Does a 1031 Exchange Eliminate Capital Gains Taxes?

But many people incorrectly believe that a 1031 exchange completely eliminates capital gains taxes on the sale of property. In this article, we are going to explain why that’s not the case, and what benefits a 1031 exchange can actually bring to a real estate transaction.

Tax Elimination vs. Tax Deferral

So do 1031 exchanges completely eliminate capital gains taxes when you sell a piece of property? The short answer is no – a 1031 exchange does not completely eliminate capital gains taxes from the sale of real or personal property. What a 1031 exchange does is defer those capital gains taxes.

When you sell a piece of real estate, typically you are responsible for paying capital gains taxes on the sales proceeds. A 1031 exchange allows you to avoid that potentially large capital gains tax bill by moving your net proceeds into a like-kind investment property.

While a 1031 exchange does not completely eliminate your capital gains taxes, you can effectively keep them at bay by continuing to exchange out of and into like-kind property. Ideally, you can continue deferring your taxes (and allowing your money to compound and build wealth over time) until you die.

Start Your 1031 Exchange

A like-kind exchange can present a lot of challenges and complications if you don’t know what you’re doing. Having a qualified intermediary on your team can be the difference between a successful and a failed exchange. At CPEC1031, our team of qualified intermediaries has been helping taxpayers with their like-kind exchanges for decades. We have the experience and the knowledge to help you through your exchange. Start your 1031 exchange today by reaching out to one of our qualified intermediaries.

• Start Your 1031 Exchange: If you have questions about tax deferral through section 1031, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved

Tax Reporting Requirements When an S-Corp Does a 1031 Exchange

Tax day is almost here, and we're getting a lot of questions from clients about how to report property exchanges to the IRS. This article focuses on the topic of S-Corp property exchanges and IRS reporting requirements.

When an S-Corp Exchanges Property

When an S-Corp exchanges a property do the shareholders report the exchange via Form 8824 on their own 1040? If so, should each shareholder receive the relevant transaction info (acquisition/disposition dates, share of gross sales price etc., etc.) with their Schedule K-1?

Answers from the IRS

To answer questions like these, it's always best practice to go right to the IRS for answers. This link to the IRS website offers some insight to the question. Here are some relevant excerpts so you don't have to read through the entire article:

"Partners and S corporation shareholders. If you received a Schedule K-1 from a partnership or S corporation reporting the sale, exchange, or other disposition of property for which a section 179 expense deduction was previously claimed and passed through to its partners or shareholders, you must report your share of the transaction on Form 4797, 4684, 6252, or 8824 (whether or not you were a partner or shareholder at the time the section 179 deduction was claimed)."

"If the disposition was a disposition of property given up in an exchange involving like-kind property made during the partnership's or S corporation's tax year, any information you need to complete Form 8824."

"Partnerships (other than electing large partnerships) and S corporations do not report these transactions on Forms 4797, 4684, 6252, or 8824. Instead, they provide their partners and shareholders the information they need to report the transactions."

1031 exchanges can complicate your annual tax reporting, but it's important to be proactive and accurately report your exchange to ensure its success.

• Start Your Exchange: If you have questions about 1031 exchange tax reporting requirements, or anything regarding 1031, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved

Reporting a 1031 Exchange with Form 8824

Form 8824 is a little worksheet that you attach to your tax return to report the 1031 exchange. The 8824 is sort of like the answer to the IRS’s question of "where’s my money?" Because when you sell the relinquished property, the title company, law firm, or closing agent that sells and closes that relinquished property is required to report that sale on a 1099 so the IRS is going to know that you sold your relinquished property and they’re going to be wondering where the money is.

Filing Form 8824

The form 8824 answers that question by saying we sold that relinquished property and here's the replacement property that we purchased, and it gives the IRS all the information they need to know to line up and see how the dots are connected between the sale of the relinquished property and the purchase of the new property.

Sometimes taxpayers that sell say in one year and acquire the replacement property in the subsequent year are uncertain what year they file the 8824. Is it the year from which the sale occurred or is it in the year that the purchase occurred? The answer is you need to file the 8824 for the tax return applicable to the year you sold the relinquished property. The IRS is going to receive that 1099 for the year in which you sold your relinquished property and they're going to be asking where's my money. And the answer will come from the 8824 in the year in which you sold your relinquished property.

• Start Your 1031 Exchange: If you have questions about form 8824, feel free to call me at 612-643-1031.

Defer the tax. MAXIMIZE your gain. 

© 2016 Copyright Jeffrey R. Peterson All Rights Reserve