A 1031 exchange allows the taxpayer to defer federal and state capital gain and depreciation recapture taxes when selling and replacing property held in the productive use of a business, trade or for investment. The taxpayer’s CPA should always be asked to quantify the tax consequences of the transaction, which represents one of the most important taxpayer’s criteria to evaluate when considering whether or not to initiate a 1031 exchange. Ultimately, when the 1031 exchange is reported to the Internal Revenue Service on form 8824 along with the taxpayer’s federal return, the CPA will provide the details of the 1031 exchange and affix their signature.
1031 exchanges can be straightforward; however, the capital gain tax deferred strategy can also be quite complex, requiring the insight and direction of an experienced tax attorney. As a Qualified Intermediary (QI), providing legal advice is the unlicensed practice of law. A smart QI will know when to say no and refer the question to a tax attorney, along with seeking financial advice from the client’s CPA. Nearly everyone wants free advice, but there is a time and place when securing a tax attorney and CPAs’ input is incredibly valuable.
Decision to initiate a 1031 exchange depends on such factors as the taxpayer’s intent and the taxes triggered upon the property’s sale. Does the taxpayer want to acquire a replacement property? If not, do the triggered taxes justify a Deferred Sales Trust allowing the gains to be deferred through a trust investing in marketable securities and annuities? Or does it make sense to pay the taxes given the historical low federal capital gains rate?