Biden’s Proposal to Limit Like-Kind Exchanges Impacts Small Business

The Manhattan skyline is seen at sunrise from the 86th floor observatory of the Empire State Building in New York City on April 3, 2021.Angela Weiss/AFP via Getty Images

By Tom Wheelwright 

If you’ve ever owned real estate, you’ve likely heard of the 1031 exchange, also known as a like-kind exchange. Essentially, this allows business owners or investors to sell a property, acquire a new one and not pay tax on the property they sold as long as it is equal to or greater in cost to the property that was sold.

While this opportunity has been available since 1921, past presidents have modified its use over the years. For example, in the 2017 Tax Cuts and Jobs Act, President Trump changed it to only apply to real estate. Prior to that, the exchange had been available on other kinds of property, such as machinery and equipment. In 2021, President Biden looked to limit like-kind exchanges even further.

Proposed Limits

As it stands, when completing a like-kind exchange, most taxes are deferred until the time you sell, which is typically many years later, and there is no limit to the number of times you exchange. The flexibility of this section of the tax code makes it very popular with business owners and investors as it’s a legal way to reduce taxes on the sale and allows for greater capital to reinvest.