Recently, the United States Congress has considered many different strategies for cutting taxes as well as ways to recover lost revenue from those cuts. One of the possible measures to get the boot may be the 1031 exchange.
Section 1031 of the tax code was created in 1921 and was primarily used by neighboring farmers who would exchange properties. A 1031 exchange allows sellers of real estate and other personal assets to waive capital gains taxes by reinvesting the revenue from the sale into other real estate or like-kind assets (ex. – sell a commercial building and use the proceeds to buy another while avoiding capital gains tax). For further information on this tax saving strategy, see this article on 1031 Exchanges Explained.
Although this may be on the chopping block, there are lesser known programs in place that may be able to help sellers defer capital gains taxes as well. One of these programs is the proprietary program based on Section 453. This program will allow individuals to defer taxes like 1031 but does not include constraints on time limits, loan to value ratios, or property type.
There are a few ways a potential seller could benefit from Section 453.
- Unlike the 1031, there are no time constraints in Section 453. This means that once selling your property, you are not under a time crunch to find your next legacy ranch.
- Like the 1031, the proprietary program of Section 453 allows one to defer capital gains.
- If there are multiple sellers, one can choose to defer and the other can absorb the gains immediately.
- If a seller would like to sell and use the proceeds for something other than real estate, they can still defer capital gains and use for a separate purchase later-on.
Although the Section 453 tax deferral strategy has not been used as often, it can be as effective as the 1031 exchange and a powerful tool for sellers and brokers alike. It’s possible sellers may still have a way to defer capital gains for a second purchase if the 1031 tax shelter is taken away.
Articles and posts provided by Mirr Ranch Group are for informational purposes only and is NOT a substitute for the advice of an attorney or accountant, who will assess your financial situation and give you individualized guidance.