A Changing Landscape: How Tax Reform Has Modified the 1031 Exchange Process
Are you selling a piece of real property and looking for a way to defer the capital gains taxes owed on your investment? Due to the recent 2018 tax reform and the resulting changes made to Section 1031 of the tax code, new issues have arisen that smart sellers and buyers must take into account before deciding that a “1031 Exchange” is wise decision.
To put it simply, a 1031 Exchange allows an investor to “defer” paying capital gains taxes on a property when it is sold, as long another “like-kind property” is purchased with the profit gained by the sale of the first property. “Like-Kind” property is a broad term which means that both the original and replacement properties must be of the same nature or character, even if they differ in grade or quality. In other words, you can’t exchange farming equipment for an apartment building, because they are not the same asset, but you can exchange an apartment building for a duplex.
Under the new tax reform law, 1031 Exchanges now are limited only to real property and can no longer be used for the sale of personal property. For a seller or buyer of real estate, 1031 Exchanges in the past allowed a seller to include the value of personal property contained in the property (e.g., light fixtures, stove, etc.) in and as part of the Exchange. Under the new tax reform, this is no longer the case. Now, sellers and buyers will have a more difficult time negotiating the real vs. personal property split because now sellers will want to negotiate a lower selling price for the personal property in order to save on taxes, while buyers will want a higher price for the personal property for a higher basis, which will allow for more capital asset depreciation opportunities in future years.
Our office has experienced attorneys who can navigate the array of steps and parties involved in an1031 Exchange. If you are considering a 1031 Exchange but would like to learn more about its intricacies or changes resulting from tax reform, please contact our office by phone at 202-296-2121 to schedule a consultation.