Dave Brown has been in business for two decades -- married to his business you might say – and knows big changes could be ahead for a big part of his business’ focus depending on political priorities in Washington, D.C.
“It’s…pretty foundational and remarkable, too,” Brown said.
It is a 1031 exchange, or by its official Internal Revenue Service designation: “IRC Section 1031.”
Brown is president at IPE 1031, a West Des Moines, Iowa-based firm focused on 1031 exchange expertise. Dave’s wife, Katie Brown, serves as the firm’s vice president. They met during Drake University Law School.
No, 1031’s weren’t the topic of their law school courtship.
“It wasn’t all business focused at that point,” Brown laughed.
But the future of those exchanges is part of their professional focus as they look ahead to the political landscape to see what, if anything, changes.
Dave Brown bio:
o University of Iowa College of Business graduate
o Drake University Law School
o Past Chair, Iowa State Bar Association Tax Committee
o Co-Chair of the Federation of Exchange Accommodators Government Affairs Committee
o Certified Exchange Specialist
o Contributing Editor, Iowa State Bar Association Income Tax Manual
Katie Brown bio:
o Saint Mary’s College in Notre Dame, Indiana graduate
o Drake University Law School
o Member, Iowa State Bar Association
o Iowa Commercial Real Estate Association
o Federation of Exchange Accommodators
o Certified Exchange Specialist
1031’s have served as a critical option for farmland owners and investors. And even though they have been around for more than a century, they could face new restrictions or limitations from future presidential administrations or changes in Congressional focus following November’s general election.
The Internal Revenue Service provided this explanation about the intent of 1031 exchanges in this 2008 update:
“Whenever you sell business or investment property and you have a gain, you generally have to pay tax on the gain at the time of sale. IRC Section 1031 provides an exception and allows you to postpone paying tax on the gain if you reinvest the proceeds in similar property as part of a qualifying like-kind exchange. Gain deferred in a like-kind exchange under IRC Section 1031 is tax-deferred, but it is not tax-free.”
That IRS fact sheet also laid out “like-kind exchanges” according to the code:
“The exchange can include like-kind property exclusively or it can include like-kind property along with cash, liabilities and property that are not like-kind. If you receive cash, relief from debt, or property that is not like-kind, however, you may trigger some taxable gain in the year of the exchange. There can be both deferred and recognized gain in the same transaction when a taxpayer exchanges for like-kind property of lesser value.”
RELATED: IRC Section 1031 fact sheet from the Internal Revenue Service explains the different structures of Section 1031 exchanges and what properties are not eligible for like-kind exchange classification. Find that here.
Dave Brown, pointing out the longevity of 1031 exchanges, explained how the genesis of the provision still holds true today. “In 1921 somebody sold a horse, and they bought another horse. Well, they don’t have any cash. So, they’ve reinvested their money. If you don’t have any cash…and you’ve kept your money going…they said that you should be able to defer the tax,” Brown said
“It’s all in the context of the real estate.”
In 2024, a landowner or investor may not be looking to exchange one horse for another but could be eying a nearby property rather than one far away. Regardless of the individual’s scenario in the 1031 exchange context, that ability could be threatened by the original budget proposal of the Biden administration, Brown said.
There are no capital gains deferral limits under the current rules for 1031 exchanges. However, the administration’s proposal would set a maximum of $500,000 in capital gains tax deferral each year ($1 million for couples filing jointly).
Brown isn’t advising panic for those thinking about using a 1031 exchange in the future. And the political reality of this is that Biden’s proposal was just that, a proposal. Even if the administration made this a top priority, it faces a likely roadblock in the Republican-led U.S. House of Representatives.
And if you are speculating about whether Republicans could go for this provision as part of some “Grand Bargain” overall tax and revenue compromise package…well, the GOP has shown little willingness for broad, bipartisan reform like that.
Limiting capital gains tax benefits – regardless of whether you are talking about short-term or long-term implications – doesn’t seem like something that Republican lawmakers would want, regardless.
RELATED: Kiplinger authored a report on how the 1031 exchange annual limit would work, and why it is unlikely to materialize. Read that here.
Brown thinks that instituting annual benefit caps for 1031 exchanges would prove devastating. “A cap of $500,000 on exchanges would be tantamount to repeal.”
The American Land Title Association provides research on its website that found the median transaction under 1031 exchange’s like-kind transactions tracked from 2010-2020 was $2.1 million.
As Brown pointed out, not all transactions would be impacted by the $500,000 annual cap, but he believes that the limit would stunt growth potential for farmland value in the future.
“1031 is an incredible driver of the economy,” he said.
