Biden targets tax break on property capital gains

President Joe Biden is pushing to close a tax break that helped his predecessor amass a fortune.

The Democrat has proposed narrowing a tax code provision that allows real estate investors to avoid capital gains taxes when they sell property, as long as they use the gains to buy more. Former president Donald Trump's most valuable investment, which traces back to his $95 million purchase of a westside Manhattan development site, has benefitted from the rule.

In 2005, when Trump's partners agreed to sell the site for $1.8 billion— a deal Trump resisted— his cut was about $500 million. Because the partners then used the capital gains from the sale to purchase two office towers, they and Trump didn't owe any tax on their gains. Today, Trump's stake in the buildings is worth about $1.2 billion before accounting for debt. Biden's plan would eliminate that kind of manoeuvre for Trump and thousands of others with real estate investments.

The so-called 1031 likekind exchange rule, named after a section of the tax code, was created a century ago to aid family farmers. It has evolved into a beloved tool of property moguls, Fortune 500 companies and real estate trusts that can use it to create a daisy-chain of tax avoidance.

It works like this: An investor buys a building for $4 million and sells it later for $10 million. By redeploying the proceeds into a new property within six months, she can defer paying taxes on her gains. She can repeat that process indefinitely. When coupled with another tax break that wipes out all capital gains at death, the 1031 provision can enable real estate investors to forgo capital gains taxes entirely, enabling family dynasties to pass on riches to heirs virtually tax-free. Some wealth managers call the strategy "swap 'til you drop."