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Happy 1031? IPX1031


NO TRICK: A Treat for Unsuccessful 1031 Exchanges!

A treat from the IRS? Taxpayers should not be spooked if they are unable to complete their 1031 Exchanges. A treat may exist for a calendar-year taxpayer who initiates a 1031 tax-deferred exchange during the last few months of this year only to find that the exchange fails (they are unable to purchase new replacement property within the time periods set forth in Section 1031). Since the exchange period will go into 2018, the IRS provides an option called “tax straddling” which allows most taxpayers to pay the tax that is due on their 2018 return as opposed to their 2017 return.

Of course the major benefit for a taxpayer who successfully completes a 1031 Exchange is 100% deferral of taxes and the ability to invest all of their equity into new property. Unfortunately, if a taxpayer is not able to purchase new property to successfully complete the 1031 Exchange, the taxes associated with the sale of their investment property will be due. However due to “tax straddling” the taxpayer may receive a one year tax payment deferral thanks to the coordination between IRC §453 and §1031 provided in the §1031 regulations.

How does this work? If a delayed 1031 exchange begins in the latter portion of 2017, the exchange period may run into 2018. If the exchange fails or if the taxpayer (having a bona fide intent to do an exchange) receives cash boot in 2018, the 1031 regulations treat the exchange as an installment sale allowing the taxpayer to consider that the exchange proceeds were received (and are taxable) in 2018.

However, if a taxpayer prefers to pay their taxes as soon as possible, in accordance with IRC section 453 (d) a taxpayer may “elect out” of the installment method. By electing out, the taxpayer can recognize the gain in 2017 instead of 2018. To elect out, the sale should be reported on Form 8949, Form 4797 (or both) and not on Form 6252. The election must be made by the due date, including extensions, for filing the 2017 tax return. For more information about the procedure and forms to use, see IRS Publication 537 and consult with your tax advisor. Additionally, tax straddling does not apply to all sales and any gain attributed to debt relief will have to be recognized in the year of sale.

The IRS does not penalize investors for attempting to complete a 1031 Exchange. Tax straddling provides an added incentive to taxpayers selling investment property at the end of the year. Why not attempt to complete a 1031 Exchange when a one year payment deferral is available as the back-up plan?

Please call us at IPX1031 to discuss tax straddling and other valuable tax-deferral solutions. Be sure to consult with your tax advisor before participating in a 1031 exchange.

Key Points of Corporate Tax Reform

  • Corporate tax reform looks to be a top priority for Congress and the Trump administration
  • Supporters are promoting strategies designed to boost the economy
  • Changes implemented could have an impact on the markets and investors

Discussions about corporate tax policy are usually just the ticket for those wanting to be left alone at dinner parties. As investors though, we should be aware of how potential changes in corporate tax policy can impact the value of companies of which we are shareholders. In some cases, changes in corporate taxes can have as much impact on our financial well-being as changes in personal tax rates.

Corporate tax reform stands a relatively high chance of being enacted within the current legislative year, in our view. Reforming the code is a stated priority of the Trump administration and is one of the few areas of potential reform that has at least some bipartisan support in Congress.

Changes affecting imports and exports

There are a number of proposals reportedly being evaluated, but one in particular could have notable implications for the economy, corporate earnings, currency values, and even international trade.

This proposal is sometimes called a “border tax”, but legislators more accurately refer to it by its full title of “destination-based cash flow taxation.” The title may not exactly roll off the tongue, but it denotes the basic idea of eliminating taxes on exports while disallowing the cost of imports as a deductible item for tax purposes. The goal is to incentivize shipping more goods abroad while reducing imports, presumably to encourage more domestic production.

It remains to be seen how far this proposal goes, but in its purest form, it could have significant investor implications. Based on present activity, this proposal could also generate higher tax revenue for the federal government given that the U.S. currently imports more than it exports.

Improving U.S. competitiveness by lowering taxes

The U.S. currently has the highest corporate tax rate in the developed world at 35%, according the Organization of Economic Cooperation and Development (OECD). Allowable deductions and credits lower the actual or “effective” tax rate most companies pay, but the complexity of the U.S. tax code often inadvertently entices businesses to locate operations in more favorable tax jurisdictions outside the U.S.

Benefits of repealing the “repatriation tax”

Any meaningful reform of the corporate tax code is also likely to lower or eliminate the tax on income generated outside the U.S. Currently, businesses face the full corporate tax rate (as high as 35%) on foreign income — but only when the profits are brought home to the U.S. (i.e. “repatriated”). This policy is very unusual and has the unintended consequence of encouraging companies to keep their foreign generated profits outside the U.S. As a result, it can be more appealing for large, multi-national firms to expand production overseas.

It is estimated that domestically based companies held approximately $2.5 trillion outside the U.S. as of the third quarter of 2016 according to Capital Economics, an economic research firm. It’s impossible to say how much of this money would be brought back to the U.S. if rates were cut or eliminated, but reinvesting that cash domestically could have notable economic benefits. Companies could invest in new operations, hire more workers, pay higher dividends, reduce debt, or repurchase shares.

Nothing firm yet, but an issue to watch

Specific proposals for corporate tax reform are still taking shape. The potential of these policies to have material economic or financial market implications, however, makes it an issue worth careful watching. Investors should note that changes to corporate tax laws could have a meaningful impact on their portfolios.

Linda@justsoldit.com

If you decide to invest in real estate, particularly if for residential or commercial rental use, you have essentially gone into business and there are many tax benefits to owning such a business.

First, it is important to consider all of the possible forms of ownership and the tax benefits of each. You can own a business as any of the following:

  • Sole Proprietorship
  • Partnership
  • Limited Liability Company (LLC)
  • C-Corporation
  • S-Corporation

Read more

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