Page 38 - JoFA_2022

TAX

There must be a continuation of diminished. The taxpayer pays $198,000 less in tax
using a Sec. 1031 exchange versus an outright sale,
ownership such that the replacement a significant reduction from the $378,870 in tax
savings that would accrue from using a like-kind
property and the relinquished property exchange under the current rules; however, the
like-kind exchange is still the better option.
are held by the same taxpayer. Use of a like-kind exchange is appropriate in
myriad situations. For example, investors may
relinquish a single-family home in exchange for an
Taxes from like-kind exchange under apartment building, a warehouse in exchange for an
office building, or one investment property for mul-
proposed changes tiple properties. Taxpayers may seek improved cash
Realized gain on flow investments, decreased management responsi-
sale $1,490,000 bility, or simply a geographical relocation. Provided
Maximum 500,000 both the relinquished property and the replacement
deferred gain property are used in a trade or business, or used for
Long-term 505,000 39.6% $199,980 investment purposes, and provided the replacement
capital gains property is owned by the same taxpayer, Sec. 1031
gain deferral may be applied. If the Biden admin-
Depreciation 485,000 25% 121,250
recapture istration is successful in eliminating or significantly
limiting gain deferral under Sec. 1031, taxpayers
Net investment
income tax $1,490,000 3.8% 56,620 may incur substantially increased tax liabilities on
future like-kind exchanges of real property.
Total tax
liability $377,850 UNCERTAIN OUTLOOK FOR LIKE-KIND
EXCHANGES
Sec. 1031 is a decades-old tax provision that has
The chart “Total Tax Liability From Sale of Re- incentivized growth in the real estate industry
linquished Property Under Proposed Rules” shows for many years. However, Sec. 1031 may not be
the tax consequences under the proposed changes if a viable option for high-income taxpayers in the
A sells the property outright. future, given the current political climate. While
Sec. 1031 provisions remain in place, CPAs
Total tax liability from sale of should be prepared to inform and educate their
clients regarding how to take advantage of the
relinquished property under deferral of capital gain and depreciation recapture
proposed rules in the current unprecedented times of market

Realized gain on appreciation and low-interest-rate financing.
sale $1,490,000 Successful completion of a like-kind exchange is
Long-term 1,005,000 39.6% $397,980 an extremely rules-based endeavor, which, in most
capital gains cases, will require the assistance of both a CPA and
Depreciation 485,000 25% 121,250 an independent intermediary to achieve the desired
recapture outcome. ■
Net investment $1,490,000 3.8% 56,620
income tax
Total tax $575,850
liability
AICPA RESOURCE
Article
If the changes proposed under the American “Like-Kind Exchanges of Real Property: New Final
Families Plan are assumed in this example to have Regs.,” The Tax Adviser, April 2021,
been enacted, we can observe that the tax benefits tinyurl.com/3wmxkyyt
of exercising a like-kind exchange are drastically

36 | Journal of Accountancy January 2022