Nationally, there were a robust number of tax deferred exchanges in 2015 and continued momentum is expected for 2016. This momentum is sparked by an improving commercial real estate market coupled with higher tax rates. Section 1031 of the tax code allows investors to sell a property, defer the taxes that would normally be due, and reinvest the proceeds into a replacement investment. This popular investment tool greatly enhances purchasing power and encourages taxpayers to continually invest in real estate. As we start this new year, here are some of the issues that will affect real estate and/or 1031 tax deferred exchanges.
FIRPTA – What the Change to FIRPTA Withholding Means for You
Under current federal law, if a foreign person sells US real property, the buyer is obligated to withhold 10% of the gross sales price and remit this to the IRS. Pursuant to the Protecting Americans from Tax Hikes Act of 2015, however, which became law on December 18, 2015 (the “PATH Act”), the required 10% withholding will increase to 15% for all closings occurring on or after February 16, 2016. There is an exception to the increase for sales of a personal residence wherein the sales price is between $300,001 and $1,000,000. Under this circumstance, the 10% withholding rate continues to apply. In summary:
- If the sales price is $300,000 or less AND the buyer will use as a personal residence – No change, exempt from withholding.
- For all other real estate sales the buyer must withhold 15% of the sales price of the real estate (10% if a personal residence with a sale price between $300,001 and $1,000,000) and send it to the IRS within 20 days after the date of transfer.
California Franchise Tax Withholding – “But I Already Paid the Taxes…”
What happens to California Franchise Tax Withholding when the Exchanger files a tax return, and pays tax, on a failed exchange while the Qualified Intermediary is still holding the exchange funds? Unfortunately, the California Franchise Tax Board (“FTB”) takes the position that the Qualified Intermediary must still withhold, notwithstanding that the taxpayer has already filed a tax return reporting the relinquished property as a taxable sale and has already paid the taxes.
1031 Tax Reform Update
The most important news for the Section 1031 community coming out of the year-end tax and budget bills was the absence of any mention of §1031 as a “pay-for” for any of the expenditures in those bills. These are expensive bills, so non-mention of §1031 is a big win for all of us that have been so engaged in the campaign to increase the level of awareness that like-kind exchanges are not a loop-hole, but rather an important economic stimulator. Our major concern has been, and continues to be, that elimination of §1031 may be cherry-picked to pay for reduced tax rates and other governmental costs.
IPX1031® – Choose the Experts
As the nationwide leader in tax deferred exchanges, IPX1031® is here to offer you the best in service, experience and security. When you choose IPX1031® as your Qualified Intermediary, you can be confident that your exchange will be handled expertly and that your funds will be safe, secure, and available when needed. IPX1031® strives to help our clients and their advisors keep current on tax and industry issues pertaining to 1031 Exchanges. For more information about us, additional resources, or our complimentary monthly webinars, visit our website at www.ipx1031.com.