Property values have been steadily increasing over the last few years. This fact coupled with higher tax rates and new taxes have led to a sharp increase in the number of Internal Revenue Code Section 1031 Tax Deferred Exchanges initiated beginning last fall. Our industry has observed a resurgence in Taxpayers in all categories of property ownership, industrial, commercial, retail, agricultural, residential rental and investment taking advantage of the reinvestment potential of deferring capital gains and recapture tax by participating in Sec. 1031 Exchanges.
If during the current tax year a taxpayer transferred property to another party in a like-kind exchange, the taxpayer must file Form 8824 with their tax return for that year. Taxpayers must also file Form 8824 for the 2 years following the year of a related party exchange (see the IRS instructions for line 7 of the form). We can provide exchangers with the IRS instructions and the form, as well as pertinent information needed to complete the submission. Taxpayers are required to report their Exchange on the tax return for the tax year in which the exchange begins.
For taxpayers whose exchange transaction started in the fall, after mid-October, the normal 180-day deadline to complete an exchange is foreshortened to the due date of their tax return. If the Replacement Property closing will occur after the due date of the taxpayer's return (April 15, for most calendar year personal, partnership, estate or trust tax returns and March 15 [March 17, 2014] for filing a corporation or S-corporation return), the taxpayer will need to file for an extension using Form 4868 in order to reflect the entire exchange on the appropriate tax return. Though the extension is optional, actual filing is mandatory in order to take advantage of the extension to the full 180 days potentially available. Failure to timely file the extension when required may result in a failed Exchange…Taxpayers should consult their tax advisor!
If the strong start seen in the Industry this Spring is any indication, 2014 should be another busy year for 1031 Exchanges. As taxpayers seek creative ways to preserve their equity and attain their property investment goals, a knowledgeable and experienced Exchange facilitator becomes increasingly critical. Although the Qualified Intermediary's primary task is to facilitate the IRS mandated aspects of the qualified property sale or purchase underlying the like kind exchange transaction, much of the role of a knowledgeable and experienced Intermediary is to serve as a resource for the professionals structuring the exchange transaction on behalf of the taxpayer.
Discussions with the legal and tax advisors, brokers and lenders comprising the client's Exchange Team will take place to formulate the best strategy for meeting the taxpayer's tax savings maximization and investment goals. Taxpayers with the help of Statewide Title Exchange Corporation as part of their Exchange Team are better prepared to make informed decisions as to whether or when to utilize the Internal Revenue Code Section 1031 Exchange Regulation safe harbors as a strategy to defer paying taxes when selling qualified real or personal property assets. Sales of land and buildings, leasehold and tenant-in-common interests, business and construction equipment, oil and gas royalties and patents, all may qualify as long as replaced with property deemed like-kind by the IRS.