A tithe is really an Old Testament term and religious tradition. Early Israelites followed the law of tithing. For example, by giving every tenth animal that passed under the shepherd’s rod. Leviticus 27:28-32, Genesis 28:20-22, Numbers 18:25, 26 and “Render to Caesar the things that are Caesar’s; and to God the things that are God’s” Matthew 23:13.
In present-day, this tradition of tithing is often accomplished by church members giving one-tenth of their incomes to the Lord through their church.
In a 1031 exchange, however, the general tax rule is that ALL the net sales proceeds from the disposition of the relinquished property should be re-invested into the new replacement property; and the replacement property should be of equal or more value than the relinquished property.
The Issue with Tithes and 1031 Exchanges
What if you take 10% of the proceeds, and do not use these funds for the purchase of the new replacement property…so that you can make the Lord ’s offering as a contribution to a religious organization? Will that impact the success of the 1031 exchange?
Consider Your Boot
To answer that question, we have to take a look at your boot. No, not your footwear! For 1031 exchange purposes, boot is any non-like kind property that is received by the taxpayer in the course of conducting a 1031 exchange. To the extent that you receive boot, you will recognize gains (on the value of the boot) and may only partially defer the recognition of any more gains that you have by re-investing the remaining proceeds into your replacement property. Tithes would essentially fall into this category and result in a reduced tax deferral.
Careful tax-planning and timing may be required so as you don’t unnecessarily render unto Caesar, while rendering unto the Lord.
Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.
Defer the tax. Maximize your gain.
© 2020 Copyright Jeffrey R. Peterson All Rights Reserved
