferred, most likely, will not be on the chopping block come November of 2014.  Nor do I think LKEs will be legislated away in the next few years – at least without a fight.  Too many employers, associations, service industries, congressmen and women, recognize 1031s are a vital tool in the US economy.