1031 Exchanges for enhanced tax savings.
Cost segregation studies and 1031 Exchanges are two of the most valuable tax strategies available to real estate owners today. MSC professionals often utilize a strategy that combines both tools. Working with MSC, property owners may reduce operating expenses and defer capital gain taxes.
Section 1031 at a Glance
As amended under the Tax Cuts and Jobs Act (TCJA), Section 1031(a) states the general rule that no gain or loss is recognized on the exchange of real property held for productive use in a trade or business or for investment.
Property classified as real property for Section 1031:
- Classified as such under local or state law where the property is located subject to certain restrictions
- Specifically listed as real property in the Final Regulations
- Considered real property based on all the facts and circumstances under factors in the Final Treasury Regulations
What doesn’t qualify as exchangeable property under Section 1031?
Most 5 and 7 year personal property does not qualify. Owners must calculate the gain on this type of property separately and pay tax. Since this property is no longer part of the 1031 exchange, there is no need to look into the purchased asset to see if there is similar property to in which to exchange.
How do you offset this taxable gain?
A portion of the new cash and debt spent for the replacement property qualifies for Bonus Depreciation. A cost segregation study of the additional “boot” that has been paid should be conducted to determine the amount. MSC has a proven strategy for this type of scenario.
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