The 1031 Exchange Blog
Every taxpayer’s situation is unique and therefore every 1031 exchange is individually nuanced. Despite the innate differences in every potential exchange, a pattern has emerged as to the most common reasons that an individual will move forward and utilize a 1031 exchange. Below are the top ten reasons we’ve found that have motivated taxpayers to move forward.
For the uninformed, 1031 exchanges can be confusing, yet for those who have initiated them, they are an effective strategy to defer the federal and state capital gain and depreciation recapture. Some believe that all that is needed is for someone to hold the exchange funds. Nothing could be farther from the truth. If that is what you are being told you are potentially headed for trouble.Read More
If you are a tenured investor who has built a portfolio of diverse properties, a 1031 exchange is an exceptional tool to assist in continuing to add to, diversify or consolidate your holdings. A common misconception exists around 1031 exchanges that a single investment property must be exchanged for a single like kind investment property. This is incorrect. In fact, the ability to trade a single investment property for multiple properties, or in reverse; multiple properties for a single property gives the savvy investor the flexibility to adjust their portfolio according to their needs.Read More
One of the many questions that people ask a Qualified Intermediary of 1031 tax deferred exchanges is how long the relinquished property needs to be held to qualify for a 1031 exchange? The answer represents one of many ways to develop a fact pattern that supports a 1031 exchange. As you recall, a 1031 exchange allows the taxpayer to defer or postpone the payment of federal and state capital gains and depreciation recapture taxes, when real property held for the production of income for a business or investment is replaced with real property of equal or greater value than the relinquished property's net sales price. What is not eligible for tax deferral treatment is a primary residence, Section 121 transaction, or second home.Read More
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Long thought of as the retirement capital of the United States, Florida is reinventing itself as the new national destination for real estate investment. According to a February 2018 Forbes article, “Best Buy Cities: Where to Invest in Housing in 2018” by Samantha Sharf, Orlando is ranked first in the country for value in real estate investment. Sharf and the team at Forbes highlight Orlando’s 7.1% job growth over the last two years as well as the 7.6% population growth over the past three years as strong factors in addition to their Local Market Monitor’s speculation that the prices of homes in Orlando could increase another 35% by 2021. With Orlando’s average home value still sitting roughly 22% below the national average, the opportunity for first-time and long-time investors to build or expand their portfolio has never been better.Read More
President Trump signed into law the Tax Cut and Jobs Act taking effect January 1, 2018, changing the 1031 tax deferred exchanges that were first imposed in 1921. The major change to the 1031 code is the removal of tax deferral treatment for tangible and intangible personal property, including assets such as collectible cars, aircraft, gold and silver bullion, equipment, cars and trucks, franchise fees and licenses. Tax deferred exchanges for real property were maintained.Read More
A 1031 exchange allows the taxpayer to defer indefinitely federal and state capital gain and recaptured depreciation taxes that may represent a tax of up to forty percent of the net sales price. The Internal Revenue Service (IRS) Section of the tax code is used by taxpayers who own real and tangible and intangible personal property such as vacation and commercial property, aircraft, equipment, collectible vintage cars, artwork or franchise rights, that is held in the productive use of a business or for investment. When the property is sold and conveyed at closing or escrow, the capital gain tax obligation is triggered that can be deferred or pushed forward if a 1031 exchange is initiated prior to or at closing. A replacement property of equal or greater value must be acquired within 180 calendar days or the partial tax or full tax is due. The 1031 tax code also applies to property held internationally when replaced with property held overseas.Read More
A 1031 exchange is not for everyone. The question is often asked “Should I do a 1031 exchange?” It depends. What are the tax consequences of the sale? Do you want to own replacement property? Are your long term goals appreciation, cash flow or possibly converting the rental property into your primary residence?Read More
Given the property titleholder is subject to US federal capital gain taxes, a foreign 1031 exchange is a recognized tax deferral strategy that both the foreign and domestic taxpayer should utilize when replacing like kind real, tangible and intangible personal property. For example, a US taxpayer selling a property held in the productive use of a business or investment in China can exchange for property held in the productive use of a business or investment in Japan. Property held outside the US is considered like kind with any property held internationally. US property predominantly held in the US is not eligible for replacement property held outside the US and vice versa. Israel is experiencing an appreciating real estate market with many 1031 exchanges being initiated selling and replacing with Israeli real property.Read More
The Treasury Department Office of Tax Analysis published a paper on the 1031 like kind exchange discussing rationale, history and thorough review of use by market vertical for fiscal years 2007 and 2010. Included in the analysis is an interesting perspective from the Joint Committee on Taxation quantifying the value while the Federal Budget does not consider the 1031 exchange a tax expenditure. Why this of particular interest is that given the drive for tax reform including the removal of the 1031 code, the analysis is deficient in quantifying the macro economic impact. 1031 exchanges provide the liquidity to sell and replace assets from real estate to equipment, especially vehicles. Eliminating 1031 exchanges as the paper recognizes, would “freeze” the replacement of real and personal property, resulting in a slower frequency of replacement, subsequent decrease in real estate sales, closings, tax revenues, potential decrease in sales of cars, aircraft and equipment with higher costs of replacement being passed on to the consumer.