Under the Internal Revenue Code 1031, a wide range of real estate can be transferred as qualifying property “property of “like-kind” Any real estate kept for productive use in a trade or industry, or for investment purposes, is eligible “property of “like-kind” Many investors are drawn to REITs because of the variety they provide, and they question if such an appealing investment qualifies for a 1031 exchange.
The bad news is that REITs do not qualify for a 1031 exchange as suitable replacement property.
The good news is that certain pooled real estate investment portfolios are eligible for a 1031 exchange.
What types of investments qualify for a 1031 exchange?
The “like-kind” requirement for real estate transactions (rental houses, farmland, office buildings, strip malls, and so forth) does not mean selling and buying the same type of property. The phrase “like-kind” describes the property’s nature or character rather than its grade or quality. As a result, practically all real estate is similar to one another.
In the case of real property like-kindness, the IRS has a fairly broad scope. “All real property is like-kind to all real property,” the regulations read. As a result, if you’re selling a real estate interest (something to which you have fee title), you can hunt for any type of real estate to replace it.
For properties to qualify for IRC 1031 tax-deferral treatment, they must pass a two-part test.
- The Exchanger must hold both the Relinquished and Replacement Properties for investment purposes or for productive use in a trade or company. The critical criteria is the Exchanger’s purpose and intent in holding the property. Other parties to the exchange’s use of the property (Relinquished Property buyer or Replacement Property seller) is unimportant.
- The Relinquished and Replacement Properties must be “like-kind” as well. The word “like-kind” alludes to the property’s nature or character, rather than its grade or quality. Because the lack of improvements is a distinction of grade or quality, unimproved real estate is deemed like-kind to improved real estate. The underlying real estate essence of both parcels is the same. 1.1031(a)-1 of the Treasury Regulations (b). In essence, all real estate in the United States is “like-kind” to all other real estate in the country.
Real property held principally for sale does not qualified for tax deferral under section 1031(a)(2) of the Internal Revenue Code.
- For a 30-year leasehold, a fee simple interest in real estate or a Tenant-in-Common interest in real estate
- Rental properties for any other type of real estate, including residential, commercial, industrial, and retail.
Can you 1031 into stocks?
Is it Possible to Do a 1031 Exchange on Stocks? Only investments that fit the IRS’s definition of “real property” are eligible for a 1031 exchange under this statute. The IRS does not regard stocks, bonds, or other types of assets to be real property.
Can a REIT be traded on an exchange?
Many REITs are registered with the Securities and Exchange Commission (SEC) and are traded on a stock exchange. These are known as publicly traded real estate investment trusts (REITs). Others may be registered with the Securities and Exchange Commission (SEC), but they are not publicly traded. Non-traded REITs are what they’re called (also known as non-exchange traded REITs). One of the most crucial contrasts between the various types of REITs is this. Before investing in a REIT, make sure you know if it’s publicly traded and how that can influence the benefits and dangers you face.
Is there an alternative to 1031 exchange?
Deferred Sales Trust vs. Deferred Sales Trust The deferred sales trust is a viable 1031 exchange option for business and real estate owners who want to sell assets while deferring capital gains tax. The 1031 exchange and the deferred sales trust are both well-known investing techniques.
Can you do a 1031 exchange with an LLC?
No, an LLC member interest or partnership interest is considered personal property and cannot be exchanged if the LLC elects to be handled as a partnership. The exchange of partnership interests is expressly prohibited by IRC Section 1031(a)(2)(D). However, a 1031 exchange can be done on the entity level by an LLC or partnership (or any other entity for that matter), which means the entire partnership relinquishes a property and the entire partnership continues together and obtains a replacement property. If some LLC members or partners want to exchange but others don’t, talk to your tax or legal counsel about the challenges involved with tactics and the timing of “drop and swap” or “swap and drop” options. A husband and wife who are the sole members of a two-member LLC may be considered a single-member disregarded LLC for Federal tax purposes in community property states only – consult your tax or legal professionals for further information. Partnerships and 1031 Exchanges is the complete article.
Can I live in my 1031 exchange property?
Property that is primarily used for personal purposes is not eligible for a 1031 exchange. There are certain exceptions to the basic rule that you should not be living in any property that you want to exchange with a 1031 transaction.
Holding onto an asset for more than 12 months if you are an individual.
If you do, you will be eligible for a CGT reduction of 50%. For example, if you sell shares that you have held for more than 12 months and make a $3,000 capital gain, you will only be charged CGT on $1,500 (not the full $3,000 gain).
On the sale of assets held for more than 12 months, SMSFs are entitled to a 33.3 percent discount (which effectivelymeans that capital gains are taxed at 10 percent ).
On assets held for more than 12 months, companies are not eligible to a CGT discount and must pay the full 26 percent or 30 percent rate on the gain.
Can Fundrise be used in a 1031 exchange?
Fundrise investments are not eligible for 1031 exchanges. A person must exchange real property for “like-kind” property under Section 1031. Section 1031 treatment does not apply to stocks or shares (such as shares of our eREITs or eFund).
Will capital gains change in 2021?
The maximum capital gains tax rate would also be increased, from 20% to 25%. This new rate will apply to any sales made on or after September 13, 2021, as well as Qualified Dividends. Any gains and losses experienced before to September 13, 2021, as well as any gains arising from transactions entered into under binding written contracts prior to September 13, 2021, will be taxed at the current rate of 20%. As a result, gains from sales made before September 13, 2021 that are reported using the installment method, even if received after September 13, 2021, will still be taxed at the 20% rate when received in the second half of 2021 and in subsequent years, as long as the sale was made before September 13, 2021 or on or after September 13, 2021 and was made pursuant to a binding written contract entered into before September 13, 2021.
What is the 121 exclusion?
A Section 121 Exclusion is an Internal Revenue Service provision that allows you to deduct up to $250,000 in gain from the sale of your primary house from your taxable income. A married couple filing a combined return can deduct up to $500,000. The name of the exclusion comes from the section of the Internal Revenue Code that allows it. To qualify for the exception, a taxpayer must own and use the home as their primary residence for two years out of the five years before selling it. Consult a financial counselor to be sure you’re obtaining all of the credits, exemptions, and deductions you’re entitled to.
What will capital gains tax be in 2021?
Long-term capital gains taxes are 0%, 15%, or 20%, and married couples filing jointly with taxable income of $80,800 or less ($40,400 for single investors) fall into the 0% band for 2021.
