CHANGES POSSIBLE TO 1031 EX IN TAX REFORM PROPOSAL
While the tax reform debate chugs along in Washington, a few details have come out that bear watching by investors, particularly those who own property.
Investors should consult their financial advisor to discuss the in’s and outs of the new tax policies affecting 1031 Exchanges. Adam Ausloos can guide you through the process and help to both protect and enhance your portfolio. Contact Adam Ausloos, MBA, CRPC at 414-269-2600, adam@defernow.com or visit www.DeferNow.com to learn more about how tax reform can affect you.
Most significant to property owners is a proposal on the 1031 Exchanges in Section 3303 of the legislation. The 1031 Exchange, also known as a like-kind exchange, is a transaction allowing for disposal of assets and the acquisition of others without generating tax liabilities from the sale of the first asset.
According to the House Ways and Means Committee, the taxing committee in the House, the like-kind exchange rules currently allow taxpayers to defer tax on the built-in gains in property by exchanging it for similar property. With multiple exchanges, gains essentially may be deferred for decades, and ultimately escape taxation entirely if the property’s basis is stepped up to its fair market value upon the death of the owner.
A special rule in the proposed legislation provides that no gain or loss is recognized to the extent that property held for productive use in the taxpayer’s trade or business, or property held for investment purposes, is exchanged for property of a like-kind that also is held for productive use in a trade or business or for investment.
The proposal states that the taxpayer receives a basis in the new property equal to the taxpayer’s adjusted basis in the exchanged property. The like-kind exchange rule applies to a wide range of property from real estate to tangible personal property. It does not apply, however, to exchanges of stock in trade or other property held primarily for sale, stocks, bonds, partnership interests, certificates of trust or beneficial interest, other securities or evidences of indebtedness or interest, or to certain exchanges involving livestock or involving foreign property. A like-kind exchange does not require that the properties be exchanged simultaneously – as long as the property to be received in the exchange is identified within 45 days and ultimately received within 180 days of the sale of the original property, gain is deferred.
The proposed legislation includes a special rule allowing deferral of gains on like-kind exchanges that would be modified to allow for like-kind exchanges only with respect to real property. The provision would be effective for transfers after 2017. However, the provision would provide a transition rule to allow like-kind exchanges of personal property to be completed if the taxpayer has either disposed of the relinquished property or acquired the replacement property on or before December 31, 2017.
The bill provides full expensing for most tangible personal property which provides a marginal effective tax rate of zero percent to fully expensed property, equating to the deferral that like-kind exchanges provide currently. According to the Joint Committee on Taxation, the provision would increase revenues by $30.5 billion over 2018-2027.
To read the tax reform proposal, go to https://waysandmeansforms.house.gov/uploadedfiles/tax_cuts_and_jobs_act_section_by_section_hr1.pdf
Meanwhile, the Senate version of tax reform limits allows tax free rollovers of gains from sale of business property are to real estate only.
When the bills pass each house of Congress differences must be reconciled in a “conference committee” consisting of members of both chambers. Once the bill reaches final form it goes to the President for his signature.
