Andy Gustafson

A 1031 exchange allows the taxpayer to defer indefinitely federal and state capital gain and recaptured depreciation taxes that may represent a tax of up to forty percent of the net sales price. The Internal Revenue Service (IRS) Section of the tax code is used by taxpayers who own real and tangible and intangible personal property such as vacation and commercial property, aircraft, equipment, collectible vintage cars, artwork or franchise rights, that is held in the productive use of a business or for investment. When the property is sold and conveyed at closing or escrow, the capital gain tax obligation is triggered that can be deferred or pushed forward if a 1031 exchange is initiated prior to or at closing. A replacement property of equal or greater value must be acquired within 180 calendar days or the partial tax or full tax is due. The 1031 tax code also applies to property held internationally when replaced with property held overseas.

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A 1031 exchange is not for everyone. The question is often asked “Should I do a 1031 exchange?” It depends. What are the tax consequences of the sale? Do you want to own replacement property? Are your long term goals appreciation, cash flow or possibly converting the rental property into your primary residence?

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Given the property titleholder is subject to US federal capital gain taxes, a foreign 1031 exchange is a recognized tax deferral strategy that both the foreign and domestic taxpayer should utilize when replacing like kind real, tangible and intangible personal property. For example, a US taxpayer selling a property held in the productive use of a business or investment in China can exchange for property held in the productive use of a business or investment in Japan. Property held outside the US is considered like kind with any property held internationally. US property predominantly held in the US is not eligible for replacement property held outside the US and vice versa. Israel is experiencing an appreciating real estate market with many 1031 exchanges being initiated selling and replacing with Israeli real property.

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Stan Johnson Company is pleased to offer for sale to qualified investors a 1031 exchange eligible single tenant retail property located in Martinsville, Virginia. The property is leased to Mattress Firm, Inc. who operates a brand new NN lease with Ten (10) years on the term and Two (2), Five (5) year renewal options. The lease term contains 10% rental increases, every Five (5) years, throughout the primary term and option periods. The Mattress Firm is located adjacent to Liberty Fair Mall on Martinsville’s major retail corridor. The subject property is currently undergoing renovations and is estimated to open at the beginning of December, 2014.

The asking price is $2,269,500 with a capitalization rate of 6.50 percent.

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The Treasury Department Office of Tax Analysis published a paper on the 1031 like kind exchange discussing rationale, history and thorough review of use by market vertical for fiscal years 2007 and 2010. Included in the analysis is an interesting perspective from the Joint Committee on Taxation quantifying the value while the Federal Budget does not consider the 1031 exchange a tax expenditure. Why this of particular interest is that given the drive for tax reform including the removal of the 1031 code, the analysis is deficient in quantifying the macro economic impact. 1031 exchanges provide the liquidity to sell and replace assets from real estate to equipment, especially vehicles. Eliminating 1031 exchanges as the paper recognizes, would “freeze” the replacement of real and personal property, resulting in a slower frequency of replacement, subsequent decrease in real estate sales, closings, tax revenues, potential decrease in sales of cars, aircraft and equipment with higher costs of replacement being passed on to the consumer.

1031 Exchange Rationale

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