Capital Gains and Losses
Questions and comments about tax rules for buying and selling stocks, mutual funds, real estate and other assets.
If 1031 exchange law is repealed in the future, what happens to capital gain previously deferred?
Posted by: starfish11040, November 12, 2017 12:40AM
I realize that there is no definitive answer to this question, but I would be interested in opinions because I have to make a very important decision.

I own a 10 unit apartment building that has been in the family for 57 years. I have owned and managed it for 16 years. In those 16 years it has appreciated in value by about 500%. So obviously there would be a substantial capital gain upon sale.

I plan on selling it and exchanging into a tenant-in-common property, which is permissible under the 1031 law. Thus the taxes on that substantial capital gain would be deferred. My question is this: If at some point in the future (near or distant) 1031 is repealed, and sometime after that my tenant-in-common property is sold (I would have no control over that sale's timing), would I owe tax only on the capital gain from the sale of the tenant-in-common property, or would I also owe tax on the capital gain from the sale of the first property? Remember, the sale of the first property occurred BEFORE the repeal of 1031.

It seems to me that if I would be liable for the tax on the sale of the first property, which occurred when 1031 was still the law, that would be making the repeal RETROACTIVE. Seems unfair because if the 1031 law currently did not exist, or somehow my crystal ball told me that there would be a future repeal, I would reluctantly hold on to my current property.

Again, I know this is guess work. But in your opinion how do you think a repeal would work in this respect?

Re: If 1031 exchange law is repealed in the future, what happens to capital gain previously deferred?
Posted by: Clemrick, November 12, 2017 09:54PM
If any changes are made to section 1031, the changes will probably affect transactions going forward.

I'm confused by your question.

You say you understand the gain on your first building is deferred, but then your question asks if you really have to pay taxes on the gain when the second building is sold.

Whether or not 1031 is changed, you will have to deal with the gain and depreciation recapture for the first building when the second building is sold. That gain does not disappear, unless you take a big loss on the second building.

Re: If 1031 exchange law is repealed in the future, what happens to capital gain previously deferred?
Posted by: starfish11040, November 12, 2017 10:57PM
Clemrick,
Sorry for the confusion. If or when the second property is sold, the proceeds would again be rolled over in a 1031 exchange. So the deferred gain from the first sale would again be deferred and the gain (if any) from the second sale would be deferred. So I'm looking ahead fairly long term - that's why I'm hoping that 1031 remains unchanged for a while.

Thanks for your opinion. I hope you're right that a 1031 change would probably affect gains only going forward because the bulk of my gains would be from the first sale. So if 1031 is repealed or limited while I'm still holding the second property, then when that property is sold I would owe tax on only the gain (if any) on the second property, assuming your guess turns out to be correct.



Re: If 1031 exchange law is repealed in the future, what happens to capital gain previously deferred?
Posted by: Drewremedy, November 16, 2017 01:16AM
IVe done a few 1031s as have some of my smarter tax lawyer /CPA pals .....sometimes the exit options are very troublesome ....and people having a phobia against taxes get trapped in deals that don't make sense downstream

I'd be very nervous about any TIC deed deals where I did not have solid control of the big picture and especially a deal put together by some packager...yes I know they are legal.

Might be that future 1031s come under different light...but I've not read such .

Keep in mind you get a hefty free step up in basis
..for your heirs at end game if all else fails .

Re: If 1031 exchange law is repealed in the future, what happens to capital gain previously deferred?
Posted by: 47Percent, November 17, 2017 08:03PM


This Tax Bill is being done in such a hurry and zeal, mostly behind closed doors just by a handful of people, I expect a lot of unintended consequences, loose threads, situations subject to interpretations, and even inconsistent treatments due to contradictory language.

It is quite possible this would be one of them.

It will be even more of an issue during reconciliation where even a smaller number of folks would be arguing over provisions that they haven't looked into in detail and "negotiating and compromising" over due to time pressure.


If this does get signed, 2018 promises to be a very interesting year.




Re: If 1031 exchange law is repealed in the future, what happens to capital gain previously deferred?
Posted by: triad, November 24, 2017 03:17PM
47percent, I don't trust them not to sign anything, so I am changing my year end habit and itemizing. Normally, I double up on payments in even numbered years, but if SALT and property taxes go away, I will stop altogether as my charity giving alone won't be high enough to.

As a reminder, they can pass new laws in June of 2018 and make them retroactive to January 1st.

Meanwhile, I suspect no exyenders for 2017.



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