Recently, the New Hampshire Governor signed Senate Bill 483 into state law. This is a significant event in the 1031 exchange world especially as states look for revenue generating sources.
“The new law amends prior law which would deprive taxpayers Section 1031 tax deferral on a state level if they purchased replacement property in the name of a new entity, notwithstanding that the acquiring entity was a disregarded entity. The typical situation would be that in which a taxpayer was required by a lender or TIC sponsor to acquire a replacement property in the name of a new single member LLC. The State of New Hampshire began disallowing exchange treatment on those transactions in 2008 and began to audit previously closed transactions as far back as 2004, without notice either to taxpayers or to the professionals in the industry.
The new law makes it clear that exchange treatment will not be affected by taking title in the new entity as long as the entity is a single member LLC, revocable trust or other entity which is disregarded for federal income tax purposes. The amendment eliminates the “claw back” efforts to 2004.” Provided by the Federation of Exchange Accommodators.
For New Hampshire the bill removes a tax liability that otherwise made 1031 reverse exchanges a non starter. Single member limited liability companies are frequently used to take title to either the new or old property in a reverse 1031 exchange.
What do you think about the New Hampshire state law?
Given the asset sale is a taxable event and the taxpayer’s intent is to replace with a like-kind asset, a 1031 tax deferred exchange results in the efficient use of the dollar through economies of scale. Maximizing the marginal use of the dollar is the core principle in a 1031 tax deferred exchange, rather than paying the capital gain tax. Economies of scale is a microeconomics term used to describe reductions in unit cost as other cost contributing factors decrease. Relative to a 1031 exchange, the cost of capital decreases as the return on capital may increase over time.