1031 Exchange Proposal Threatens Capital Gains

1031 Exchange Proposal Threatens Capital Gains

1031 Exchange Proposal Threatens Capital Gains for Crested Butte second homeowners. I have a number of clients who have utilized a 1031 Exchange when purchasing or selling Crested Butte homes as investment properties.

President Joe Biden’s had proposed doing away with Section 1031 like-kind exchanges during his campaign, and his recent tax proposal includes a $500,000 limit on the amount of deferred gain from Section 1031 like-kind exchanges, and a capital gain tax hike from 23.8% to 43.4%. If the proposal becomes part of the official package that moves through Congress, it could present adverse consequences for communities like Crested Butte and their economic development.

1031 Exchange Proposal Threatens Capital Gains

“Many Crested Butte second homeowners utilize their homes as an investment for short-term or long-term rental, and buy and sell leveraging the 1031 tax code.”

These Crested Butte second homeowner client’s dollars and spending on real estate services in our community. Would this proposed tax hike have a chilling affect on new buyers motivation to buy a second home in Crested Butte? …and all the incremental dollars second homeowners spend in the Crested Butte / Gunnison Valley?

Some of these dollars include hiring professionals for architecture, engineering, interior design, landscape design, construction, real estate brokerage, property management, HOA Management. In addition there is a myriad of other home services that second homeowners spend money on that ends up in the pockets of locals who live in Crested Butte.

Not to mention the dollars spent in the local retail shops, restaurants that generate sales tax, and the 3% Transfer Tax in downtown Crested Butte and 1% at the base area in Mt. Crested Butte. The local non-profits benefit greatly because we have second homeowners who generously volunteer, support and donate dollars that the non-profits need to support their capital campaigns and operating budgets – these non-profits enrich our community.

Section 1031 of the Internal Revenue Code began with the Revenue Act of 1921.Section 1031 allows investors to defer paying capital gains taxes on the exchange of one investment property for another if the replacement property is of like kind. Biden had proposed doing away with Section 1031 like-kind exchanges during his campaign.

WHAT IS IRC SECTION 1031?

Section 1031 of the Internal Revenue Code (IRC) allows a taxpayer who owns property held for investment or used in a business to exchange a relinquished property and defer paying federal, state capital gain taxes and depreciation recapture taxes if the taxpayer acquires a like-kind replacement property to be held for investment or used in a business following the rules and regulations of IRC §1031 and 1991 Treasury Regulations. This allows taxpayers to potentially use all of the proceeds from the sale of the relinquished property to leverage into more valuable property, increase cash flow, diversify into other properties, expand business operations, reduce management or consolidate into one larger replacement property.

WHAT IS LIKE-KIND PROPERTY?

There is some confusion regarding what type of property qualifies for tax deferral under IRC §1031. IRC §1031 states that “no gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like kind which is to be held either for productive use in a trade or business or for investment.” Like-kind property can include, but is not limited to, any of the following types of real property, provided it is held for investment: single family rental, duplex, apartment, industrial commercial property or land. For example, land can be exchanged for a single family rental or a multi-family property for a commercial building. Properties can be exchanged anywhere within the United States.

DOES A 1031 EXCHANGE NEED TO BE SIMULTANEOUS?

No, a 1031 exchange is rarely a two-party swap and done simultaneously. Most 1031 exchanges are delayed exchanges, whereby the taxpayer has 180 days between the sale of the relinquished property and the closing of replacement property. The taxpayer must identify the potential replacement property(s) within 45 days from closing on the sale of the relinquished property.

WHEN IS A 1031 EXCHANGE APPLICABLE?

It is applicable whenever a taxpayer intends to sell any property that is not their primary residence or held for sale (and falls under the definition of like-kind property) and plans to purchase another like-kind property within 180 calendar days following the relinquished property closing. Paramount to any exchange is a competent and experienced qualified intermediary.

More Info on 1031 Exchange Proposal Threatens Capital Gains

Do you have questions about 1031 Exchange Proposal Threatens Capital Gains? I have taken a couple of 1031 Exchange Continuing Education Classes – the most recent taught by Erin Crowley, Colorado Division Manager, Asset Preservation Inc.

ERIN CROWLEY
Colorado Division Manager
1031 Exchange Colorado Qualified Intermediary
55 Madison Street, Suite 400
Denver, Colorado 80206
Phone: 720.648.3512
Erin@apiexchange.com

1031 Exchange Experts

How Can I Help You?

I have been in your shoes – as both a Second Home Seller and Buyer here in Crested Butte. If you want to chat about the real estate market here in Crested Butte – give me a call or text me… (970) 209-5405

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