Market Update May 5, 2021

SO LONG 1031 EXCHANGE?! WHAT THIS WOULD MEAN FOR THE MIDDLE CLASS

To help pay for his $1.9 trillion dollar economic plan, President Biden wants to put a $500,000 cap on the 1031 Exchange. The 1031 has been around since the 1920s and allows taxes to be deferred essentially indefinitely on investment real estate due to the profit from one deal getting wrapped into the purchase of the next deal.

Around 10% of all real estate transactions involve 1031 exchanges. Large corporations, pension funds, and investment syndicates use this tax deferment strategy to buy shopping centers, large multifamily apartments and other developments.

While you and I won’t be directly affected by this new tax (I’m assuming), nor will we shed any tears for corporations having to pay taxes, we will most likely see Wall Street shift their attention towards the single-family residential market.

This will only exacerbate the housing shortage. How could middle class America, let alone first-time home buyers, compete with corporations? We already see corporations buying up whole brand-new subdivisions for the purpose of renting out individual houses. Only time will tell what impact this will have.