How to Tithe & Still Defer Your Gains in a 1031 Exchange

In a recent article, we discussed the challenges that occur at the intersection of tithing and 1031 exchanges. Despite these challenges, it is still possible to tithe and still defer your gains in a 1031 exchange.

So How can you Tithe and still Defer all the Gains?

If you have other funds available (other than the sales proceeds from the disposition of the relinquished property), you could re-invest 100% of the net sales proceeds from the disposition of the relinquished property into the replacement property… and then make an appropriate and equivalent charitable contribution with other funds.

Another option would be to complete the 1031 exchange by re-investing all the proceeds; and later in a separate subsequent closing transaction, refinance the replacement property and borrow then funds necessary for your church contribution.

Currently, charitable deductions made under Section 170(c) of the Internal Revenue Code are classified as below-the-line deductions. That means that these amounts are subtracted from one’s adjusted gross income, so they may not necessarily reduce your tax liability, particularly if you opt to take the standard deduction. If you do itemize your deductions, there is a limit on charitable cash-contributions capped at 60 percent of your adjusted gross income (computed without regard to net operating loss carrybacks).

The big take-away is the potential charitable deduction probably will not be as valuable (for federal tax purposes) as the full tax deferral that can be achieved through a successfully completed 1031 exchange.

Start Your Exchange with CPEC1031

Start your 1031 exchange today by contacting CPEC1031. Our qualified intermediaries have over two decades worth of experience facilitating like-kind exchanges under section 1031 of the Internal Revenue Code. Contact us today to learn more about our 1031 exchange services and how we can help you save money in capital gains taxes when selling real estate. Our primary office is located in the heart of downtown Minneapolis, but we also have satellite offices around the country.

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

Defer the tax. Maximize your gain.

© 2020 Copyright Jeffrey R. Peterson All Rights Reserved

What to Know About Tithing & 1031 Exchanges

A tithe is really an Old Testament term and religious tradition. Early Israelites followed the law of tithing. For example, by giving every tenth animal that passed under the shepherd’s rod. Leviticus 27:28-32, Genesis 28:20-22, Numbers 18:25, 26 and “Render to Caesar the things that are Caesar’s; and to God the things that are God’s” Matthew 23:13.

In present-day, this tradition of tithing is often accomplished by church members giving one-tenth of their incomes to the Lord through their church.

In a 1031 exchange, however, the general tax rule is that ALL the net sales proceeds from the disposition of the relinquished property should be re-invested into the new replacement property; and the replacement property should be of equal or more value than the relinquished property.

The Issue with Tithes and 1031 Exchanges

What if you take 10% of the proceeds, and do not use these funds for the purchase of the new replacement property…so that you can make the Lord ’s offering as a contribution to a religious organization? Will that impact the success of the 1031 exchange?

Consider Your Boot

To answer that question, we have to take a look at your boot. No, not your footwear! For 1031 exchange purposes, boot is any non-like kind property that is received by the taxpayer in the course of conducting a 1031 exchange.  To the extent that you receive boot, you will recognize gains (on the value of the boot) and may only partially defer the recognition of any more gains that you have by re-investing the remaining proceeds into your replacement property. Tithes would essentially fall into this category and result in a reduced tax deferral.

Careful tax-planning and timing may be required so as you don’t unnecessarily render unto Caesar, while rendering unto the Lord.

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

Defer the tax. Maximize your gain.

© 2020 Copyright Jeffrey R. Peterson All Rights Reserved