What Real Estate Investors Need to Know About the Proposal to Cap 1031 Exchange Tax Benefits in 2025

The White House’s latest budget proposal for the 2025 fiscal year includes a $500,000 cap on capital gains tax deferral under Section 1031 of the Internal Revenue Code (IRC). Currently, Section 1031 allows real estate investors to indefinitely defer capital gains on qualifying like-kind exchanges—with no limit on the amount of potential tax liability they can defer. By working with an experienced 1031 qualified intermediary, real estate investors can buy and sell properties without triggering immediate tax liability, allowing them to reinvest more in their portfolios.

If you are a real estate investor who relies on Section 1031, what does this proposal mean for you?

The first thing to keep in mind is that this is just a proposal. It has not been made final, so there is currently no cap on capital gains tax deferral under Section 1031. It is also important to note that similar proposals have been floated in the past to no avail. As one analyst writes for Kiplinger, “Just like last year, the proposal . . . will be deemed ‘dead on arrival’ by Congress, including some members of the president’s own party.”

Why the Cap on Capital Gains Tax Deferral Under Section 1031 is Likely to Fail

There are a number of reasons why the proposed cap on capital gains tax deferral under Section 1031 has failed in the past—and is likely to fail again this year. From a political standpoint, Republicans control the House of Representatives, and raising taxes on corporate and high-income taxpayers is deeply unpopular within the GOP. But, even from a practical standpoint, the benefits of capping capital gains tax deferral under Section 1031 appear to be limited at best. According to a report from the Tax Foundation:

• Limiting capital gains tax deferral on 1031 exchanges to $500,000 would increase the federal government’s tax revenue by roughly $2 billion per year. This is less than one percent of the total additional tax revenue that would be generated under the proposed budget for 2025 and an even smaller fraction of a percent of the government’s annual tax revenue of $4.39 trillion.
• Even more significantly, the Tax Foundation calculates that a $500,000 cap on capital gains tax deferral from like-kind exchanges would lead to a slight decrease in GDP, wages and full-time jobs. This makes sense since paying additional taxes would mean that large investors would have less cash flow to support their operations.

As the author of the Kiplinger op-ed also writes, “[l]imiting . . . 1031 exchanges would blast a hole in real estate values, hurt the economy and ironically reduce tax collections over time by depressing activity. . . . Many investors would simply freeze in place, unwilling to sell appreciated assets, removing a huge chunk of supply from the market.”

Of course, while the White House’s proposal might be “dead on arrival,” there are no guarantees that unlimited tax deferral under Section 1031 will remain in place. As a result, investors should not ignore the proposal completely and instead continue to make informed decisions going forward.

Three Tips for Real Estate Investors in Light of the Proposed 1031 Exchange Cap

Since real estate investors should not ignore the proposed 1031 exchange cap entirely, what should investors be doing heading into 2025? Here are three tips:

1. Don’t Change Your Approach At This Time

Even if the proposed cap becomes final (which, again, appears unlikely), real estate investors will have time to react. As a result, generally speaking, it doesn’t make sense for investors to change their approach at this time.

2. Monitor for Updates

Even though the imposition of a 1031 exchange cap seems unlikely, such a cap would have significant impacts for many real estate investors. With this in mind, it is worth continuing to monitor the situation so that you can react if necessary.

3. Seek Professional Guidance

If you have questions about conducting a 1031 exchange, whether now or in the future, it is best to seek professional guidance. An experienced 1031 qualified intermediary can help you make informed decisions and maximize the benefits that are available.

Consult with a 1031 Qualified Intermediary at 1031 National Services

If you would like to consult with an experienced 1031 qualified intermediary, we invite you to get in touch. Call us at 888-872-1031 or contact us online to schedule a free, no-obligation consultation at 1031 National Services today.