The Biden 1031 exchange proposal would have capped the amount of capital gain a real estate investor could defer through a like-kind exchange at $500,000 per year for individuals and $1 million per year for married couples filing jointly. It appeared in three consecutive Treasury budget requests, never advanced as legislation in either chamber of Congress, and is now effectively dead. Section 1031 in 2026 still permits unlimited deferral on qualifying real property exchanges, exactly as it did before the proposal surfaced.1Office of the Law Revision Counsel. 26 USC 1031 – Exchange of Real Property Held for Productive Use or Investment
What the Proposal Would Have Done
Starting with the fiscal year 2023 budget and continuing through the FY2025 request, the Biden Treasury Department included a 1031 cap in its annual Greenbook of revenue proposals. An individual taxpayer could have deferred no more than $500,000 of gain per year through like-kind exchanges. Married couples filing jointly would have faced a $1 million annual ceiling.2Department of the Treasury. General Explanations of the Administration’s Fiscal Year 2025 Revenue Proposals
Gain above the cap would have been taxed in the year of the exchange. An investor with $1.2 million in realized gain would have deferred $500,000 and owed tax on the remaining $700,000. That taxable slice would have faced the top long-term capital gains rate of 20%, plus the 3.8% Net Investment Income Tax for taxpayers above the NIIT income thresholds.3Internal Revenue Service. Net Investment Income Tax The combined federal hit on gains above the cap would have approached 24%.
The administration positioned the cap as a funding source for the American Families Plan, which called for spending on universal pre-kindergarten, childcare subsidies, and paid family leave. Treasury argued that unlimited deferral disproportionately benefited large-scale investors who rolled gains across decades without ever triggering a taxable event. The cap was designed to create periodic collection points on the largest transactions while leaving smaller investors untouched.
The Step-Up in Basis Piece
A second Biden proposal, closely tied to the 1031 cap in its practical effect, would have eliminated the step-up in basis at death. Under current law, an investor can sell a property, defer the gain through a 1031 exchange into a replacement property, and pass that replacement property to heirs at death. The heirs inherit at fair market value, and every dollar of deferred gain accumulated across the chain of exchanges disappears. Investors sometimes call this “swap till you drop.”
Taxing unrealized gains at death would have closed that exit. Combined with the $500,000 deferral cap, investors would have paid on the way in and again on the way out. Real estate industry groups argued the pair would have fundamentally changed the economics of commercial property investment. Neither proposal was enacted. The step-up in basis remains fully intact.
Why It Never Passed
Budget proposals are wishlists. Treasury’s Greenbook lays out the administration’s tax priorities each fiscal year, but the numbers only become law if Congress writes them into a bill and passes it.4U.S. Department of the Treasury. Revenue Proposals No companion legislation implementing the 1031 cap ever advanced through committee in either chamber during the three years the proposal appeared.
The real estate industry pushed back hard. Industry groups argued that like-kind exchanges promote liquidity in property markets, support property improvements, and sustain jobs in construction and property management. They also pointed out that deferred gains are eventually taxed when the chain of exchanges ends without another exchange, so the true long-run revenue effect of unlimited deferral is smaller than critics suggested.
With the change in administration in January 2025, the proposals stopped appearing in Treasury’s budget materials. The current administration has signaled support for preserving both 1031 exchanges and the step-up in basis. Absent a new proposal from a future administration and passage by Congress, neither element of the Biden plan is on the near-term horizon.
What Section 1031 Still Allows in 2026
The statute permits unlimited deferral of capital gain on the exchange of real property held for business use or investment, with no cap on the amount of gain deferred and no cap on how many times an investor can exchange.1Office of the Law Revision Counsel. 26 USC 1031 – Exchange of Real Property Held for Productive Use or Investment Basis in the relinquished property carries over to the replacement, so the deferred gain stays embedded until a future sale that isn’t structured as an exchange.
Two boundaries on the current rules are worth stating plainly, because they predate the Biden proposals and sometimes get confused with them. Since 2018, Section 1031 applies only to real property. The Tax Cuts and Jobs Act removed personal property such as equipment, vehicles, and artwork from eligibility.5Federal Register. Statutory Limitations on Like-Kind Exchanges And real property in the United States is not like-kind to real property outside the country.6Internal Revenue Service. Like-Kind Exchanges – Real Estate Tax Tips Within domestic real estate, the like-kind definition is broad: an apartment building can be exchanged for vacant land, a strip mall, or a single-family rental.
The estate planning combination that would have been dismantled by the Biden proposals is also intact. An investor can exchange repeatedly during life, collect rental income and depreciation deductions on each replacement property, and pass the final property to heirs with a stepped-up basis at death. Every dollar of deferred gain across the chain is permanently eliminated at that point. This is a deliberate feature of how the basis rules interact with the estate tax system, not a drafting oversight.
Could a Similar Proposal Return
The policy debate has not disappeared with the change in administration. The Joint Committee on Taxation has estimated the revenue cost of like-kind exchange deferrals in the billions annually, and Congress periodically revisits tax expenditures of that size. A future administration or a deficit-focused Congress could revive a cap in the same form the Biden Treasury proposed, or in a different one.
For investors planning around Section 1031 today, the working rule is that the statute is unchanged, unlimited deferral remains available, and the step-up in basis at death still applies to real property acquired through exchange. Building an entire portfolio strategy around a single tax provision always carries legislative risk, but the risk is speculative rather than pending. Nothing in current law reflects the Biden proposals, and nothing in the current legislative pipeline would enact them.