2019 was another record year for 1031 Exchanges. What’s in store for 2020?

Commercial real estate is predicted to have a very good 2020, supported by resilient economic activity, low interest rates and the attractiveness of real estate investment.

With an election year, government leaders will push to keep economic activity strong. A recession or major economic disruption is unlikely. However tax reform continues to be an issue that could drive transactional activity. Republicans want technical corrections. Many of the Democratic Presidential candidates are promoting substantive changes. Elimination of FIRPTA to encourage foreign investment is a bipartisan issue that could spur real estate transactions. Also, proposals such as mark to market, a wealth tax, increases in the tax rates, and increase or complete elimination of capital gains all could impact investor behavior. An increase in ordinary income tax or capital gains tax rates would make like-kind exchanges more valuable to taxpayers, but could also make 1031 a larger potential target for tax revenue seekers.

With expected growth in investment and commercial real estate transactions, we are expecting another strong year for 1031 tax deferred exchange transactional activity.

A 1031 Exchange transaction requires planning, expertise and support. Here’s a checklist outlining key steps in your exchange.

1. Choose your 1031 Qualified Intermediary (QI)
2. Consult with your tax professionals
3. Include Cooperation Clause language in your purchase and sale agreement
4. QI prepares your exchange documents
5. Start searching for Replacement Property
6. Sign all documents QI prepares
7. Sell your Relinquished Property
8. Identify your Replacement Property
9. Enter into contract on Replacement Property
10. Contact QI once Replacement Property escrow is opened
11. Close on Replacement Property
12. QI transfers funds to complete your purchase
13. Your exchange is complete

2017 tax reform indexed the Long-Term Capital Gain rate breakpoints (whether a 15% or 20% rate) to inflation. The actual rates didn’t change for 2020, but the income brackets did adjust slightly. The breakpoints for 2020 are as follows: married filing jointly – $496,601+ and single filers – $441,451+. The capital gains brackets are based on “Taxable Income” whereas the Net Investment Income Tax thresholds are based on “Adjusted Gross Income”. For more information

If your transaction closed at the end of 2019 and you are unable to find new property to identify or purchase the property that you have identified, you may still be able to defer paying taxes on your capital gains until 2021. Since you will receive your 1031 funds back in 2020, in certain circumstances, since you did not have control/possession of your funds until 2020, the IRS may allow you to pay taxes on your 2020 tax return, which are due in 2021. This is in accordance with IRC Section 453(d) and requires your accountant to file specific tax forms. Ask your accountant if you are eligible to take advantage of this “mini” tax deferral.