Jack Wroldsen (Cal Poly), 1031 Offramps: Incentives for Small Investors to Sell Single-Family Rental Homes, 27 N.Y.U. J. Legis. & Pub. Pol'y ___ (2025): 

It has never been so expensive to purchase a single-family home. Multiple interrelated causes headline the affordability crisis, such as historically low interest rates that suddenly spiked higher, ongoing population growth, a decade of historic underbuilding of starter homes after the Great Recession, and Wall Street's unprecedented new business model of purchasing single-family rental homes (SFRs) in concentrated areas across the country.

Yet, while those contributing causes fluctuate over time, a more structural and long-lasting factor has remained unexamined in the current crisis: the lock-in effect that arises from Section 1031 of the Internal Revenue Code. The 1031 lock-in powerfully impacts the single-family home market because, on the one hand, Section 1031 incentivizes investors to buy SFRs, and, on the other hand, it strongly disincentivizes investors from selling SFRs before death.

This article proposes both short-term and long-term solutions to the 1031 death lock-in effect in the single-family home market. The proposed solutions, or 1031 offramps, are designed not only to alleviate the immediate price and supply pressures in the starter home market but also to prevent the 1031 lock-in from reoccurring in the single-family home market. Whereas existing proposals seek to disincentivize large corporate buyers from purchasing single-family homes and converting them into SFRs, this article's proposals are unique in seeking to affirmatively incentivize small "mom and pop" investors to sell SFRs. Because small investors own the large majority of SFRs, incentivizing them to sell is an important strategy to increase the supply of single-family homes available to first-time homebuyers pursuing the American dream of homeownership.

Editor's Note:  If you would like to receive a daily email with links to tax posts on TaxProf Blog, email me here.