Licensed in 1978, Jim Wootton, a real estate broker and a structured sale consultant, provides real estate exchange counseling to his clientele. He served as president of the Columbus Real Estate Exchangors and rose to become president of OCREA, the statewide association of 1031 real estate exchangors.
Standard Company LLC, as a boutique real estate advisory firm, has been a leader in providing other approved tax advantaged strategies for its clients pursuant to the Internal Revenue code, including partial gifts of real estate under IRC Section 170 for bargain sales to nonprofit organizations on IRS Form 8283, and deferring the tax until principal payments are received, with installment sale reporting on IRS Form 6252 pursuant to IRC 453.
For information on using a structured sale to defer and reduce capital gains taxes while receiving a fully guaranteed income stream, even when a 1031 exchange fails, or when selling a high value home, or other capital gains personal property such as privately owned businesses, oil & gas lease bonuses, agricultural crops, antique car collections and art, click here. For information on real estate philanthropy for churches and other nonprofits, click here.
Contact Jim Wootton at Standard Company LLC (614) 468-0198
Using a 1031 exchange, the seller can defer federal and state capital gain and depreciation recapture taxes by selling and replacing the property sold with like-kind property, which means generally any real estate held for investment. It does not include the taxpayer’s personal residence.
To qualify for Section 1031 of the Internal Revenue Code, the properties exchanged must be held for productive use in a trade or business, or for investment. Prior to 2018, stocks, bonds, and other properties were listed as expressly excluded by Section 1031 of the Internal Revenue Code, although securitized properties were not excluded. Today, only real property is included under Section 1031. The properties exchanged must be of "like kind", i.e., of the same nature or character, even if they differ in grade or quality (such as one commercial apartment to another). Personal properties of a like class were like-kind properties under the pre-2018 provisions. Personal property used predominantly in the United States and personal property used predominantly elsewhere were not like-kind properties.
Real properties generally are of like kind, regardless of whether the properties are improved or unimproved. However, a real property within the United States and a real property outside the United States would not be like-kind properties. Generally, "like kind" in terms of real estate, means any property that is classified real estate in any of the 50 U.S. states or Washington, D.C., and in some cases, the U.S. Virgin Islands.
Taxpayers who hold real estate as inventory, or who purchase real estate for re-sale, are considered "dealers". These properties are not eligible for Section 1031 treatment. However, if a taxpayer is a dealer and also an investor, he or she can use Section 1031 on qualifying like properties. Personal use property will not qualify for Section 1031.
Taxpayers may wonder whether items such as equipment used on a property are included in the lump-sum sale of the property, and whether recognition of related gains may be deferred. Under Treasury regulation §1.1031(k)-1(c)(5)(i), property that is transferred together with the larger item of value that does not exceed 15% of the fair market value of the larger property does not need to be identified within the 45-day identification period, but still needs to be exchanged for like kind property to defer gain.
Cash to equalize a transaction cannot be deferred under Code Section 1031 because cash is not of like kind. This cash is called "boot" and the gain, to the extent of the receipt of this cash, taxed at a normal capital gains rate.
If liabilities assumed by the buyer exceed those of the seller (taxpayer), the realized gain of the seller will be recognized. If, however, the seller assumes a greater liability than the buyer, the realized loss cannot offset any realized and recognized gain of receiving boot such as cash or other personal property considered boot.
Originally, 1031 cases needed to be simultaneous transfers of ownership. But after the rendering of the decision in Starker v. United States, a contract to exchange properties in the future is practically the same as a simultaneous transfer. This case invented the concept of the Starker exchange. It is under this case, decided in 1979, that the rules for election of a delayed 1031 originated. To elect the 1031 recognition, a taxpayer must identify the property for exchange before closing, identify the replacement property within 45 days of closing, and acquire the replacement property within 180 days of closing. A Qualified Intermediary must also be used to facilitate the transaction, by holding all the profits from the sale, and then disbursing those monies at the closing, or sometimes for fees associated with acquiring the new property.
The §1031 exchange begins on the earliest of the following:
the date the deed records, or
the date possession is transferred to the buyer,
and ends on the earlier of the following:
180 days after it begins, or the date the Exchanger's tax return is due, including extensions, for the taxable year in which the relinquished property is transferred.
The identification period is the first 45 days of the exchange period. The exchange period is a maximum of 180 days.
If the Exchanger has multiple relinquished properties, the deadlines begin on the transfer date of the first property.
These deadlines may not be extended for any reason, except for the declaration of a Presidentially declared disaster.
A deadline that falls on any weekend day or holiday does not permit extension. For example, if your tax return is due April 15, but that date falls on a Saturday, then your tax return due date is forwarded to the first business day following April 15, or Monday, April 17. However, if a deadline falls on a Sunday, the requirements for the exchange must be met no later than the last business day prior to the deadline date, i.e. the prior Friday.
The above work is released under CC-BY-SA https://en.wikipedia.org/wiki/Internal_Revenue_Code_section_1031