A SUMMARY OF SECTION 1031 EXCHANGES...

The last two days I told you a story about something that happened in regard to a Section 1031 Exchange. I know that this is a very well known Internal Revenue Code section and that just about all people in Real Estate know the rules. But, what is going to happen to this favorable Code Section and how can you benefit from it?

First, the rules, which a lot of you know very well. If you want to defer the gain on a sale of Real Estate, as this does not work for personal property, you have to choose a replacement property or properties of equal or greater value within 45 days and complete the transaction in 180 days. Delaware Statutory Trusts can be used to accomplish this. You have to place the proceeds of the sale with a facilitator, you cannot see it, touch it or smell it!!! And, the rules have to adhere to exactly or else the exchange is void and you have to pay taxes on the gain. The deferred gain reduces the tax basis of the replacement property meaning that, when you do the final sale, you will pay taxes on the total gain of all of your Section 1031 transactions.

There have been a few creative ways that you could use the Section 1031 Exchange to your advantage. One, for example, is to purchase one property and keep doing section 1031 exchanges until you pass away. Under the current law, upon your passing, the property goes to your heirs at fair market value. So, when the property is sold to your heirs there is no gain on the transaction to be recognized by anyone if the sale occurs shortly after the heir receives the property.

Why am I bringing this up now? Well, Joe Biden, and this is not a critique on the Presidential candidate, wants to do away with Section 1031 Exchanges and the step-up In basis on the transfer of the property upon death. I'll bet that over half of the Congress has taken advantage or is taking advantage of these two Code sections as we speak.

So, what can you do?  You have to plan, plan, then plan again.  If you own real estate and want to complete a Section 1031 Exchange before the laws change, assuming that they will, you have to start now.  Because today is August 22 and 45 days from now is October 6, 2020 and 180 days from that is almost 26 weeks away.

I was a practicing Certified Public Accountant for over 50 years before becoming a Realtor.  And I have seen many changes to the law and the Internal Revenue Code over the 5 decades while I was practicing.  It is my educated opinion that any section 1031 Exchanges transactions started before the possible change in the law will be allowed to be completed.  So, you have time to start the process.  Remember, assuming that Mr. Biden becomes President Biden on January 21, 2021 it will take time to pass the laws changing the Section 1031 Exchanges and the Step up in Basis Laws I referred to above.

So, my advice to you is to start now with the process of completing a Section 1031 Exchange before the law changes.  And, in the event that the law does not change, you’ve lost nothing!!!

My name is PAUL LEVINE and I am a Commercial Realtor practicing in Southern California. I can be reached almost anytime at (818) 298 - 4000 or at "PLevineRealtor@gmail.com".