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.
1031 Exchange RationaleRead More
Real estate investors should be familiar with the requirements of the Internal Revenue Code Section 1031 exchange. All too often, taxpayers have mis-interpreted or received bad information that can potentially jeopardize the tax consequence of their real estate investment. A 1031 exchange allows the taxpayer subject to federal and state taxes to defer the federal and state capital gain along with the depreciation recapture taxes when selling and replacing with like-kind property. The deferral represents an indefinite interest free loan that is not due until the replacement property is sold. Imagine an interest free loan that can represent up to forty percent of the sales price.Read More
Tags: 1031 exchange
Maintenance, personal and related party use issues surface when owning an investment property either acquired in or when owning a relinquished property with the intent to initiate a 1031 exchange when selling. Proper 1031 intent is to hold the property, either real or personal, in the productive use of a business or for investment versus holding primarily for personal use. Facts support the investment intent such as how the property is reported on the taxpayer’s federal tax return, was the property in a rental pool and whether personal use exceeds the 14 overnights or ten percent of the rental days per year for real property. For personal property, such as collectibles like artwork, classical instruments or vintage cars, are there adequate facts to support the assets are held in a business or for investment?
An Internal Revenue Code (IRC) Section 1031 tax deferred exchange allows the taxpayer to defer the federal, state capital gain and recaptured depreciation taxes triggered when selling property held primarily in a business or for investment when replaced with property of equal or greater value held in a business or for investment. The tax deferral has many rules, such as the same taxpayer requirement, 45 and 180 calendar day timeframes and g(6) limitations of the code, requiring a qualified intermediary to hold the exchange funds in a manner such that the taxpayer does not receive, pledge, borrow or otherwise obtain the benefits of the exchange proceeds other than towards the purchase of replacement property. If exchange funds remain post completion of the 1031 exchange, the funds are conveyed to the taxpayer and taxed accordingly.Read More
Tags: personal use
The Internal Revenue Service (IRS) has ruled the Federal Communication Commission (FCC) television and radio licenses with spectrum rights containing bandwidth differences are like-kind, or eligible for a 1031 exchange, because they were not different in nature and character, but merely grade and quality, per Private Letter Ruling 200532008. Television (TV) stations are assigned licenses with different frequency bandwidths. These licenses are being auctioned by the FCC along with other actions to free up more spectrum for broadband users by incentivizing license holders for certain TV stations to sell their rights in a FCC auction. When sold, the sole underlying property is the assigned frequency of the electromagnetic spectrum known as a FCC TV license. In Technical Assistance Memorandum 200035005 and Private Letter Rulings 8321127 and 8340041, the IRS allowed the exchange of a TV license for a radio license.Read More
Tags: Radio and TV Stations
A 1031 exchange is fraught with rules and requirements that, if not followed can result in an IRS audit, penalty and tax bill. Known as a like-kind exchange, the Internal Revenue Code (IRC) Section 1031 allows the deferral of federal and state capital gain and depreciation recapture when property either real or personal held in the productive use of a business or for investment is exchanged solely for property held for productive use in a business or for investment. The 1031 exchange effectively postpones the payment of the tax until the replacement property is sold and another 1031 exchange is not initiated. The strategy is recognized by the Treasury Department and enforced by the Internal Revenue Service.
Tags: family use
“Are you familiar with a 1031 exchange?” is a question that more taxpayers wish their Realtors would ask them when they are considering the sale of a property not held as their primary residence. Is it the Realtor's responsibility to ask? Not necessarily; however, the Realtor is one, in addition to the taxpayer’s CPA, to be in a unique position to suggest that the taxpayer add a 1031 exchange to their list of topics to consider.
The landscape quietly changed for investment property acquired in a 1031 exchange later to be converted and sold as a primary residence by the American Jobs Act of 2004. Internal Revenue Code Section 121(d)(11) was amended per section 840 of the 2004 legislation for the property acquired as replacement property in a 1031 exchange, rented for two years, converted and later sold as a personal residence. The Section 121 $250,000 ($500,000 for married filing jointly) exclusion requires that the property be held for five years beginning on the date of acquisition in the 1031 exchange. The exclusion does not apply to that portion of the gain from the sale of the property that is allocable to periods of “nonqualified use” or time held not as the taxpayer’s principal residence and depreciation recapture.