1099-S Reporting of 1031 Exchange Transactions

Many people conducting 1031 exchanges are concerned about getting 1099’d on the sale of their relinquished property. They are worried that if the IRS is notified of their sale, that it will jeopardize their exchange.

Taxes & 1031 Exchanges

Title companies, escrow companies, attorneys, mortgage brokers, real estate brokers, and other people involved in closing real estate transactions (the "Reporting Person") for the “sale or exchange” of real estate must report these transactions to the IRS under 26 U.S. Code § 6045(e).  Penalties are imposed if the Reporting Person fails to comply with these rules.

Under Treasury Regulation 1.6045-4(b)(1), the term “sale or exchange” includes any transaction properly treated as a sale or exchange for federal income tax purposes, whether or not these transactions are currently taxable. So the requirements of § 6045 also apply to 1031 tax deferred exchanges under § 1031 of the Internal Revenue Code as reportable transactions.

At the outset of a 1031 tax-deferred exchange, the Reporting Person conducting the closing of the sale of the relinquished property may not know if the exchange will be fully completed, or if the like-kind replacement property will be received by the taxpayer within the 180 exchange period, or even if the replacement property will qualify for tax-deferral. None of that matters though because the Reporting Person is still legally required to report the transferor’s proceeds to the IRS using form 1099-S.

Who is the Taxpayer that is Issued the 1099-S?

Typically, the "Reporting Person" is the taxpayer who:

• Transfers or sells the property being sold

• Conveys the property to the buyer

• Would be entitled to the payment of the proceeds or to whom the proceeds is credited to such person’s account. 

The term “transferor” includes any persons conveying “ownership interest” in real estate such as:

• Fee simple interests

• Life estates

• Reversions

• Remainders

• Perpetual easements

• Lease-hold estates of 30 years or more, including any period for which such rights may be renewed at the option of the holder.

In a standard forward exchange, the proper person to be issued the 1099 is the taxpayer conducting the exchange — the seller conducting the exchange — and not the qualified intermediary.

After the exchange is completed the seller or exchanger will inform the IRS of the connection between the sale of the relinquished property and the purchase of the replacement property on IRS form 8824 with their federal tax return. This allows the IRS to understand how the first 1099 relates to the tax-deferred exchange, and the full story of events will be revealed.

• Start Your Exchange: If you have questions about the 1031 exchange and 1099 reporting, feel free to call me at 612-643-1031.

Defer the tax. MAXIMIZE your gain. 

© 2016 Copyright Jeffrey R. Peterson All Rights Reserved

What are Capital Gains and Capital Gains Taxes?

In the US, we have different tiers or levels of taxation. Here is a brief explanation of some of those tiers, and a specific examination of capital gains taxes and rates.

Levels of Taxation

Ordinary income is typically the highest taxed level of income.  Currently, this goes up to 39.6% at the federal level.

Other types of income have a more preferential or lower taxation. In particular, the sale of a capital asset, such as real estate that’s used for investment or business purposes, is taxed at a lower rate. Capital gains rates are at a max now of 20% in the US. Juxtapose that with an ordinary income tax payer who may be paying 39.6% in income taxes. So it’s a higher rate of taxation for earned income, compared to the sale of a capital asset.

Depreciation Recapture

The maximum deprecation recapture tax rate on the portion of the gain attributable to depreciation deductions taken over the years is 25% at the federal level.  The tax code won’t allow taxpayers its most favorable capital gains rates on the portion of the gain relating to these prior depreciation deductions that were taken for the theoretical wear and tear on the property.

Net Investment Income Tax

On January 1, 2013, to fund the new health care laws, Congress created a new 3.8% Net Investment Income Tax (NIIT) as a direct new tax to fund the Affordable Care Act. This extra level of tax applies to taxpayers with net investment income above certain applicable threshold amounts.

The 3.8% tax applies to the excess of modified adjusted gross income over the following threshold amounts: ◦

• $250,000 for married filing jointly or qualifying widow(er) with dependent child

• $125,000 for married filing separately

• $200,000 in all other cases

• Start Your 1031 Exchange: If you have questions about capital gains, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2016 Copyright Jeffrey R. Peterson All Rights Reserved

Death & Taxes (Part 1)

Many people ask me questions along the lines of: "over the years I have invested a large amount of money into an investment property. How does this affect my taxes if I sell the property or if I die?"

First, I would like to talk about the sale vs. 1031 exchange part of the question, and then I would like to go into the ramifications of dying while owning the property.

Selling ~ The 1031 Question

Section 1031 is a very taxpayer-friendly provision of the internal revenue code. It gives you a way to sell your investment property without having to recognize the gains. This defers your taxes indefinitely…perhaps forever.

There are some rules and regulations that you must follow in order to get this tax deferral. One of the key rules is that your property must have been held for investment or for use in your trade or business. Watch the video below for more information on this: 

Like-Kind Property

The other major requirement is that you have to re-invest your proceeds into like-kind property. If you have watched the video above then you have probably picked up that certain property held for investment can be exchanged for certain other like-kind properties that will be held for investment.

In a delayed exchange using a qualified intermediary, your proceeds from the sale must be invested in a like kind property within 180 days of the sale. Also, your replacement property must be identified within the first 45 days.

Remember, both your relinquished property and your new replacement property must be held either for investment or for productive use in a trade or business.

Start Your 1031 Exchange

Start your 1031 exchange today to defer your capital gains taxes on the sale of real estate. Contact CPEC1031, LLC to start the exchange process. Our intermediaries can walk you through every stage on your way to the closing table and answer any questions you may have along the way.

• Start Your Exchange: If you have questions about the time value of money and Minnesota 1031 exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved