Real Estate Journal — 1031 Exchange — Financial Digest — March 10 - 23, 2017 — 15A
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M id A tlantic
1031 E xchange
By Jeffrey M. Lawson, CPA, MST, Stoy, Malone & Company, P.C. 1031 exchange – Installment sale treatment
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to decide in which year to rec- ognize a gain. It can be in the current year, by electing out of installment sale treatment, or in the subsequent year by not electing out of installment sale treatment. Besides the obvious time value of money consider- ations, delaying the gain can also be a good idea heading into a year, such as 2017, with expected decreases in tax rates. Another less common scenario we have seen, but can be very important to consider, is when a taxpayer has unrecaptured Section 1231 losses. As you probably know, when you sell
business assets you generally get the best of both worlds; losses are treated as ordinary and gains are treated as capi- tal. What may be overlooked is that net Section 1231 losses are subject to recapture for 5 years. In other words, if a taxpayer has a net Section 1231 loss in year one and then has a net Section 1231 gain in year 3, the year 3 Section 1231 gain is taxed as ordinary to the extent of the previous Section 1231 losses taken. So, if a taxpayer is sitting on the 5th year of a large Section 1231 loss recapture and is selling a Section 1231
asset in the last 6 months of the year the use of a QI should be considered to defer the gain and avoid this sting. There are other matters to bear in mind though. First, when recognizing gains under the installment method the tax rate that ap- plies is the tax rate for the year in which you recognize the sale, not the rate in effect in the year that the sale occurred. It is also important to note that there are depreciation recapture provisions under the install- ment sale rules. Therefore, if a taxpayer has taken accelerated depreciation on an asset which
is sold, the taxpayer is required to include the accumulated de- preciation as ordinary income, to the extent of the gain, in the year of the sale. This does not apply to what is referred to as “unrecaptured 1250” depreciation; i.e. straight-line depreciation. So, on most real property, this does not apply. However, we have recently seen a greater potential for this cur- rent income hit to apply due to bonus depreciation on tenant improvements. Jeffrey M. Lawson, CPA, MST, Stoy, Malone & Com- pany, P.C. n
sing a qualified in- termediary (“QI”) can be an effective tool to
give a proper- ty owner the choice of the year in which to recognize a gain, even if the exchange is not com- pleted. The regulations
Jeffrey Lawson
under Section 1031 are very specific as far as setting forth the requirements and duties of QIs. One such requirement is that once the replacement properties are identified within the first 45 days, the QI is required to hold onto the cash until the earlier of acquisition of replacement property, or 180-days after the sale of the relinquished property. To pro- vide property owners relief, the regulations also provide that the cash received in a subse- quent year can be treated as proceeds from an installment sale. By parking proceeds with a QI the property owner may defer the gain to the subse- quent year. This actually gives the property owner flexibility Why you should consider deferring . . . real estate investments. Note: The content of this article is not meant to be tax or legal advice. Always consult your CPA and attorney before making any investment deci- sions. For more information or f eedback, contac t Jason Salmon via email at: jason@ kpi1031.com as well as visit the Kay Properties and Invest- ments, LLC website at www. kpi1031.com. Jason Salmon is senior vice president and manag- ing director of Real Estate Analytics at Kay Properties and Investments, LLC. n IRC Section 1031, IRC Section 1033 and IRC Section 721 are complex tax codes therefore you should consult your tax or legal professional for details regarding your situation. This material is not intended as tax or legal advice. This material does not constitute an offer to sell nor a solicitation of an offer to buy any security. Such offers can be madeonlybytheconfidentialPrivatePlacementMemorandum (the “Memorandum”). Please be aware that this material can- not and does not replace the Memorandum and is qualified in its entirety by the Memorandum. This material contains information that has been obtained from sources believed to be reliable. However, Kay Properties and Investments, LLC, Colorado Financial Service Corporation and their representa- tivesdonotguaranteetheaccuracyandvalidityofthe informa- tion herein. Investors should perform their own investigations before considering any investment. There are material risks associated with investing in real estate, Delaware Statutory Trust (DST) properties and real estate securities. These include tenant vacancies, potential loss of investment principal, that past performance is not a guarantee of future results, that potential cash flow, potential returns and potential appreciation are not guaranteed in any way and that real estate is typically an illiquid investment. For an investor to qualify for any type of investment, there are both financial requirements and suitability requirements that must match specific objectives, goals and risk tolerances. Securities offered through registered representatives of ColoradoFinancialServiceCorporation,MemberFINRA/SIPC. Kay Properties and Investments, LLC and Colorado Financial Service Corporation are separate entities. OSJ Address: 304 Inverness Way S, Ste 355, Centennial, Colorado. continued from page 12A
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