Commercial and Investment Properties – 1031 Exchange in the new landscape

For commercial and investment property owners here in the Bay Area much of the new tax bill brought uneasiness and uncertainty. As bad as things could have been for Bay Area real estate owners the results could have been worse.

Fortunately, the 1031 exchange remained in the tax code.

Now that investors and commercial real estate owners have reviewed the details of the tax legislation, interest in structuring real estate transactions as 1031 tax deferred exchanges brought new momentum.

Here are some points to consider when contemplating a 1031 tax deferred exchange (courtesy of Ron Ricard at IPX1031):

1.    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.

2.    1031 Exchanges allow taxpayers to defer capital gain taxes and depreciation recapture taxes and the 3.8% Net Investment Income Tax.

3.    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.

4.    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.

5.    Exchanges between related parties are allowed, but specific rules must be followed. Buying from a related party requires advanced planning.

6.    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.

7.    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.

8.    1031 Qualified Intermediaries are not regulated by the Federal Government, nor most State Governments. 

I am not a tax expert. 

I can be reached by email at Keith (at) ResourceRock.com