Plan Now to Realize §1031 Capital Gains Deferment

Successful execution of an IRC Section 1031 Like-Kind Exchange has always required careful planning.  In order to enjoy the benefit of deferred capital gains taxes on the sale of commercial or investment property, a timeline must be followed carefully, appropriate filings must be made, etc. (see our §1031 Overview for details). Now, although §1031 Like-Kind Exchanges have been part of the Internal Revenue Code for many decades, they are under threat from both major political parties at the national level.  Additionally, California has imposed new reporting requirements on property owners who are exchanging California property for property in other states.

For the moment, a §1031 Like-Kind Exchange remains an important strategic option for investors who wish to keep their money invested in real estate while exchanging properties, but desire to change their specific holdings without incurring immediate capital gains liabilities.  Still, given recent developments, investors who may be considering a §1031 Like-Kind Exchange should consult their real estate broker and attorney sooner rather than later to avoid unpleasant surprises down the road.

Below are some third party articles and commentary we thought might be of interest.  We are providing these links for informational purposes only; Holm & O’Hara LLP does not endorse or attest to the veracity of these materials.

White House Budget Proposes Cap on §1031 Capital Gains Deferrals

In his 2015 budget proposal, President Obama called for a cap on the amount of capital gains tax that can be deferred under a §1031 exchange.  The proposed cap is $1M in deferred capital gains per taxpayer per tax year.  If this cap is adopted, it will most negatively impact investors who relinquish properties in areas with high real estate values, such as New York City.

Further information at The Hampton Roads Business Journal

Leading House Republican Proposes Elimination of §1031 Exchanges

Representative Dave Camp (R-MI), former chair of the tax-writing House Ways & Means Committee, floated a proposal in late 2014 that would end §1031 exchanges altogether.  While this specific proposal expired with the previous Congress, some of the information Mr. Camp used to justify it may be invoked in new proposals.

Further information on the 2014 proposal from PriceWaterhouseCoopers

California Imposes New Reporting Requirements on §1031 Exchanges

Beginning with the 2014 tax year, investors residing outside California who use §1031 to exchange California investment property for properties in other states are required to file informational returns with California’s Franchise Tax Board.  The initial return is due the year the exchange was implemented, but the taxpayer must file every subsequent year until the the capital gain is actually realized. When the gain is realized, the appropriate tax return must be filed and any capital gains tax due to the State of California paid. This requirement is intended to help California “claw back” capital gains revenues being lost to other states.

Further information at The National Law Review.


Top of Page