Tax Deferral vs. Tax Avoidance – What’s the Difference?

When some people discuss the benefits of 1031 exchanges, they highlight how a 1031 exchange can help you “avoid” taxes. What they really mean is that 1031 exchanges can help you “defer” taxes. In this article, we are going to talk about the difference between tax deferral and tax avoidance.

Tax Avoidance

Put simply, avoiding taxes is illegal. The term “tax avoidance” implies that the taxpayer is actively working to avoid paying the taxes that they owe. This is different from the tax deferral benefits of a 1031 exchange. With tax deferral, you are simply postponing your tax payment until a later point in time – in this case, whenever you decide to sell your replacement property.

Tax Deferral

Tax deferral, on the other hand, is perfectly legal under the right circumstances – such as a 1031 exchange. A like-kind exchange allows you to defer (not avoid) your capital gains taxes when selling real estate. The difference is that you are deferring your taxes until a later date (if/when you decide to sell your replacement property), rather than avoiding them completely.

Start a Like-Kind Exchange Now

If you’re looking to start a like-kind exchange, reach out to our qualified intermediaries today! At CPEC1031, we have decades of experience helping clients through their 1031 exchanges. Our primary office is located in downtown Minneapolis, but we work with clients throughout the state of Minnesota and all around the United States. Contact us today to learn more about our 1031 exchange services and start your like-kind exchange now!

• 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.

© 2022 Copyright Jeffrey R. Peterson All Rights Reserved

How 1031 Exchanges Benefit the Greater Economy

1031 exchanges of real estate are beneficial for the taxpayer conducting the exchange, as well as the economy as a whole. But many people may not understand why that’s the case. In this article, we are going to explain why 1031 exchanges of real estate benefit the economy.

Encouraging Investment

First and foremost, 1031 exchanges encourage investment in real estate. The ability for taxpayers to defer their capital gains taxes makes re-investing very attractive. Selling a piece of real estate can result in a hefty tax bill on the capital gains from the sale. A 1031 exchange allows taxpayers to defer that tax burden, and continue their investment in another property.

Consider the situation from the perspective of an investor. If the 1031 exchange did not exist and you were required to pay your capital gains taxes, you may hesitate to sell your property. But by doing a 1031 exchange, you can avoid a tax hit with the incentive of reinvesting your funds in bigger, better property. This keeps money moving around the market and stimulates growth!

Real Estate Exchanges in Minnesota

At CPEC1031, we work with taxpayers large and small in numerous industries to facilitate the like-kind exchange of real estate under Section 1031. A 1031 exchange can save you a lot of money in capital gains taxes when you’re selling real estate. It allows you to keep your money working for you in a continued investment. Contact our qualified intermediaries today to see if you are a good candidate for a 1031 real estate exchange. We have decades of experience advising clients through every step of the 1031 exchange process.

• 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.

© 2022 Copyright Jeffrey R. Peterson All Rights Reserved

How to Identify the Tax Owner of Real Estate in a 1031 Exchange

As we’ve discussed before, in a 1031 exchange the same tax owner who sells the relinquished property must also acquire the replacement property. This is one of the most important rules in a 1031 exchange. But what if you want to sell a property you own individually and acquire the new replacement property as part of an LLC? This is where things get tricky. In this article, we are going to discuss the importance of determining the “tax owner” in a 1031 exchange of real estate.

Who is the Tax Owner?

When it comes to 1031 exchanges, the tax owner is the person (or entity) that has the benefits and burdens of ownership. Often the tax owner typically files tax returns for the property and appears on the deed as the title owner of the property. However, that is not always the case. Sometimes the deed will list a disregarded entity as the owner on the deed. Remember, a disregarded entity is an entity (typically an LLC or other business) that is disregarded for federal tax purposes.

The important thing to note is that the tax owner of the property needs to be the same on both the relinquished property and the replacement property in order for the 1031 exchange to be a success.

Real Estate Exchanges

Considering a like-kind exchange of real estate under section 1031 of the Internal Revenue Code? You’ve come to the right place! At CPEC1031, we have over two decades of experience facilitating exchanges of real property for our clients. Our qualified intermediaries can help you identify replacement property and prepare your documents for closing. Contact us today at our offices in downtown Minneapolis to chat with one of our intermediaries about the tax-saving benefits of a 1031 exchange!

• 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.

© 2022 Copyright Jeffrey R. Peterson All Rights Reserved

Capital Gains Tax Consequences of Not Doing a 1031 Exchange

Many people want to know how much they are going to have to pay in capital gains taxes if they don’t do a 1031 exchange? We take a look at capital gains taxes and 1031 exchanges in this article.

Layers of Taxation

There are different layers of taxes you have to look at. The first is how much of the property that you’re selling has appreciated in value. The portion of the gain that is from appreciation or natural increase in value over time, is taxed at a maximum rate of 20%. Congress also has an investment income tax of 3.8%, which may be applicable to some or all of that appreciation so you could rough it in or say rule of thumb is a 23.8% appreciation.

Recaptured Depreciation

Then there’s a portion of the game that relates to depreciation. That’s the deductions you have been taking over time for the theoretical wear and tear on the property. So incremental, over time you’re lowering your basis every year due to these depreciation deductions. That’s called depreciation recapture. The maximum federal right now is 25% on the recapture of depreciation.

So on the appreciation, the upward climb, we’ll say 23.8%. On depreciation, we’ll say a maximum rate of 25%. However, some of the gain may be taxed at a maximum rate of 39.6%, which is the Federal Ordinary Income rate for §1245 Personal property (either tangible or intangible).  A gain on the disposition of section 1245 property may be treated as ordinary income to the extent of depreciation allowed or allowable on the property. On top of all of that, if you’re in a state that taxes such as Minnesota or California, these states have their own layer of taxation around 10%.  So if you’re going to rough it in, you’re going to be giving away 45%-50% of your gains in federal taxes.

Rather than taking that tax hit, a 1031 exchange can help you roll that gain over into a new property and avoid the tax hit.

• 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.

© 2022 Copyright Jeffrey R. Peterson All Rights Reserved

Can the 1031 Exchange Deadlines be Extended?

Many people want to know if the 1031 exchange 180 day period is a hard-and-fast deadline or if there’s flexibility to prolong the exchange period.

As a General Rule

The general rule is no, you can’t go beyond the 180th day. It is a hard and fast rule. That being said, many people have been affected by hurricanes and other federally declared disasters that are eligible for extensions under rev proc 2007 – 50.

Federal Disaster Areas

However, in some situations the executive branch will issue a notice that a certain geographic area has been declared a federal disaster area and folks that are in that area may be eligible for extensions (typically of 120 days from the date of the disaster).

Other taxpayers who are not in that geographic area but are doing business transactions within the disaster area may also be eligible for extensions, but the notices typically require the taxpayers to contact the IRS and to explain why they are directly and adversely affected by the disaster. Maybe their title company was flooded out, for example.

So you need to follow the notice issued by the executive branch and the requirements of rev proc 2007. If you do that you may be eligible for an extension but there are limits on how far that extension can go out. You should always work with a competent CPA to make sure you’re eligible for the extension and understand how long that extension is in relation to your exchange.

• 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.

© 2022 Copyright Jeffrey R. Peterson All Rights Reserved