Skift Take
The so-called 1031 exchanges are tax deferrals on profitable real estate that, at face value, seem like a no-brainer to repeal and generate revenue. But the coronavirus pandemic's negative impact on hotel building values should cause Washington to reconsider eliminating the provision.
Presidential candidate Joe Biden wants to eliminate the 1031 exchange, a tax provision popular with hotel owners looking to trade up properties and defer or avoid capital gains taxes incurred along the way.
The tax move is tied to transactions like Hilton’s nearly $2 billion 2014 sale of the Waldorf Astoria in Manhattan, where the company deferred taxes on profits by using the proceeds to buy five luxury hotels across Florida and California.
But analysts and hotel developers say the measure is used more by smaller operators already struggling under the weight of the worst year in travel on record — and its elimination could have a negative impact when the economy rebounds.
“It is one of those moves that sounds good to a politician, but they seldom understand the economic implications,” said Bruce Percelay, a Boston-based hotelier and founder of real estate development firm Mount Vernon Co. “In the case of hotels, it will either freeze the market or reduce the number of transactions. People will either sell and take a big tax hit, which they’re often hesitant to do, or they won’t transact.”
Biden’s tax plan includes eliminating the 1031 program to fund a $775 billion plan to provide childcare and services for the elderly and individuals with disabilities.
The 1031 exchange, also known as a like-kind exchange, is a highly popular tax tool in commercial real estate. Owners can defer taxes on profits made off the sale of a property by rein
