It’s doubtful that any 1031 changes will get passed this year, but they are going to keep knocking. If you are a longtimer who would like to sell your primary residence but don’t want to pay the hefty tax, I recommend doing the double move as the best solution (move temporarily for two years – rent your primary residence then exchange it):
Potential changes to the 1031 exchange
The President’s 2023 budget currently includes some proposed tax changes to the 1031 exchange benefit. The proposed changes, if passed, could limit 1031 exchanges to an annual maximum deferral of $500,000 per person. This means that if you sold a rental property for a $800,000 taxable gain, a 1031 exchange may only help you defer up to $500,000 of that gain and the remaining $300,000 could be taxable in the current year.
To be fair, there is no indication that this section in the proposed budget will pass and become law anytime soon. But even outside of the potential law change, there are times when a 1031 exchange is not the most ideal solution when it comes to tax deferral. With the hot real estate market, it can sometimes be difficult to identify and close on properties within the timeline and monetary restrictions of a 1031 exchange. In addition, investors may be interested in keeping some of the cash from the sale and not roll all of it into another property. Or if you are no longer interested in being a landlord and prefer to be a passive investor, then a traditional 1031 exchange may not be as appealing to you either.
So, this brings up the question:
Are there alternative ways to offset taxable gain outside of using a 1031 exchange?
If you have a healthy gain built up in your real estate, here are some other strategies that can potentially help you to minimize the tax bite.