tax planning

Tax Implications of Unwinding a 1031 Exchange

Posted on | by Tom Gustafson | Leave a Comment on Tax Implications of Unwinding a 1031 Exchange

Let’s face it. Times have changed. The tumultuous real estate market, renovations over budget, difficult tenants combined with the challenging job environment have resulted in questions about how to unwind a 1031 exchange. Imagine ten years ago, we survived the Y2K scare and were approaching the tech market bubble burst. Real estate appreciation was gaining traction. Washington was promoting regulations to help those interested in securing a home. Ten years is not a lot of time when you are young. But when you have experienced the depths of job loss, foreclosure and declining retirement portfolio your perspective changes questioning why not sell the rental property and cash out.

Three Reasons Why Unwinding a 1031 Exchange Makes Sense Before 2013

Every market is cyclical, which helps cleanse inefficiencies and to adopt new strategies. Adjusting to change is a maturing process requiring us to take note of the whole and the individual pieces. Three reasons why unwinding a 1031 exchange makes sense includes:

  • Historically low federal capital gains rate of 15% will sunset on December 31, 2012 to 20%. In 2013, federal capital gains will increase 3.8% Medicare tax for those earning over $200,000.
  • If in the ten or fifteen percent income tax bracket, your long term federal capital gains tax rate may be even lower than 15%.
  • Divorce and changing partnership interests: it may make sense to consider cashing out the partner and continue the tax deferral in another 1031 exchange if you want to continue holding real property.

Unwinding a 1031 Exchange

The first place to start is talking with your accountant to understand the tax consequences. If you are selling a replacement property purchased in a prior exchange, is you will have two sets of taxes, one due on the replacement property and a second set due on the original property sold. Questions to consider include:

  • What is your current federal income tax bracket?
  • Were the investment properties itemized on Schedule E?
  • Was depreciation taken on Schedule E of your tax return?

Your accountant will look to determine the adjusted basis of each property to determine the estimated recognized gain or tax due. The tax bill may not be as bad as you think. But not understanding the tax implication could also be quite risky.

If you would like to discuss the tax implications of unwinding your 1031 exchange, please contact us at office number 800-227-1031 or ask a question with the links above.

Five Emerging 1031 Exchange Trends

Posted on | by Tom Gustafson | Leave a Comment on Five Emerging 1031 Exchange Trends

The last several years in the 1031 exchange industry have been to say the least challenging. Don’t get me wrong, I love doing what I get to do everyday. What is that? As a qualified intermediary, I help individuals and companies defer capital gains taxes through what is known as a 1031 exchange.

1031 Exchange Trends

Since late 2006, real estate prices for investment properties began to stall, slowly falling into free fall from 2007 through 2010. States effected the most were those that also saw the rapid appreciation of 25 to 30% for the period 2003 – 2005 such as Florida, Nevada and California. I saw first hand how condominiums and rentals properties along the Gulf Coast from Texas to Florida experienced the highs and lows of perceived value compounded by natural disasters of hurricanes and an oil spill. Today, I see the following trends in the 1031 exchange market:

  • all cash buyers both individuals and corporations;
  • a desire to diversify replacement property into oil and gas royalties as an alternative to real estate;
  • unallocated gold and silver bullion exchanged for the physical metal;
  • bonus depreciation for corporations has reduced the need for 1031 exchanges in like-kind exchange (LKE) programs;
  • more reverse 1031 exchanges than the traditional forward acquiring under valued properties in preparation for the current upward trending business cycle.

The Joint Committee on Taxation estimates a 21.88% increase in the value of tax deferrals from $2.5 billion in 2011 to $3.2 billion in 2012. This is up from $2.1 billion in 2010. The majority of those exchanges or 62.5% are estimated to be by corporations in 2012.

The individual exchange will be a slower to rebound given Revenue Procedure 2008-16 effective March 10, 2008 requiring vacation rental properties to be held for two years followed by the replacement rental property to also be held for two years to qualify for a 1031 exchange.

Conclusion

Unless the 1031 exchange is eliminated as a deficit reduction measure, the number and value of the tax expenditure is estimated to continue a slow rebound from the 2003 – 2005 era when the estimated value of tax deferrals reached $73.6 billion in 2004.

When considering whether a 1031 exchange makes sense, consider other reasons than just the tax deferral. If you are not sure, call us for a free consultation.

What You Get

  • Rapid response within 12 hours of request;
  • Thoroughness and expertise of a Certified Exchange Specialist®;
  • The value of your potential exchange;
  • The estimated recognized tax if an exchange is not initiated;
  • Email summarizing plan of action and details of consultation.

What You Don’t Get

  • A sales call;
  • Mumbo jumbo technical jargon;
  • Responses that are not compliant with the 1031 code.

Three Issues to Consider When Selling Farmland

Posted on | by Tom Gustafson | Leave a Comment on Three Issues to Consider When Selling Farmland

Farmland is in high demand in many areas around the United States. Higher commodity prices, increased farm incomes and a reported 30% reduction in the supply of farmland for sale from historical numbers are driving farmland prices up. Although much of the demand comes from farmers, investors are also looking to farmland to diversify their holdings as return on farmland almost equals Standard & Poor’s 500-benchmark index’s return. Due to higher prices and increased demand, landowners are selling their assets and using profits to acquire more farmland or other cash generating real property. With a tax deferrment tool known as 1031 exchange, they can use taxable dollars as interest free loans for new acquisitions.

Three Issues to Consider When Selling Farmland

Over the years, Atlas 1031 has accommodated 1031 exchanges for many families and partnerships owning farmland. Some elect to purchase more farmland while others decide to sell and reinvest into a vacation property held for investment with minimal personal use. Arriving at the decision to sell can be and often is a difficult task. Securing the guidance of your CPA and estate attorney is important to achieving family and financial goals. Issues to consider when selling include:

  1. How can farmland be sold and provide a cash flow for the retiring farmer?
  2. If the goal is to sell and purchase additional land, how can taxes be minimized and new land purchased?
  3. What are the tax implications of passing on the farmland to your beneficiaries?
  4. Do you have a multi generational C corporation and the generation offspring do not want to continue the farm or ranch? Seek the input of an attorney to determine options. Added on December 8, 2011.

1031 Exchange

A 1031 exchange is a tax deferment tool that allows the landowner to sell and replace with any real property given the Internal Revenue exchange rules are followed. The tax obligation does not go away, but is deferred until the replacement property is sold. Those taxable dollars rather than being paid can be used towards the acquisition of the replacement property interest free. Farmland can be sold and exchanged for an investment property that generates cash flow, such as triple net lease, single tenant Tire Warehouse or CVS Pharmacy leased property.

Rather than selling, farmland can be passed on to the beneficiaries and estate taxes paid. The beneficiaries could elect then to sell at a stepped up basis without capital gains taxes. If sold later, they should consider the tax implications deciding whether to initiate a 1031 exchange or sell and pay federal and possible state capital gains taxes.

Finally, there is merit to paying the federal and state capital gains taxes given the federal rate is at a historical low rather than the likelihood of paying higher taxes in the future. However, if the intent is to minimize capital gains taxes, a 1031 exchange is an alternative that uses those taxable dollars towards purchasing replacement property that generates cash flow for tomorrow’s needs. It is recommended to discuss these options with your estate attorney and CPA.

Once the decision to sell is made and you want to learn more about a 1031 exchange, contact us for a free consultation.

We Can Help 

Atlas 1031 Exchange has been accommodating tax-deferred exchanges of all kinds for more than 17 years. We are fluent in the rules and regulations of IRC Section 1031 and able to help you navigate your exchange.

Contact us today to discuss any questions you may have. Call our office at 1-800-227-1031, email us at info@atlas1031.com, or submit your question through the online form at the top of this page.

Tax Implications of Unwinding a 1031 Exchange

Posted on | by Tom Gustafson | Leave a Comment on Tax Implications of Unwinding a 1031 Exchange

Let’s face it. Times have changed. The tumultuous real estate market, renovations over budget, difficult tenants combined with the challenging job environment have resulted in questions about how to unwind a 1031 exchange. Imagine ten years ago, we survived the Y2K scare and were approaching the tech market bubble burst. Real estate appreciation was gaining traction. Washington was promoting regulations to help those interested in securing a home. Ten years is not a lot of time when you are young. But when you have experienced the depths of job loss, foreclosure and declining retirement portfolio your perspective changes questioning why not sell the rental property and cash out.

Three Reasons Why Unwinding a 1031 Exchange Makes Sense Before 2013

Every market is cyclical, which helps cleanse inefficiencies and to adopt new strategies. Adjusting to change is a maturing process requiring us to take note of the whole and the individual pieces. Three reasons why unwinding a 1031 exchange makes sense includes:

  • Historically low federal capital gains rate of 15% will sunset on December 31, 2012 to 20%. In 2013, federal capital gains will increase 3.8% Medicare tax for those earning over $200,000.
  • If in the ten or fifteen percent income tax bracket, your long term federal capital gains tax rate may be even lower than 15%.
  • Divorce and changing partnership interests: it may make sense to consider cashing out the partner and continue the tax deferral in another 1031 exchange if you want to continue holding real property.

Unwinding a 1031 Exchange

The first place to start is talking with your accountant to understand the tax consequences. If you are selling a replacement property purchased in a prior exchange, is you will have two sets of taxes, one due on the replacement property and a second set due on the original property sold. Questions to consider include:

  • What is your current federal income tax bracket?
  • Were the investment properties itemized on Schedule E?
  • Was depreciation taken on Schedule E of your tax return?

Your accountant will look to determine the adjusted basis of each property to determine the estimated recognized gain or tax due. The tax bill may not be as bad as you think. But not understanding the tax implication could also be quite risky.

We Can Help 

Atlas 1031 Exchange has been accommodating tax-deferred exchanges of all kinds for more than 17 years. We are fluent in the rules and regulations of IRC Section 1031 and able to help you navigate your exchange.

Contact us today to discuss any questions you may have. Call our office at 1-800-227-1031, email us at info@atlas1031.com, or submit your question through the online form at the top of this page.