“I was able to do it all through emails from my home. Andy made the process much less stressful. I was on a deadline and he gone it done for me, no issues at all. Communication was remarkable and always there whether through email or telephone. I give him two thumbs up and wouldn’t change a thing.”
Andy Gustafson
1031 Exchange
A 1031 exchange is a Treasury Department Regulation and Section in the Internal Revenue Code that allows taxpayers to defer the capital gains and recaptured depreciation taxes when selling real and personal property held in the productive use of a trade, business or for investment. In addition to the exchange regulations and section 1031, Treasury and Internal Revenue Service issue rules and guidance including regulations on new legislation, revenue procedures, revenue rulings, private letter rulings, technical advice memorandums and chief counsel advice memorandums.
Importance of Fair Market Rent in a 1031 Exchange
Investing in real property with a 1031 exchange can be a lucrative venture; however, an investor can also lose a considerable amount of potential income to capital gains taxes if the purchase and sale of properties is not conducted with care. One option for taxpayers who are trying to avoid paying the often high rate of capital gains taxes is to enter into a Section 1031 Exchange instead of a traditional sale. When a transaction qualifies for Section 1031 treatment, the profits realized as a result of the exchange are deferred for purposes of computing capital gains taxes. Although the general concept behind a Section 1031 Exchange is rather straightforward, an overlooked detail can cost a taxpayer as significant amount of money because a taxpayer who fails to meet each and every requirement for Section 1031 treatment will lose the tax benefits offered by a 1031 Exchange.
2013 Capital Gain Tax Increase and Impact on 1031 Exchanges
Capital gain and 1031 exchanges are as intrinsically related as are the terms cause and effect. The amount of capital gain is the cause and the deferral of the gain in an Internal Revenue Code (IRC) Section 1031 tax deferred exchange is the effect. As the capital gain increases, the value of the deferred tax also increases. The American Taxpayer Relief Act of 2012 permanently increased the Federal long term capital gain rate for top income earners (Modified Adjusted Gross Income of $400,001 + for individuals and $450,001 + for married filing jointly) from 15 percent to 23.8 percent including the IRC Section 1411 3.8 percent Medicare Surtax. Consequently, high income taxpayers who plan to replace the disposed asset within 180 calendar days with a like-kind asset have the incentive with a 1031 exchange to indefinitely defer the capital gains tax on real and personal property held in a business or for investment. By deferring the gain, those otherwise paid out dollars are used towards the replacement property purchase, interest free.
1031 US Capital Gains Deferral in India
In the United States, a taxpayer who wishes to avoid paying capital gains taxes upon the sale of property may have the option to defer those gains by entering into a Section 1031 Exchange instead of pursuing a traditional sale of the property. Although the rules and procedures for a Section 1031 Exchange within the U.S. are complicated, it essentially allows a taxpayer to replace the property sold with another property of “like-kind” within a specific period of time without having to pay capital gains taxes that would otherwise be due on the sale of the original property. Other countries also have similar tax schemes that allow for deferment of capital gains taxes. India is one of those countries.
1031 Exchange When Selling Farm with a Primary Residence
Taxpayers considering selling their farm or ranch with a primary residence can utilize both Section 121 and Section 1031 to exclude and defer capital gain taxes. Section 121 applies to the primary home while Section 1031 applies to the land and out buildings. This is also known as a mixed use property where a portion of the property is a personal residence and the acreage is held in the productive use of a business or for investment.