Tax Reform is behind us and we are happy to report that Section 1031 remains in the Tax Code. Now that investors and businesses have seen the details of the tax legislation, interest in structuring real estate transactions as 1031 tax deferred exchanges has seen great momentum. Here are some points to consider when contemplating a 1031 tax deferred exchange:
- 1031 Exchanges are used to defer taxes only on real estate. 1031 Exchanges for personal property were eliminated in the Tax Cuts and Job Act of 2017.
- 1031 Exchanges allow taxpayers to defer capital gain taxes and depreciation recapture taxes and the 3.8% Net Investment Income Tax.
- To completely defer payment of any capital gains taxes, taxpayers need to purchase Replacement property with a value equal to or greater than the property that is being sold. In some cases the taxpayer may purchase a property of lesser value and still defer a significant amount of tax.
- 1031 Exchanges follow strict time limits. Once the Relinquished property is sold, taxpayers have a total of 180 calendar days to purchase Replacement property. Within the first 45 days of the 180 the taxpayer must identify the Replacement property that they intend to purchase.
- Exchanges between related parties are allowed, but specific rules must be followed. Buying from a related party requires advanced planning.
- Partnerships may participate in 1031 exchanges. However, if the partners do not wish to stay together for the exchange, there are several interesting structures that can be considered.
- Taxpayers must utilize the services of a "Qualified Intermediary" when participating in a 1031 tax deferred exchange. The Intermediary provides guidance, proper documentation and secures the taxpayer's funds between the sale and purchase.
- 1031 Qualified Intermediaries are not regulated by the Federal Government, nor most State Governments. Therefore, it is up to taxpayers to ascertain the competency and safety of their chosen Intermediary. Questions that should be asked include:
- Who owns the 1031 Intermediary and how financially stable are the owners?
- What criteria does the 1031 Intermediary use to select its depository banks?
- Does the Intermediary have a Fidelity Bond, Errors and Omissions insurance and a Corporate Guaranty?
- Does the Intermediary have Certified Exchange Specialists® on staff?
- Is the 1031 Intermediary a member in good standing in the Federation of Exchange Accommodators (FEA)?
Visit www.ipx1031.com for more information