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Posts tagged IRC § 1031 Exchanges.

NOTICE 2020-23

Working lateOn April 9, 2020, the U.S. Secretary of the Treasury issued Notice 2020-23.  It greatly expands the tax compliance relief previously granted to taxpayers in response to the COVID-19 pandemic.


On March 13, 2020, President Trump issued an emergency declaration, instructing the U.S. Secretary of the Treasury to relieve taxpayers from certain tax compliance deadlines during these horrific times. 

Code Section 7508A grants Treasury authority to postpone the time to perform certain acts required under the Code for taxpayers affected by a federally declared disaster (as defined in Code Section 165(i)(5)(A)). 

Opportunity ZonesAs with any investment, due diligence is required. Investing in an Opportunity Zone Fund (“OZF”) is not any different.

Historically, we have seen taxpayers go to great lengths to attain tax deferral. In some instances, the efforts have resulted in significant losses. With proper due diligence, many of these losses could have been prevented.


Tax deferral efforts under IRC § 1031 have often resulted in significant losses for unwary taxpayers.   The best examples of these losses resulted from the mass Qualified Intermediary failures we saw over the last two decades.

I Stock - San Diego SkylineAs I reported late last year (in my November 25, 2014 blog post), former House Ways & Means Committee Chairman David Camp proposed to repeal IRC § 1031, thereby eliminating a taxpayer’s ability to participate in tax deferred exchanges of property. The provision, a part of Camp’s 1,000+ page proposed “Tax Reform Act of 2014,” was viewed by some lawmakers as necessary to help fund the lowering of corporate income tax rates.

The Obama Administration responded to former Chairman Camp’s proposal, indicating its desire to retain IRC § 1031. The Administration, however, in its 2016 budget proposal, revealed its intent to limit the application of IRC § 1031 to $1 million of tax deferral per taxpayer in any tax year. The proposal was vague in that it was not clear whether the limitation was intended to apply to both real and personal property exchanges.

Despite former Chairman Camp’s proposal and the Obama Administration’s response, many commentators believe IRC § 1031 will remain unscathed. In other words, tax reform will not touch it in any material manner. In prior blog posts, I have expressed some doubt that they are correct.

Keep in mind, the repeal of IRC § 1031 is not a new concept. In fact, former Senate Finance Committee Chairman Max Baucus proposed, as part of his cost recovery and tax accounting reform discussion, the repeal of IRC § 1031. Senator Baucus’s proposal was originally published and circulated to lawmakers back in November 2013. Fast forward almost 18 months: lawmakers are still considering the repeal of IRC § 1031.

On March 17, 2015, EY LLP issued a 42-page report entitled the “Economic Impact of Repealing Like-Kind Exchange Rules.” The report, prepared on behalf of the “Section 1031 Like-Kind Exchange Coalition” (“Coalition”) examines the macro economic impact a repeal of IRC § 1031 would have on our economy.

The report reveals some interesting economic data relating to a repeal of IRC § 1031. EY concludes a repeal would result in businesses holding property longer, businesses relying more heavily on debt financing, and a less productive employment of capital into our economy. The results would lead to:

  • Our gross domestic product declining by $8.1 billion a year;
  • Investment in the economy declining by $7 billion a year; and
  • Annual income from labor declining by approximately $1.4 billion a year.

EY makes a very important and practical observation. The report reveals that, while the repeal would help fund reducing corporate income tax rates, individuals and individual owners of pass-through entities, who are helping pay for the corporate rate reduction and who currently participate in a bulk of all exchanges, would not directly benefit from reduction in corporate tax rates. In fact, according to a report published by the Treasury Office of Tax Analysis (“OTA”) in 2014, the bulk of tax deferred exchanges are completed by individuals and entities taxed as partnerships. Looking at tax year 2007, the OTA found total tax deferral from exchanges for the year amounted to $82.6 billion, of which $56.8 billion or 69% was attributable to individuals and entities taxed as partnerships. So, EY’s conclusion appears to be well supported.

According to EY, several industries would be adversely impacted by the repeal of IRC § 1031. These industries not surprisingly include: construction, real estate, transportation and civil engineering.

Obviously, proponents of IRC § 1031 are not convinced that tax reform will leave their code provision unscathed. If such was not the case, the Coalition would not have engaged EY to undertake the study and issue its report. One thing is certain--the debate over IRC § 1031 is ongoing. Will changes to the code section be included in tax reform? Stay tuned!

Whether we will see tax reform in this country anytime soon is debatable.  When and if we see it, whether IRC § 1031 will survive has been a subject of discussion.

House Ways and Means Committee Chairman David Camp issued a discussion draft of the Tax Reform Act of 2014 earlier this year.  The proposed legislation spans almost 1,000 pages.*  One of its provisions repeals IRC § 1031 and taxpayers’ ability to participate in tax-deferred exchanges.  The Obama Administration responded to Chairman Camp’s proposal.  It wants to retain IRC § 1031, but limit its application to $1,000,000 of tax deferral per taxpayer in any tax year.  Based upon the precise wording of the White House’s response to Chairman Camp’s proposal, it appears the $1,000,000 limitation would only apply to real property exchanges.  So, personal property exchanges would be spared from the proposed limitation.  Of course, there is always the possibility that lawmakers, if they take this approach, would expand the White House’s proposed limitation to apply to personal property exchanges.  Only time will tell.

Despite this talk, many practitioners believe IRC § 1031 will survive tax reform unscathed.  After reviewing a recent report issued by the Treasury Office of Tax Analysis (“OTA”), I am not convinced IRC § 1031 will remain unchanged in any tax reform legislation enacted by lawmakers.

In its report, Treasury points out that tax deferral under IRC § 1031 is not considered a tax expenditure for purposes of the federal budget.  The Joint Committee on Taxation (“JCT”), however, does not adopt this approach.  Rather, it considers the gain deferral from IRC § 1031 exchanges as a tax expenditure.  For 2014, the JCT estimates IRC § 1031 will result in a federal tax expenditure of about $8.7 billion.  That number is large enough to get the attention of lawmakers.

The OTA report primarily focuses on 2007.  In that year, it found:

  • Total IRC § 1031 tax deferral amounted to about $82.6 billion.

    • $25.8 billion was claimed by C corporations.
    • $35.6 billion was claimed by partnerships.
    • $21.2 billion was claimed by individuals.

  • Over one half of the tax deferral claimed by C corporations related to vehicle exchanges (e.g., car rental companies or businesses with large fleets of trucks and/or automobiles).
  • Banks are a significant user of IRC § 1031 exchanges (primarily exchanges of automobile fleets).
  • Real estate exchanges accounted for almost 90% of the exchanges conducted by partnerships.
  • Nearly $10.6 billion of the gain deferred by individuals related to residential rental properties.
  • Over 90% of all individual exchanges involved real estate.
  • Tax deferral from real estate dramatically decreased from 2007 to 2010 due to the recession, but interestingly, during this same period, tax deferral by corporations increased by about $3.5 billion due to an increase in vehicle exchanges.

The OTA report makes one thing crystal clear--IRC § 1031 exchanges result in a significant amount of gain deferral.  Accordingly, eliminating or limiting exchanges could be a significant source of tax revenue.  Treasury is obviously closely analyzing IRC § 1031 for this very reason.

Tax practitioners that believe IRC § 1031 will remain unchanged, if and when we see tax reform, may be unrealistic.  Given these huge numbers and the JCT’s view of exchanges (i.e., they result in a tax expenditure), it is not farfetched to conclude there is a high probability tax reform will result in the repeal of IRC § 1031 as Chairman Camp proposes or a significant limitation on the amount of tax deferral as the Obama Administration proposes.  STAY TUNED!


*For a more detailed discussion of the proposed legislation, see:

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Larry J. Brant

Larry J. Brant is a Shareholder in Foster Garvey, a law firm based out of the Pacific Northwest, with offices in Seattle, Washington; Portland, Oregon; Washington, D.C.; New York, New York, Spokane, Washington; and Beijing, China. Mr. Brant practices in the Portland office. His practice focuses on tax, tax controversy and transactions. Mr. Brant is a past Chair of the Oregon State Bar Taxation Section. He was the long-term Chair of the Oregon Tax Institute, and is currently a member of the Board of Directors of the Portland Tax Forum. Mr. Brant has served as an adjunct professor, teaching corporate taxation, at Northwestern School of Law, Lewis and Clark College. He is an Expert Contributor to Thomson Reuters Checkpoint Catalyst. Mr. Brant is a Fellow in the American College of Tax Counsel. He publishes articles on numerous income tax issues, including Taxation of S Corporations, Reasonable Compensation, Circular 230, Worker Classification, IRC § 1031 Exchanges, Choice of Entity, Entity Tax Classification, and State and Local Taxation. Mr. Brant is a frequent lecturer at local, regional and national tax and business conferences for CPAs and attorneys. He was the 2015 Recipient of the Oregon State Bar Tax Section Award of Merit.

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