1031 Exchanges and Why Some Investors are Choosing to Pay the Tax

Some real estate investors are opting to pay the capital gains tax on the sale of investment property now rather than defer the gains in a 1031 exchange amid concerns that a new presidential administration might raise the tax rate, according to the Wall Street Journal. A 1031 exchange, also called a like-kind exchange, lets a property owner roll over the capital gains from the sale of an old investment property to a new one, if certain conditions are met. Some investors believe that the current 15 percent capital gains tax rate could rise to 20 percent or 25 percent, so they are choosing to pay the taxes now, the Journal reports. Fri, Mar 14, 2008.

Comments:
I like the points Bob Sorey makes, but wanted to add a thought or two on 1031 TIC's. They are also great for successful investors who'd like to continue to reap the rewards of investment real estate but get out of property and tenant management. Since 2002 the 1031 TIC transactions have grown from a market of about $320 million to over $4 billion. For details, see an article I wrote with CRS Senior Instructor Doug Richards at http://mikemerin.com/articles.htm. Posted by Michael G. Merin - Wayne, PA on Sat, Mar 15, 2008 at 07:05:09

1031's are a good product regardless of the capital gains rate. One thing missing from the article just read is recapturing of depreciation or cost recovery...ie they are the same but different terms. This is 25% of what was depreciated while the property was owned. Everyone's situation is different. My older clients with plenty of money and a very low basis (purchase cost plus some additional things) are using the IRS code 1031 for estate planning so the basis is stepped up to current market value at their death and passed on to their heirs without having to pay taxes or cost recovery UNLESS their estate is over the estate tax threshold. With that in mind, please don't rule out using 1031's to defer the tax or have the tax eliminated as an estate planning tool. If they need cash, they borrow it because no tax is paid on borrowed money. Plus they can deduct the interest. My younger clients are cashing out and yes, they are cashing out and paying the 15% capital gains, 25% of what they depreciated and in Tennessee, there is not a state tax but other states have taxes that will also have to be paid. 1031's can be rolled into Wall Street investment grade commercial products called TIC's - Tenant In Common properties that pay monthly income. These products do qualify under the IRS code BUT the SEC - Security and Exchange Commission that regulates securities - stocks, bonds, mutual funds - requires a securities license to earn a commission. Min required license is a series 63 and 22. NAR has requested the SEC allow certain Realtors be exempt from the licensing. The SEC has not ruled on the request. The request is for specific NAR designations and persons who can show specific dollars and experience in commercial be exempt. Always consult a good tax account, CPA or attorney before suggesting or ruling out an exchange.
Bob Sorey, CCIM, ALC, CRSPosted by Bob Sorey - Mount Juliet, TN on Fri, Mar 14, 2008 at 23:36:35