Use of 1031 Exchanges to Increase When George Bush-Era Tax Cuts Expire
Jotham Sederstrom Oct. 9, 2012, 7:30 a.m.
Accountants and financial analysts predict an increase in the use of 1031 Exchanges as tax cuts implemented more than a decade ago by then-President George W. Bush expire at the end of the year and other additional surtaxes threaten to add a 13.8 percent burden to real estate investors.
The tax strategy, so named for Section 1031 of the Internal Revenue Code, could draw renewed interest next year depending on how legislators vote on the tax cuts, which could increase from 15 percent to 23.8 percent if elected officials in Congress allow them to expire, said Kenneth Weissenberg of EisnerAmper.
Additionally, a 3.8 percent Medicare surtax levied on certain trusts, estate and individuals will ratchet that rate up to a whopping 27.6 percent, prompting most real estate investors to opt for an exchange, which allows capital gains taxes to be deferred, analysts said.
“There’s still a willingness to pay taxes at the 15 percent rate and a lot more activity along those lines,” said Mr. Weissenberg, who advises real estate clients as the head of EisnerAmper’s real estate department. “But I think 1031 exchanges next year will be a lot more popular because the stakes are higher. The taxes are higher.”
As for whether the cuts will expire, most tax specialists agree that no matter what presidential candidate the electorate votes for next month, a temporary hiatus can be expected.
“I can’t imagine it not expiring,” said Jerry Glassman, a partner at Holtz Rubenstein Reminick LLP. “But I also expect, especially if there’s a majority in the senate as well as in the house, that they’ll work on a new tax plan and try to make it retroactive until the beginning of the year, which kind of would solve a lot of confusion, but that’s just one scenario.