Have you considered a 1031 Exchange?

The 1031 Exchange continues to be an option for deferring capital gains taxes (for now). Before selling an investment property outright, owners should consider a 1031 Exchange to defer taxes. The new tax laws being proposed in Congress may amend the 1031 Exchange laws. Here is one main point to know about 1033 exchanges before considering one. 

You Can Execute 1031 Exchange Between States, But Know the State Rules:

Many of our clients who own investment property often ask if they can use a 1031 exchange between states. For example, could they relinquish property in California and replace it with property in Texas? Fortunately, they can and the practice is quite common.

Since the Internal Revenue Code 26 U.S. Codes 1031, which governs like-kind exchanges is a federal tax code, by default, all states generally recognize it. And while most states impose their own capital gains tax, most of those states mirror the federal regulations and allow for the deferral of state capital gains.

There are exceptions, however, and it is important to understand different state rules.

 Clawing Back:

Clawback provisions linked to exchanges exist in four states: California, Massachusetts, Montana, and Oregon. This means that upon the taxable sale of your replacement property, you may be subject to state capital gains tax in two states.

 Withholding Requirements:

Another consideration for owners selling an investment property in a state where they are on-residents is the potential for that state to withhold a percentage of the sale proceeds.

However, some of these states have certain state withholding exemptions for non-residents using a 1031 exchange. Taxpayers are generally required to file specific state forms for exemptions and timelines for filing vary from state to state.

You might find it interesting that the Delaware Statutory Trust (DST), which meets 1031 exchange-like-kind requirements, is a driver of interstate exchange activity.

So, be aware that you can use your transaction to exchange property in one state for property in another. Section 1031 of the Internal Revenue Code allows for this. However, keep in mind that there are nuances at the state level that necessitate the assistance of an expert to help you determine the best approach for your exchange.

The rules may be changing soon! Now is the time to consult with an attorney is – like most things – sooner rather than later! Contact us at https://kmckernanlaw.com.