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Taxpayers and their advisers must be

aware of potential pitfalls that can

derail any attempt to accomplish a

tax-deferred swap of properties.

like-kind real property. As will be seen, investors
would experience a significant loss of tax benefit
from carrying out such an exchange if the White
House proposal is enacted.

TIME TO CASH OUT
With housing prices at all-time highs, interest rates
at all-time lows, and an ever-shrinking inventory
of available homes, real estate owners may be
considering whether to cash out or leverage equity,
given the current economic climate as this is being
written. According to the National Association
of Realtors, median home prices in September
2021 were up 13.3% compared with the same
time a year earlier (NAR, Summary of September About the
2021 Existing Home Sales Statistics). Meanwhile, author
interest rates on 30-year fixed-rate mortgages have
Dana L. Hart,
remained flat at an attractive rate of just above
CPA, Ph.D., is an
3% on average. Investors who have experienced
assistant professor
appreciation in the current strong real estate
of accounting at
market might consider selling their property while
the University
housing prices are at market highs, which for many
of Southern
would mean recognizing capital gains. Alterna-
Mississippi in
tively, property owners might want to capitalize
Hattiesburg, Miss.
on increased appreciation by reinvesting in other
income-producing properties. Tax professionals and
trusted advisers should be prepared to educate their
clients regarding the potential tax consequences of
inancial and investment advisers should seek sale or reinvestment decisions.
to understand the implications of a legislative Sec. 1031 provides for deferral of capital gains
Fproposal originally set forth in the American on the exchange of property held for productive
Families Plan that would severely limit benefits use in a trade or business, or for investment,
historically provided by Sec. 1031 of the Internal for replacement property that is also held for
Revenue Code. Under the proposal, the deferral productive use in a trade or business or for
of capital gains from the exchange of real property investment purposes (Regs. Sec. 1.1031(k)-1(a)).
used in a trade or business, or of investment In other words, an investor can exchange one
property, would be limited to $500,000 ($1 million investment property for another investment
for married individuals filing jointly). At the time of property without triggering a taxable event,
this writing, Congress is actively considering major assuming the rules of Sec. 1031 are properly
tax legislation that may include such a limitation on applied.
Sec. 1031 exchanges. Sec. 1031 also provides for the deferral of
The discussion below summarizes the changes depreciation recapture, currently taxed at a flat rate
proposed that would affect deferral of capital gains of 25% upon sale of an investment property. If an
and depreciation recapture related to exchanges of asset has been held and depreciated over a long

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