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.
The Protecting Americans from Tax Hikes Act of 2015, better known as the “PATH Act,” made permanent a multitude of “extenders,” previously temporary tax provisions that had been extended from year to year. Among those now permanent “extensions” of note to the real estate community are:
• 15 year straight line depreciation for qualified leasehold improvement, qualified restaurant buildings and improvements, and qualified retail improvements.
• Increased expensing limitations and treatment of certain real property as Section 179 property, extending the small business expensing limitation of $500,000 and phase-out amount of $2 million.
• 5 year period for which an S corporation must hold its assets following conversion from a C corporation to avoid the tax on build-in gains.
• 50% bonus depreciation for property placed in service during 2015, 2016 and 2017, then a phase down to 40% in 2018 and 30% in 2019.
Additional non-extender provisions of which tax practitioners should be mindful include:
• Increase in FIRPTA withholding from 10% to 15%, except for personal residences in which the amount realized is $1 million or less.
• Multiple provisions related to REITs and FIRPTA
• ITINs issued prior to 2013 must be renewed between 2017 and 2020, on a staggered basis. Additionally, an ITIN will expire if an individual fails to file a tax return for three consecutive years.
Pro §1031 Article from Congressman Stivers
U.S. Representative Steve Stivers, (R-Ohio) recently published an article in The Hill on Jan 6, 2015 in which he called for tax reform that retains like-kind exchanges. In “Raising Taxes on Property Exchanges Would Kill Jobs, Raise Rents, Deepen Debts,” the Congressman admonished his colleagues, “Tax reformers from both parties want to reduce rates while closing loopholes and broadening the base. But repealing like-kind exchanges is the wrong way to try to do the right thing.” Drawing from his own experience, Rep. Stivers further commented, “Having worked to promote economic development and job creation in the private sector, I know firsthand the incentive this provides to encourage businesses – particularly small businesses – to reinvest in their businesses and grow… This longstanding, commonsense tax incentive encourages investors to seek out new opportunities without going deep into debt.”________________________________________
The Future of Tax Reform
The chairs of the tax writing committees, along with multiple committee members, continue to call for tax reform, as do the Republican candidates for president. Rep. Paul Ryan, who left his position as chair of the House Ways & Means Committee to become Speaker of the House, and Rep. Kevin Brady, his successor chairman, are both committed to substantive tax reform.
Conventional wisdom is that broad-based tax reform is a goal for 2017, yet Sen. Schumer and Rep. Brady have both signaled a desire to tackle international tax reform this year. BNA reported that Rep. Brady told reporters on Jan 14, “There’s no guarantee an international tax proposal can or will make it to the president’s desk, but it’s very important that we advance it as far as we can in this year.” It is also clear that members of the tax writing committees are continuing to work on a comprehensive tax reform package, even if that package is not unveiled until 2017. Ways & Means Committee member Rep. Devin Nunes (R-CA) released his own tax reform package on Jan 13, 2016.
Our success in keeping §1031 out of the 2015 tax, budget and highway bills indicates that our efforts at education and myth busting are working, but §1031 is far from being out of the woods. We are highly engaged in the tax reform issue. IPX1031® is a member of the Federation of Exchange Accommodators (“FEA”), the industry association for Qualified Intermediaries. Our General Counsel, Suzanne Goldstein Baker, is a member of the FEA Board of Directors, and serves as co-chair of its Government Affairs Committee. IPX1031 President, John Wunderlich, also serves on the FEA’s Government Affairs Committee. Additionally, our parent company, Fidelity National Financial, Inc., is a member of the Real Estate Roundtable (“RER”), and Suzanne Goldstein Baker also serves on the RER Tax Policy Advisory Committee.
California Franchise Tax
Unrelated to federal tax reform, taxpayers and advisors dealing with exchanges of California property should be aware that the California Franchise Tax Board has taken the position that there is no authority by which a Qualified Intermediary is relieved of the duty to withhold under the following circumstances:
1. an exchange spans two calendar years,
2. boot is received in the second year,
3. the taxpayer reports the failed exchange as a taxable sale in Calendar Year 1, recognizes all gain and pays all taxes due when the Year 1 tax return is filed, and
4. the exchange terminates after the tax return has been filed.
The FTB’s position is that prepayment of the full tax liability is not a statutory exemption from withholding. Therefore the Qualified Intermediary cannot rely upon a letter from the taxpayer’s CPA, or any other evidence, certifying that the taxes have been paid. The FTB’s position is that the Qualified Intermediary must withhold, using the Year 1 Form 593, and then the taxpayer will be required to file an amended California tax return, reporting the subsequent withholding, and then wait for a refund of the overpayment.