Tax Season Tips for 1031 Exchanges

Tax season is in full swing, and many investors, taxpayers, and CPAs are working hard to file their taxes on time. Investors who engage in 1031 exchanges often have questions about how to report them on their tax returns. In this article, we are going to offer a few tips for 1031 exchanges this tax season.

Talk to Your CPA

The most important tips we can give you is to talk to your CPA about your 1031 exchange as it relates to your tax situation. It’s best to inform your CPA of any like-kind exchanges early in the process, but at the very least, be sure to inform them of the exchange prior to filing your tax return.

File Form 8824

IRS form 8824 is the standard method used to report your 1031 exchange to the IRS in your tax return. This form tells the IRS that you have completed, or are in the process of completing a 1031 exchange. It also provides the details of the exchange so they understand where the net proceeds are and where they are going to be reinvested.

Like-Kind Exchanges of Real Estate

Like-kind real estate exchanges offer a seamless way for you to defer your capital gains taxes on the sale of real estate, and keep your money working for you in a continued real estate investment property. While that may sound easy, 1031 exchanges are often complex and require a skilled qualified intermediary to successfully navigate. Contact CPEC1031 today to set up a time to chat with one of our skilled Minnesota qualified intermediaries. Our main office is located in downtown Minneapolis, but we work with clients throughout the United States.

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

Defer the tax. Maximize your gain.

© 2018 Copyright Jeffrey R. Peterson All Rights Reserved

How to Report a Failed 1031 Exchange that Rolled Over into the Next Tax Year

How do you report a completely failed 1031 exchange that rolled over into the next tax-year when the taxpayer received the unused exchange funds?

It would seem that the IRS Form 8824 is intended to be used to avail the taxpayer’s privilege to defer the gain.

If there is no deferral and no exchange, it would appear that the 8824 is inapplicable. The installment form is 6252.

For more information, read our previous article on the topic.

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

Defer the tax. Maximize your gain.

© 2018 Copyright Jeffrey R. Peterson All Rights Reserved

Maximum Tax Rates if You DON'T Do a 1031 Exchange

Many people want to know the maximum capital gains tax rates if you do not do a 1031 exchange on your property.

Maximum Tax Rates

Here are some of the tax rates you face when selling real property in the state of Minnesota:

• State of Minnesota Tax on the Entire Gain: 9.85% (this can vary slightly, depending on where the relinquished property is located).

• Federal Capital Gains Tax on the Appreciation: 20%.

• Federal Deprecation of Section 1250 Recapture: 25%. Could also have some section 1245 depreciation recapture if the property is treated as ordinary income to the extent of depreciation. 

• Federal Net Investment Income Tax: 3.8% on amounts of gain over certain thresholds depending on your filing status ($250,000 Married filing jointly / $200,000 filing Single).

Defer These Taxes with a 1031 Exchange

These taxes can really add up. A 1031 exchange allows you to defer your capital gains taxes on the sale of real estate and keep your money working for you over time.

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

Defer the tax. Maximize your gain.

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved

Alternatives to the 721 Contribution

Sometimes a developer will approach a seller and say: “I don't want to buy your property, I want to become partners with you. Rather than giving you cash for your property I'd like to give you a partnership interest in my new development entity. All you have to do is to contribute your property to my partnership.”

Section 721

Under Section 721 of the Internal Revenue Code when you contribute property to a partnership and you receive back partnership interest, that can be a tax neutral or untaxed transaction. However, there's a lot of traps for the unwary with regard to 721 contributions.

One very important one is the problem of mortgage over basis (or MOB). Mortgage over bases his when you're debt on the contributed property exceeds your basis. To the extent that you have debt relief over and above your basis you may inadvertently trigger the recognition of gain.

721 Contribution Alternatives

So what's the alternative to doing a 721 contribution? The alternative is to do a cash sale. Tell the developer you're not interested in being his partner but you'd happily sell the property in a cash transaction using your qualified intermediary to do a 1031 insulate you from receiving that cash so you can redeploy it into other unrelated replacement properties. Sometimes being in a partnership isn't all that it's cracked up to be.

• Start Your Exchange: If you have questions about 721 contributions, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved

Potential Ramifications if Congress Repeals the 1031 Exchange

When it comes to tax reform there are a lot of questions. What will the ramifications of a potential elimination of the 1031 exchange be?

Tax Reform

One thing I can tell you is if we have tax reform we're still going to have taxes, we just may not have a mechanism to defer those taxes through the wonderful vehicle of section 1031.

Some taxpayers are worried that if they start at 1031 exchange and then Congress changes the game on them midstream before they receive the replacement property that they could somehow be stuck in limbo with the provisions of 1031 being terminated before they've completed their exchange. That would, in effect, require them to recognize the gain on their now failed exchange because the provisions have ended.

Contact Your Legislator

Often times Congress will sunset a provision at a certain date in the future. The problem is if you haven't completed your exchange by that date you may be out of the benefits of a 1031 exchange. All of these questions highlight the importance of contacting your legislators and letting them know that eliminating 1031 will cause chaos and stagnation that we as taxpayers do not want to have happen. We want economic certainty and prosperity, and preserving 1031 is the best way to do that.

• Start Your Exchange: If you have questions about the potential repeal of 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