The 1031 exchange is a concept that’s been around since the early 1920’s. In fact, it was in the National Revenue Act of 1921 where it was established. It essentially functions as a form of relief when exchanging properties of like-kind. Confused yet? No worries, see below for an expanded look at the concept.
Why this is important now is because of the incoming president-elect. Many are wondering where this will leave the 1031 exchange premise. How will President Joseph Biden impact the concept? The answer is a bit more complex than one may think.
What exactly is a 1031 exchange?
1031 exchanges refer to property holders re-routing their proceeds to a like-kind property. This means they are “exchanging” their sales from a current property to get a new property. The statute protects these changes from further taxation. This is because there is no change in the owner’s economic standing.
In short, the statute argues that it would be unfair to tax the replacement property. Instead, it argues that taxation should only occur when there is an outright sale of the property. The same applies if another 1031 exchange occurs. The tax is simply postponed again.
What does like-kind mean?
Not all property is created equal in the eyes of the 1031 exchange. The statue defines this as property that generates or plays an active role in business. The same goes for property used for the purposes of investment. Keep in mind also, US properties can only be matched with other US locations. This also applies to international properties.
Instances of such properties are the grounds on which multi family real estate is laid. Mobile home parks are also properties that can benefit from this. Any property for personal use fails to meet said requirements.
1031 Exchange during Covid-19
Covid-19 has had a tremendous impact on our society. Several facets of the world have forever changed as we know them. Luckily though, the 1031 exchange has actually experienced support during this time. In April 2020, an extension was granted for identification and exchange periods. The typical period is 45 days for the former, and 180 days for the latter.
Even with the show of support, though, there are still many unknowns. It is advised that anyone with questions should consult a 1031 tax expert. As stated, the uncertain nature of these new times requires considerable diligence.
How will a democratic presidency affect the 1031 exchange?
Many are wondering what a Biden presidency will do to the 1031 exchange. In truth, the outcome remains to be seen. The president could keep the rates as is, or jack them up for investors. 1031 is one of the best reasons to invest in real estate because you get to save money on the sale. Some have posited this could lead to a collapse in the value of the real estate product. That’s because, in this case, it would no longer be a lucrative and attractive option. This would return back to a demand equal to supply, which is always bad on value.
The MHP expert is here to help
As we continue to track any changes, it’s good to have a strong partner in the mobile home park industry. That’s where we come in. For advice of the highest and most informed degree, contact us today!