One of the great government programs in the world of real estate transactions is the 1031 Exchange. This IRS tax deferral option was put into effect in 1921.
The Exchange allows the real estate seller to defer their capital gains tax, by exchanging their depreciated property for another like property. As with all the dozen-plus IRS deferral programs, certain requirements must be met. In normal market conditions, the 1031 Exchange regulations require focus and understanding, but they are manageable.
When the market conditions are not ‘normal’, reasonable regulations can become problematic. In today’s market, we have an environment that can be challenging. Limited inventory, rapid economic expansion, and seller driven pricing.
Starting in February/March, we added COVID-19 into the economic mix. This pandemic has created an economic, overnight, shutdown, and rapidly growing unemployment. The first-quarter GDP shrank -4.8%. Expectations are that this number will decline even further with economic revisions.
Many real estate sellers looking to complete a time-sensitive 1031 Exchange, can find themselves in a challenging situation. Fortunately, IRS deferral programs provide alternative deferral options that can be advantageous in the current market conditions.
One excellent example is IRS(C) 453(A) Installment Sale with a Tax-Free non-recourse loan. With this deferral program, the seller receives their money at closing, while deferring their capital gains tax for 30 years.
With the 453(A) the seller is then able to buy any property or investment they choose, without the time limits or like property restrictions of the 1031 Exchange.
The key for real estate sellers is to understand that they have options. In a world of uncertainty, a hurried transaction can be costly. This market will ultimately create significant buying opportunities. Avoid making a rash buying decision because of artificial time restrictions. You have options.
If you would like a more thorough understanding of the Capital Gains Tax Deferral options available to you, simply contact me. In this day of social distancing, it may have to be a phone or ZOOM meeting. Please feel free to include your CPA or Tax Attorney in our discussions.
Contributed by Jack Gruber