We continue our look at the proposed Federal Budget, and today, it’s the 1031 exchange that’s under review.
The good news? Odds are, you’ve never even heard of this. A 1031 exchange is a way of taking an appreciated property, usually real estate (rental, not your home) and after jumping through a bit of tax hoops, you are able to sell one property, and soon after, buy another one at last as costly as what you sold, and defer the gain. It’s a neat trick for real estate investors and I’d never giving it much thought until recently. A friend sold a rental property and planned to use the money to buy a different one in a different location. I’m not an expert on this topic, but I knew enough to tell him to research the 1031 exchange and use the process to avoid a tax bill. Sure enough, it went off without a hitch. Out with the old, in with the new, and no tax bill.
Now, the new Budget limits the flexibility of the 1031 exchange. Specifically, it proposes a $1M limit per taxpayer per year for the value of deferred capital gain. Not a big deal for those with a few rentals, but if you have any larger buildings or expensive houses you rent out, you might kiss your 1031 goodbye.