Trying to avoid the recognition of capital gains taxes upon the sale of your property? Under Section 1031 of the Internal Revenue Code, sellers of certain real property may defer the recognition of capital gains or losses due upon sale by exchanging their property for “like-kind” property. The property must be used for productive use in a trade or business or used for investment to produce income in order to qualify under this provision.
Real properties are generally of like-kind (of the same nature or character), regardless of whether the properties are improved or unimproved, even if they differ in grade or quality. However, real property located in the United States and real property located outside the United States are not of a like-kind.
There are numerous requirements in order to be compliant under this provision that Bayer & Kaufman can assist in navigating. For example, the replacement property must be identified within 45 days from the sale of the old property, and the acquisition of the replacement company must be completed within 180 days. The seller is not permitted to access any of the proceeds from the sale of the old property – often requiring the use of a Qualified Intermediary who holds the funds until the acquisition of the replacement property. For additional frequently asked questions, please see http://www.1031.org/about1031/faq.htm .
Recent Development – One of the major requirements of a 1031 exchange is that the seller may not access any of the proceeds from the sale of the old property. A transfer of any portion of the proceeds to the seller would cause the transaction to lose its eligibility as a 1031 exchange, frustrating the entire purpose of engaging in such a venture. However, in Morton v. United States, the Court of Federal Claims held that the accidental transfer of the sale proceeds to the seller, followed by the immediate return of the proceeds, did not cause the transaction to lose its character as a like-kind exchange. Because the plaintiff/seller did not effect the transfer of the funds to themselves, they should not be penalized by the mistake of the escrow agent who was responsible for transmitting those funds to the qualified intermediary. For additional details on the case, see http://apiexchange.com/tax_and_legal_updates/other_references/morton-v-united-states.pdf
Recent Developments Continued – As part of the Wall Street Reform and Consumer Protection Act (commonly referred to as Dodd-Frank), the newly created Consumer Financial Protection Bureau (CFPB) is tasked with studying the 1031 exchange industry and submitting a report to Congress by June 21, 2012. Following the submission of the report, the agency then has 2 years with which to propose regulations or create a program to protect consumers in this industry. The CFPB has been in the news recently as President Obama appointed former Ohio Attorney General Rob Cordray to head the newly created agency. Needless to say, many changes to this industry are expected in the future and Bayer & Kaufman LLP will stay on top of these developments and ensure that our clients are compliant with any new regulations or programs proposed.