A key federal tax provision of the IRS Code used by small businesses and local landlords for more than 90 years is at risk as Congress considers piecemeal tax reform packages under pressure from the Trump administration, according to Michael W. Robinson, CEO of The Montgomery Strategies Group, LLC.
At issue is the proposed repeal of Section 1031 Like-Kind Exchanges, also called a Starker Exchange. This is a powerful tax-deferment strategy that allows businesses to invest and grow by trading rental or business-use real estate or equipment for similar real estate or equipment without an immediate tax penalty. The tax provision works the same way as a 401(K) tax deferral. It benefits local economies by freeing capital for growth and creating jobs.
Importantly, like-kind exchanges do not eliminate the taxes owed. Taxes are paid on the capital gain when the investor sells the replacement asset in a conventional sale in the future. A common example is a landlord trading from a four-unit building to a six-unit building. The landlord can incrementally grow his or her business, while deferring paying taxes. If the landlord sells the second building instead of exchanging it, he or she pays full taxes from that sale.
For more details and to speak with businesses who can discuss what’s at stake and its impact on them, contact Michael Robinson at 202-255-0737 or mrobinson@tmsgrcom.
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