There have been some interesting changes and challenges with the current 1031 tax deferred exchange laws and regulations. The capital gains tax is currently at only 15%, but that is set to "sunset" at the end of the year. It will most probably go up to at least 20%. If you're considering selling and want to buy another investment property somewhere, now might be a good time for you to take advantage of the 1031 exchange. Here is some information you might find interesting from my friend, Mary Lou Schwab of Bankers Escrow - a great 1031 exchange qualified intermediary company.
1031 CHALLENGES IN A CHANGING ECONOMY!
Decisions — Decisions! It is more challenging in this economy to understand all the tax, lending and insurance issues which affect a successful 1031 Exchange transaction. Tax changes are forth coming. Lenders are requiring more equity & also limiting the number of investor loans. Insurance is a challenge as well. An exchanger needs to review many factors to determine if they can successfully complete a 1031 exchange.
TAX REGULATORY PROPOSALS:
Capital gains tax rates have a high probability of increasing in 2011. Currently, the 2010 long term capital gains tax rate is 15% for married tax payers that have income exceeding $66,800. Publicly, the Obama administration has recommended an increase in long term capital gain tax rate to 20% and some members of Congress support a higher rate.
Watch for changes in State Tax regulations for 1031 exchange recognition and tax rates. As State legislators try to increase tax revenues for their enormous budget deficits, both 1031 Exchange recognition & capital gains tax rates are in jeopardy. Currently, a proposed California Assembly Bill 2640 would eliminate a company’s ability to use 1031 exchange deferred tax treatment. In Rhode Island, favorable capital gain treatment is no longer recognized for 1031 exchanges. In Minnesota, the majority of 1031 exchanges are audited by state auditors. Many exchanges are being excluded from tax deferral treatment due to their ultra conservative interpretation of 1031 exchange regulations.
Depreciation recapture has a current rate cap of 25% which Congress could change to match the current maximum individual tax rate of 35%. Changing the cap rate on depreciation recapture would be a simple maneuver. Then the Legislators could claim they have not raised taxes for individual taxpayers.
Commercial banks & mortgage lenders are creating incredible challenges for investors who need loans. Lower appraised values of property, higher equity requirements by banks & the FDIC requirements for limiting the amount of bank lending that is available for real estate has created a shortage of lending options. Additionally, FNMA regulations limit lending for investors if they have 3 or more investment property loans & their own principle residence loan. Double check the availability of lending prior to initiating your 1031 exchange transaction. Lastly, begin your lending request early in the 1031 exchange process as the loan processors, underwriters, SBA & bank officers are requesting more information & are not timely in responding to contract closing dates.
For any new insurance coverage a credit check is generally requested & will be utilized to calculate your premium rate. Utilize your insurance broker to compare coverage & premiums to determine the most economic alternative. By shopping for your insurance needs early in your replacement 1031 property purchase, you have the opportunity to minimize your premiums.
Prior to any contemplated 1031 exchange transaction check with your direct tax advisor regarding your own tax situation. If you have a passive loss carry forward or a long term capital loss it could be beneficial for you to do an outright sale; a partial 1031 exchange or an installment sale for tax purposes. Additionally, if you have converted a rental property into your primary residence in the last 5 years you may receive only a prorated exclusion based upon how long the property was used as a primary residence.
Planning is key to your successful 1031 exchange. Utilize Bankers Escrow Corp. for your qualified intermediary needs.
And now for your Coffee Break..."All the art of living lies in a fine mingling of letting go and holding on." ~ Henry Ellis
Make it a great day.....
Allison Simson, Owner/Broker
Lynn Sustad, Buyer Specialist
Kelie Gray, Buyer Specialist
Anna Willis, Buyer Specialist
Kristi Warner, Client Care Manager
Margaret Bowes, Transaction Coordinator