As the upcoming election draws near, real estate investors are paying close attention to how the results could reshape key tax deferral strategies, particularly qualified opportunity zones (QOZs) and 1031 exchanges. These programs play a crucial role in driving investment and offering tax advantages, making the stakes high for those in the real estate industry.
At 1031 Exchange Place, we understand the importance of staying informed about potential policy shifts. While predicting outcomes is difficult, analyzing the candidates’ past actions and policy positions can provide insights into how these investment options might evolve under either administration.
Trump’s Approach to Qualified Opportunity Zones (QOZs)
The qualified opportunity zone (QOZ) program, established under the 2017 Tax Cuts and Jobs Act (TCJA), is one of Donald Trump’s signature accomplishments in fostering economic development in distressed communities. The QOZ program aims to drive long-term private investment in economically underserved areas by offering substantial tax incentives. Trump has continuously promoted the program as a success story, positioning it as a key driver of capital investment in neglected areas across the United States.
Trump’s support for the QOZ program stems from his belief that it helps create jobs and revitalize areas that have long been overlooked by investors. During his 2020 speech at the World Economic Forum, Trump highlighted how nearly 9,000 opportunity zones had been created, providing tax advantages for investors who choose to reinvest their capital gains into these zones. His administration argued that QOZs are essential to bringing wealth and opportunity to communities that previously struggled to attract meaningful investment.
What to Expect if Trump is Re-elected:
- Maintain or expand the QOZ program: Given that the program was a significant policy achievement of the Trump administration, Trump would likely look to preserve it in its current form. More likely, he would aim to expand the program, increasing the number of opportunity zones to attract additional investment into more areas.
- Extend tax benefits: Trump might push for extending the tax deferral benefits, which currently sunset after a specific period, allowing more time for investors to take advantage of the program’s incentives. This extension could appeal to investors seeking longer-term commitments in these zones.
- Minimal reforms: While Trump supports the QOZ program in its current form, there have been bipartisan efforts to introduce reforms. For example, a 2019 bipartisan proposal led by Senators Tim Scott and Cory Booker sought to increase transparency and reporting requirements for opportunity funds. Though Trump would likely resist any substantial reforms, modest changes aimed at increasing transparency or accountability might be acceptable, as long as the core benefits of the program remain intact.
Trump’s pro-growth stance on QOZs means that he views the program as a crucial tool in encouraging private-sector investment, reducing unemployment, and stimulating economic development in areas that have suffered from underinvestment.
Trump’s Stance on 1031 Exchanges
Donald Trump’s support for 1031 exchanges is well-documented, rooted in his personal experience as a real estate developer. Section 1031 of the U.S. tax code, also known as a “like-kind exchange,” allows real estate investors to defer capital gains taxes on the sale of a property if the proceeds are reinvested into a similar property. This provision has long been a pillar of the real estate investment community, allowing for continued reinvestment without the immediate tax burden.
As president, Trump protected 1031 exchanges during the 2017 tax reform discussions, where there were proposals to eliminate or limit their use. His administration successfully defended the provision, keeping it intact for real estate properties, though 1031 exchanges for personal property (such as aircraft, machinery, and collectibles) were removed.
What to Expect if Trump is Re-elected:
- Preserve current 1031 exchange rules: Trump would likely maintain the status quo for 1031 exchanges, viewing them as essential for the real estate industry. His administration is expected to continue supporting this tax-deferral strategy, which he believes promotes economic growth by facilitating reinvestment in real estate.
- Potential expansion: Trump might explore ways to expand the applicability of 1031 exchanges. For example, his administration could seek to reintroduce some of the asset classes that were excluded by the TCJA, potentially broadening the scope of 1031 exchanges to allow for a wider range of investments. This could be particularly appealing to commercial real estate investors looking to diversify their portfolios across different asset types.
- Resist restrictions or elimination: Trump is likely to oppose any attempts to restrict or eliminate 1031 exchanges, given his belief that the provision stimulates investment and economic activity. He views the provision as critical to maintaining the liquidity and dynamism of the real estate market, allowing investors to continue developing and improving properties without facing immediate tax consequences.
Harris’ Position on Qualified Opportunity Zones
Vice President Kamala Harris has taken a more critical stance on qualified opportunity zones. While Harris acknowledges the potential benefits of driving investment into underserved communities, she has been vocal about concerns regarding how the program has been implemented. Her primary critique centers around the lack of transparency and the potential for wealthy investors to exploit the program without delivering the intended benefits to the communities it was designed to help.
Harris co-sponsored the Opportunity Zone Reporting and Reform Act in 2019, a bill aimed at increasing the transparency of the QOZ program by requiring more detailed reporting from funds operating in these zones. The bill also sought to tighten the criteria for what areas could qualify as opportunity zones, ensuring that the tax incentives were genuinely being used to support economically distressed communities, rather than gentrifying areas or places already experiencing growth.
What to Expect if Harris is Elected:
- Enhanced reporting requirements: Harris would likely push for stricter reporting requirements for QOZ funds. This would ensure that investors are held accountable for where and how their funds are being deployed, making it harder for wealthier investors to take advantage of the program without providing meaningful benefits to the local population.
- Stricter criteria for designating opportunity zones: Harris is likely to advocate for a reevaluation of the criteria used to designate opportunity zones. Currently, some zones that qualify for the program have been criticized for not being economically distressed, with affluent areas benefiting from the tax incentives. Harris would probably aim to tighten the eligibility rules to ensure that only truly underserved areas qualify.
- Focus on community benefits: One of Harris’ key concerns is that the QOZ program should directly benefit local communities, particularly in terms of job creation and business development. She might introduce measures that prioritize investments in operating businesses rather than solely focusing on real estate development, thus ensuring that local residents see tangible economic improvements.
Harris’ focus on reforming QOZs is aimed at preventing the program from being exploited by wealthy investors while ensuring that the tax incentives are genuinely benefiting the communities they are intended to serve.
Harris’ Potential Approach to 1031 Exchanges
While Kamala Harris has not explicitly focused on 1031 exchanges during her political career, her broader tax policy positions provide insight into her potential approach. Harris, like many Democrats, has voiced concerns about tax provisions that disproportionately benefit high-income individuals and large corporations. She supported President Biden’s campaign proposal to eliminate 1031 exchanges for individuals earning more than $400,000 annually.
This stance aligns with the broader Democratic effort to reduce tax benefits that they view as primarily benefiting the wealthy. Harris’ approach to 1031 exchanges would likely reflect this perspective, with a focus on limiting their use by high-net-worth individuals and large real estate investors.
What to Expect if Harris is Elected:
- Income caps on eligibility: Harris might advocate for limiting the use of 1031 exchanges to investors earning below a certain income threshold, potentially aligning with the $400,000 annual income cap proposed during Biden’s campaign. This would restrict the use of 1031 exchanges to smaller, middle-class investors, while preventing wealthier individuals from deferring capital gains taxes on large real estate transactions.
- Restrictions on eligible properties: Harris could push for limitations on the types of properties that qualify for 1031 exchanges, focusing the provision on smaller, less speculative investments. This might involve restricting 1031 exchanges to certain types of real estate, such as residential or affordable housing, while excluding larger commercial developments.
- Limitations on deferred capital gains: Another potential reform could involve capping the amount of capital gains that can be deferred through 1031 exchanges. By placing limits on the total deferred gains, Harris could aim to curb the use of 1031 exchanges by wealthy investors while still allowing smaller investors to benefit from the provision.
While a complete elimination of 1031 exchanges is unlikely, Harris could pursue significant reforms aimed at narrowing their use, particularly among high-income investors and large corporations.
In sum, Harris’ approach would likely focus on curbing what she views as excessive tax benefits for the wealthy while ensuring that tax-deferral strategies like 1031 exchanges are accessible to smaller investors.
Trump vs. Harris: Comparison of Their Tax Policies
The differences between Donald Trump and Kamala Harris on qualified opportunity zones (QOZs) and 1031 exchanges reflect their broader political and economic ideologies. These two strategies are key tools for real estate investors looking to defer capital gains taxes and promote economic growth, but their future could look quite different depending on who holds office.
Trump’s Approach
Trump’s stance on both QOZs and 1031 exchanges is grounded in his broader philosophy of stimulating economic growth through tax incentives and deregulation. He views these programs as successful vehicles for attracting private capital to the real estate market and underserved communities.
- Expansion and maintenance: Trump would likely continue to promote both QOZs and 1031 exchanges, viewing them as tools for economic growth.
- Less government intervention: Trump favors minimal oversight and restrictions, aiming to attract more investment into these programs.
Trump’s approach aligns with a free-market, pro-business philosophy, favoring less government oversight and more opportunities for investors to leverage these tax-deferral strategies.
Harris’ Approach
Kamala Harris’ views on QOZs and 1031 exchanges are shaped by her concern for income inequality and ensuring that tax incentives benefit underserved communities rather than wealthy investors. Her approach prioritizes oversight, transparency, and targeted benefits to economically distressed areas.
- Reform and oversight: Harris would likely focus on increasing transparency, tightening regulations, and ensuring that these programs benefit communities, not just wealthy investors.
- Stricter qualification criteria: Harris might implement more stringent rules for both QOZs and 1031 exchanges, potentially limiting their use among high-income individuals and larger corporations.
Harris’ approach reflects a desire to reform these programs to ensure that tax incentives do not disproportionately benefit the wealthy, while still promoting economic development in underserved communities.
How the Election Could Influence Real Estate Trends
The outcome of the election could have significant implications for real estate markets, particularly in how investors approach 1031 exchanges and opportunity zones. Here’s how the policies of Trump and Harris might impact the real estate investment landscape:
Under a Trump Administration:
- Continued growth in QOZ and 1031 exchange activity: Trump’s pro-business approach would likely lead to continued or even increased use of both QOZs and 1031 exchanges. Investors would feel confident that the existing tax incentives would remain in place, encouraging long-term holds in opportunity zones and active participation in 1031 exchanges. This could drive up property values in opportunity zones and sustain the current level of real estate transaction velocity in tax-deferred exchanges.
- Expansion of investment opportunities: Trump’s potential expansion of 1031 exchanges to a broader range of asset classes could open new investment opportunities for real estate investors. Similarly, expanding the number of opportunity zones could lead to more areas benefiting from revitalization efforts and increased investment capital.
Under a Harris Administration:
- Short-term rush in 1031 exchanges: If Harris proposes restrictions on 1031 exchanges, particularly income caps or property-type limitations, investors may rush to complete 1031 exchanges before any new restrictions are enacted. This could lead to a spike in activity in the short term, as investors try to lock in deals under the current, more favorable rules.
- Potential slowdown in the commercial real estate market: Over the long term, Harris’ proposed reforms could have a cooling effect on certain segments of the commercial real estate market. If high-income investors are restricted from using 1031 exchanges or if limitations are placed on the types of properties eligible for exchanges, this could reduce the number of tax-deferred transactions. Investors might be less willing to sell and reinvest in new properties if the tax benefits are curtailed.
- Shift in QOZ investment strategies: Harris’ reforms to the QOZ program could lead to a shift in investment patterns within opportunity zones. Investors might focus less on real estate development and more on operating businesses that align with her goal of driving direct economic benefits to local communities. Stricter reporting requirements and tighter criteria for QOZ eligibility could also steer capital toward genuinely distressed areas rather than more affluent zones that have been criticized for qualifying under the current system.
Final Thoughts on the Election’s Impact
The election’s outcome will shape the future of qualified opportunity zones and 1031 exchanges, two critical tools for real estate investors. While both Trump and Harris aim to drive economic growth and job creation, their approaches to these tax-deferral strategies differ significantly.
Under Trump:
- Expect expansion and protection of QOZs and 1031 exchanges, with fewer restrictions and an emphasis on attracting private capital to spur economic activity. Trump would likely maintain the current tax incentives, giving investors confidence to continue leveraging these programs without fear of significant changes.
Under Harris:
- Prepare for reforms that focus on ensuring QOZs and 1031 exchanges benefit underserved communities and smaller investors. Harris would likely push for more transparency and stricter oversight, especially for QOZs, while seeking to limit the use of 1031 exchanges among high-income earners. Investors may need to adjust their strategies accordingly if Harris enacts reforms that limit the scope of these programs.
Regardless of who wins the election, real estate investors should stay informed and consult with tax professionals to navigate the potential changes. The political landscape can shift rapidly, and both qualified opportunity zones and 1031 exchanges are likely to remain at the center of future debates on tax policy and economic development. At 1031 Exchange Place, we are committed to helping our clients stay ahead of these changes and optimize their investment strategies for long-term success.
