What are 1031 Exchanges and should Congress repeal 1031 exchanges? In President Obama’s budget for 2015 there is language that would change a part of the rules, however no legislation has been introduced to accomplish the changes. The change sought by President Obama would limit gain deferral for real estate to $1 million per taxpayer per year.
Under current law, an exchange of property, like a sale, generally is a taxable transaction. If you sell a business or farm, taxes will be due on the gain from your basis (your cost). 1031 exchanges are a special rule that provides that no gain or loss is recognized if a property is exchanged for a like-kind property. “Like-kind is pretty broad. You can continue exchanging one property for another for years and not pay any capital gain taxes.
1031 exchanges do not apply, however, to exchanges of stock in trade or other property held primarily for sale, stocks, bonds, partnership interests, certificates of trust or beneficial interest, other securities or evidences of indebtedness or interest, or to certain exchanges involving livestock or involving foreign property. They do not apply to your primary residence.
A like-kind exchange does not require that the properties be exchanged simultaneously – as long as the property to be received in the exchange is identified within 45 days and ultimately received within 180 days of the sale of the originally property, gain is deferred.
Robert Wood writing in Forbes about 7 Key Rules About 1031 Exchanges says, “There’s no limit on how many times you can do a 1031. You can roll over the gain from one piece of investment real estate to another, then another and another. You may have a profit on each swap, but you avoid tax until you actually sell for cash.” But, he cautions, be careful and do it right. Doing it right means to Wood:
- Investment, Not Personal.1031 is for investment and business property, not personal.
- Like-kind is Broad.
- Delayed Exchanges are OK.
- Designating Replacement Property.There are two timing rules you must observe for a delayed exchange.
- Close Within Six Months.
- Cash is Taxed.If there is cash left over, the intermediary pays it to you at the end of the 180 days. That cash is called “boot” and is taxed, generally as a capital gain.
- Beware Mortgages. You must consider mortgage loans or other debt on the property you relinquish, and any debt on the replacement property you acquire. If you don’t receive cash back but your liability goes down, that too will be treated as income just like cash.
I suspect, as the government looks farther and farther afield for money to run the government, 1031 exchanges will get repealed or some way will be found to end the rollover ad infinitum. Meanwhile, enjoy your 1031 exchanges.
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