Articles and Publications
The health of Section 1031 like-kind real estate exchanges
A taxpayer, whether an individual person or a legal entity, that purchases real estate used for productive use in a business or trade or for investment may be faced with the pleasant fact that the property has appreciated in value. Generally, when the taxpayer sells the property which has appreciated in value, a tax will be assessed upon the gain. Fortunately, since 1921, Section 1031 of the Internal Revenue Code has permitted taxpayers to defer the recognition of taxable gains on the disposition of such real estate.
The general steps in a transaction utilizing the benefits of Section 1031 are as follows:
1. Prior to, or concurrently with, the conveyance of the real estate (relinquished property), the taxpayer enters into an exchange agreement with a “qualified intermediary.”
2. At the time of the closing, the proceeds from the sale are not paid to the taxpayer but are, alternatively, deposited with the qualified intermediary.
3. Within 45 days of the date of closing, the taxpayer identifies one or more replacement properties.
4. The taxpayer purchases one or more of the identified replacement properties within 180 days of the date the relinquished property is sold. At the time of the purchase of the replacement property, the funds held by the qualified intermediary are used to purchase the replacement property.
Currently there is no limitation on the amount of taxable gain which can be deferred. For general illustration purposes only, a taxpayer that purchased an apartment building on Goethe Street in Chicago in 1979 for $100,000 and sells it for $4.1 million in 2021 could defer the entire gain of $4 million. The current Democratic administration has expressed its opinion that the amount of the gain which can be deferred should have a limitation of $500,000 per taxpayer.
On August 11, 2021, the United States Senate concluded the first step in the 2022 budget reconciliation process. A resolution passed by the Senate on a voice vote recommended that no changes be made to Section 1031. Although the expression by the Senate of a position of no change to Section 1031 is favorable, the 2022 budget reconciliation still needs to run the gauntlet of the United States House of Representatives and, accordingly, the health of Section 1031 needs to be monitored.
In the event you are the owner or a part owner of real estate owned for productive purposes in a business or trade or as an investment which has appreciated in value and are considering selling it, please consider contacting a Chuhak & Tecson Real Estate attorney to discuss opportunities that may be available to defer a tax on the gain.
This Chuhak & Tecson, P.C. communication is intended only to provide information regarding developments in the law and information of general interest. It is not intended to constitute advice regarding legal problems and should not be relied upon as such.