Interested in deferred taxes? Internal Revenue Code Section 1031 allows that “no gain or loss when shall be recognized on the exchange of property held for productive use in trade or business, or for investment, if such property is exchanged solely for property of like kind which is to be held for productive use in trade or business or for investment.” This means when selling real or personal property held for business or investment, the federal and state capital gains and recaptured depreciation taxes can be deferred indefinitely or until the replacement property is sold.
Deploying a capital gains tax deferral strategy merits additional attention given the pending federal changes effective January 1, 2013. Taxes on ordinary income will increase from 35 percent to 43.4 percent for earners in the highest bracket. The long-term capital gain rate will increase from 15 percent to 23.8 percent including the new 3.8 percent “health care tax” on interest, dividends and other passive income earned by individuals with income more than $200,000 per year, or $250,000 for married taxpayers. The estate and gift tax will also change. The current estate and gift tax exclusion is $5 million with any excess subject to a federal estate tax of 35 percent. Effective in 2013, the exclusion returns to $1 million with the maximum estate and gift tax increasing to 55 percent.
Given today’s real estate market where the lure to fix and flip is a part of mainstream reality TV, a question often in the mix is whether a 1031 exchange will defer the capital gains taxes? With the newly renovated property, the next step is to either hold or resell. If the property is resold within a year of the purchase, the short term federal and state capital gains taxes can eliminate upwards of 40 percent of the gross profit. Can a 1031 exchange defer these taxes is now a question the investor or dealer must understand.
In the midst of the stagnating economy and fears of a double dip recession, U.S. farmland and cropland values as a whole continue to be bullish. Farmland owners who made the decision to sell their current holdings should consider 2 tax deferred strategies while taking advantage of the trend.
A common 1031 exchange question is whether there is a hold time requirement? How long does the old property need to be held to satisfy the "proper intent" of holding the property for productive use in a trade, business or investment?
Internal Revenue Code §1031 represents the ability to defer Federal capital gains and recaptured depreciation taxes when selling real or personal property held for investment or in the production of income or in a business and replacing with real or personal property held for investment or in the production of income or in a business.