Potential Ramifications if Congress Repeals the 1031 Exchange

When it comes to tax reform there are a lot of questions. What will the ramifications of a potential elimination of the 1031 exchange be?

Tax Reform

One thing I can tell you is if we have tax reform we're still going to have taxes, we just may not have a mechanism to defer those taxes through the wonderful vehicle of section 1031.

Some taxpayers are worried that if they start at 1031 exchange and then Congress changes the game on them midstream before they receive the replacement property that they could somehow be stuck in limbo with the provisions of 1031 being terminated before they've completed their exchange. That would, in effect, require them to recognize the gain on their now failed exchange because the provisions have ended.

Contact Your Legislator

Often times Congress will sunset a provision at a certain date in the future. The problem is if you haven't completed your exchange by that date you may be out of the benefits of a 1031 exchange. All of these questions highlight the importance of contacting your legislators and letting them know that eliminating 1031 will cause chaos and stagnation that we as taxpayers do not want to have happen. We want economic certainty and prosperity, and preserving 1031 is the best way to do that.

• Start Your Exchange: If you have questions about the potential repeal of section 1031, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved

Tax Reporting Requirements When an S-Corp Does a 1031 Exchange

Tax day is almost here, and we're getting a lot of questions from clients about how to report property exchanges to the IRS. This article focuses on the topic of S-Corp property exchanges and IRS reporting requirements.

When an S-Corp Exchanges Property

When an S-Corp exchanges a property do the shareholders report the exchange via Form 8824 on their own 1040? If so, should each shareholder receive the relevant transaction info (acquisition/disposition dates, share of gross sales price etc., etc.) with their Schedule K-1?

Answers from the IRS

To answer questions like these, it's always best practice to go right to the IRS for answers. This link to the IRS website offers some insight to the question. Here are some relevant excerpts so you don't have to read through the entire article:

"Partners and S corporation shareholders. If you received a Schedule K-1 from a partnership or S corporation reporting the sale, exchange, or other disposition of property for which a section 179 expense deduction was previously claimed and passed through to its partners or shareholders, you must report your share of the transaction on Form 4797, 4684, 6252, or 8824 (whether or not you were a partner or shareholder at the time the section 179 deduction was claimed)."

"If the disposition was a disposition of property given up in an exchange involving like-kind property made during the partnership's or S corporation's tax year, any information you need to complete Form 8824."

"Partnerships (other than electing large partnerships) and S corporations do not report these transactions on Forms 4797, 4684, 6252, or 8824. Instead, they provide their partners and shareholders the information they need to report the transactions."

1031 exchanges can complicate your annual tax reporting, but it's important to be proactive and accurately report your exchange to ensure its success.

• Start Your Exchange: If you have questions about 1031 exchange tax reporting requirements, or anything regarding 1031, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved

State vs. Federal Treatments for 1031 Exchanges

Different states have different treatments for 1031 exchanges and not all of the states comport to the federal standard.

Pennsylvania

One state in particular is Pennsylvania. In Pennsylvania at the state level they don't recognize deferred exchanges unless they’re simultaneous swaps. So the delayed exchanges that we're all accustomed to in which we have 45 days to identify and 180 days to complete - those work fine at the federal level but if you're selling property in Pennsylvania you will not get the deferral on the 1031 exchange if it is a delayed or non-simultaneous exchange.

A Trap for the Unwary

So the trap for the unwary is it you may think that it’s all uniform across the board, but each specific state can have different nuances and interpretations of the tax code. For folks in Pennsylvania you may recognize the gains at the state level but be able to have a partial victory in deferring them at the federal level.

• Start Your 1031 Exchange: If you have questions about state taxation as it relates to 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

Minnesota Deed Tax & Transfer Tax in a 1031 Exchange

In this 1031 FAQ video, Jeff Peterson talks about Minnesota deed tax and transfer tax in a 1031 exchange. Watch more 1031 educational videos here.

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

Defer the tax. Maximize your gain.

© 2016 Copyright Jeffrey R. Peterson All Rights Reserved

Reporting a 1031 Exchange with Form 8824

Form 8824 is a little worksheet that you attach to your tax return to report the 1031 exchange. The 8824 is sort of like the answer to the IRS’s question of "where’s my money?" Because when you sell the relinquished property, the title company, law firm, or closing agent that sells and closes that relinquished property is required to report that sale on a 1099 so the IRS is going to know that you sold your relinquished property and they’re going to be wondering where the money is.

Filing Form 8824

The form 8824 answers that question by saying we sold that relinquished property and here's the replacement property that we purchased, and it gives the IRS all the information they need to know to line up and see how the dots are connected between the sale of the relinquished property and the purchase of the new property.

Sometimes taxpayers that sell say in one year and acquire the replacement property in the subsequent year are uncertain what year they file the 8824. Is it the year from which the sale occurred or is it in the year that the purchase occurred? The answer is you need to file the 8824 for the tax return applicable to the year you sold the relinquished property. The IRS is going to receive that 1099 for the year in which you sold your relinquished property and they're going to be asking where's my money. And the answer will come from the 8824 in the year in which you sold your relinquished property.

• Start Your 1031 Exchange: If you have questions about form 8824, feel free to call me at 612-643-1031.

Defer the tax. MAXIMIZE your gain. 

© 2016 Copyright Jeffrey R. Peterson All Rights Reserve