New Modifications to Capital Gains Tax Laws

If you were looking to defer capital gains on your 2021 taxes with a 1031 real estate exchange, you likely breathed a sigh of relief earlier this fall.

Long rumored to be on Congress’s list for tax credit programs to modify, the like-kind real estate exchange was not on the chopping block in tax proposals for this fiscal year. (That does not mean it will not come up again in the future, but for everyone looking at filing their taxes here in a few months, it will not affect you if you conducted any like-kind exchanges this year as you prepare your taxes.)

Recent modifications to capital gains tax rules

The last major change to the like-kind exchange was in 2017 with the Tax Cuts and Jobs Act. This limited the types of properties that were eligible for like-kind exchanges. A proposed change to the 1031 Exchange has been to limit the amount of capital gains that can be deferred; however, this has not taken effect.

Yahoo! Finance posits that a modification to the 1031 Tax Code would be “an economic blow to businesses and communities across the country.” These like-kind exchanges enable underused commercial buildings to be transformed into spaces for new businesses by providing a tax incentive to help investors in local communities.

2022 Tax Rules

Any tax-paying entity, including individuals, LLCs, corporations, trusts and partnerships are all eligible for these 1031 benefits. In these exchanges, keep in mind that capital gains are not forgiven, just deferred, and you and your tax professional must keep track of these gains for future tax purposes.

When your 1031 property is ultimately sold in the future (not as part of another 1031 exchange), the original deferred gain plus the additional capital gained since the purchase of the property is subject to taxation.

Consult your tax professional for assistance on filing your Form 8824 with your tax returns to take advantage of your like-kind exchange and its benefits. For more information on how to handle 1031 exchanges, see this Fact Sheet from the IRS.

Background of the 1031 Tax Code

Proponents of the 1031 Exchange have solid economic backing to retaining these policies. This exchange of property has been a part of the IRS Tax Code since 1921 and allows for business owners to essentially trade properties that have an equivalent value, without it showing up as a capital gain on their annual taxes. This type of exchange can be used to defer capital gains tax or simply diversify your real estate portfolio as you build your business. It’s estimated that 20 percent of commercial real estate transactions over the last decade involved a 1031 exchange.

In fact, one study by Ernst & Young found that 1031 exchanges:

  • Promote job growth
  • Contribute to the US’s GDP
  • Contributes to state and local tax revenue
  • Increases investment in the US Economy

See our resources page to determine if a 1031 exchange is right for your investment mix.

As a Qualified Intermediary, Preferred 1031, is prohibited from providing tax or legal advice.  

Taxpayer must seek such counsel from their advisors. For more information on 1031 Exchanges, please set up a free consultation with one of our advisors by contacting us at:

Tel: 866-293-1031

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