Like-Kind Exchanges Under the TCJA
TCJA Reopens Door forAdvantageous Like-Kind Exchanges
Let's Clarify Some of the Misconceptions
NOTE
TO MTAP Members: Concorde Financial Group has been our longtime provider of 1031 like-kind exchange services. With passage of the Tax Cuts and Jobs Act in 2018, like-kind exchanges have now re-emerged as a potential tax minimization option for affected clients.If you have a client interested in exploring a like-kind exchange, call Concorde today at 248-740-8500 to speak with either Mark Kosanke or Darrell Rau. Be sure to indicate you are a member of MTAP to receive special pricing should you move forward with a like-kind exchange.
July 19, 2019 - The Concorde Financial Team has helped over 500 sellers facilitate a 1031 exchange over the past 15 years. During that time, we have dispelled many misconceptions regarding the requirements of meeting the IRS Code 1031:
Myth: When you sell an investment property, there is no way to avoid paying taxes.
Fact: A taxpayer may defer recognition of capital gains and related federal income tax liability on the exchange of certain types of property, a process known as a 1031 exchange.
Myth: If I sell land, I must buy “like kind” real estate to meet the IRS requirement.
Fact: The IRS Code does not restrict the seller to any real estate asset class. Sellers of land can exchange into apartments, office, retail, industrial, etc.
Myth: I am only going to have to pay long term capital gains.
Fact: Contingent on the type of property and sale amount a seller may incur 6 types of taxation:
- 25% Depreciation Recapture
- 15-20% Long Term Capital Gains
- State Long Term Capital Gains (N/A in 9 States)
- 3.8% Net Investment Income/Affordable Care Act Tax
- Increase in Ordinary Tax rate in year of Sale
- Potential Alternative Minimum Tax.
Myth: I must exchange ALL proceeds from the sale to do a 1031 exchange.
Fact: You can exchange only a portion of your proceeds, while paying taxes on the amount you keep. Any proceeds not exchanged will be taxed at the levels listed above.
Myth: The buyer must agree for the seller to do a 1031 Exchange.
Fact: IRS Code 1031 only applies to the seller; the buyer has no say.
Myth: If I do an exchange, I must continue to own the new real estate directly.
Fact: IRS Code allows investors to pool their monies and purchase a fractional interest in a replacement property.
Delaware Statutory Trust
Prior to the Great Recession, most 1031 exchanges were completed utilizing a Tenant in Common Structure. The TIC structure presented numerous challenges for investors; these challenges resulted in many investors preferring usage of the Delaware Statutory Trust structure.
IRS Code allows the use of a DST to acquire real estate where the beneficial interests in the trust will be treated as direct interests in replacement property or purposes of IRC Section 1031. Each owner has a beneficial interest in the DST for federal income tax purposes and is treated as owning an undivided fractional interest in the properties.
The DST structure adds another dimension for sellers of real estate by addressing past concerns of prior investors.
Potential Benefits of a DST:
- No management responsibilities.
- Access to multi-million-dollar Institutional Grade Real Estate.
- Limited personal liability: Loans are non-recourse to investors; the DST is the sole borrower.
- Lower minimum investments: DST offerings can accept up to 2,000 investors.
- Broader Diversification.
- Estate Planning Tool: Heirs receive investment with Step up in Basis and not inherit capital gain tax liabilities.
- Swap until you Drop: DST structure allows investors to continue to 1031 exchange until death.
Use This Helpful Taxable Gain Estimator
to See if a Like-Kind Exchange Can Help You
Concorde Financial has created a sales tool that can be used by you and your clients. The "taxable gain estimator" will help you and your client evaluate various scenarios and determine their potential tax liabilities. Please note: the estimator does not include the increase in their ordinary tax rate or AMT tax. The calculator is for informational purposes only and does not constitute individualized tax advice.
To utilize the Taxable Gain Estimator, click on the following link: http://concordefinancial.com/calculator
This article is for informational purposes only and does not constitute an offer to buy/sell securitized real estate investments. DST 1031 properties are only available to accredited investors (typically have a $1 million net worth excluding primary residence or $200,000 income individually/$300,000 jointly of the last three years) and accredited entities only. There are risks associated with investing in real estate including, but not limited to, loss of entire investment principal, declining market values, tenant vacancies and illiquidity. Potential cash flows are not guaranteed. Diversification does not guarantee profits or protection against losses. This does not indicate suitability for any particular investor and is not to be interpreted as tax or legal advice.
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