Senate vote gives advocates for real estate tax break hope of protecting it

Advocates for a tax break for real estate investments are hopeful that a vote in the Senate this week bodes well for protecting the rule as Congress negotiates a huge spending bill.

During Senate debate Wednesday over a $3.5 trillion budget resolution, lawmakers approved a nonbinding amendment by Sen. John Kennedy, R-La., that would preserve like-kind real estate exchanges.

Under the like-kind rule, businesses or people who own an investment property can defer capital gains taxes when they reinvest the profits from the sale of one property in the purchase of another property of the same or greater value.

“Deferrals from these sales encourage people to pour resources back into the market,” Kennedy’s office said in a statement.

A Biden administration proposal would treat like-kind exchanges like sales of real property and limit the tax deferral to $500,000 annually for individual taxpayers, according to the Treasury Department Green Book (page 84).

That idea for raising revenue could be adopted by House and Senate committees as they write the legislation over the next couple of weeks to fill out the $3.5 billion budget reconciliation bill. The like-kind changes would help pay for spending on the Biden administration priorities in the bill.

The Kennedy amendment was approved on a voice vote, but it doesn’t tie the hands of lawmakers. It only sends a message about protecting the like-kind rule, which is also known as “1031” for the section of the tax code in which it appears.

“This a positive sign, but not the last word,” said Anya Coverman, senior vice president and general counsel at the Institute for Portfolio Alternatives. “I think the case for keeping 1031 intact is strong, but we have some work to do in the legislative process. We can’t stop advocating and making sure lawmakers understand its significance to the economy and local communities.”

The Alternative and Direct Investment Securities Association took the same cautiously optimistic tone in assessing the Senate vote on Kennedy’s amendment.

“This is definitely a positive indication, but it is premature to celebrate any kind of a victory,” the group said in an advocacy alert Wednesday to its members. “ADISA will continue its like-kind exchange advocacy work over the coming weeks with several meetings with congressional members.”

The Senate Finance Committee faces a Sept. 15 deadline to complete its work on its portion of the budget reconciliation bill, according to a memo to Democratic lawmakers from Senate Majority Leader Charles Schumer, D-N.Y.

The House is likely to vote on the budget resolution later this month and probably will establish a September deadline for the House Ways and Means Committee.

It sets up a busy fall for groups like IPA and ADISA that are trying to prevent their favorite tax policies from being changed and used as so-called payfors to fund federal spending.

The like-kind exchange “may be the only one that is industry-specific,” Coverman said. “It’s a small payfor affecting a large part of our real estate economy.”

She said like-kind exchanges supported 568,000 jobs and $27 billion in wages in 2021.

“Ultimately, every lawmaker needs to ask him or herself: Am I supportive of a policy that is proven to create jobs, rehabilitate communities, generate tax revenue and build a financially secure future for American families?” Coverman said.

The Biden administration sees like-kind exchange reform as a way to make the tax code fairer.

“The change would raise revenue while increasing the progressivity of the tax system,” the Treasury Green Book states.