1031 Exchanges in Massachusetts

6 Replies

@Erasmo Alvarenga , thanks for the broad latitude here.  Let me start by saying "You don't want, or need, to know it all."  I'd advise you start with the practical basics rather than the technical ones, then work with someone who does know the technical details and apply them to your specific situation.  

The 1031 Law (speaking practically)
These rules apply to any exchange:

  • Must complete within 180 calendar days of the sale of your relinquished property
  • Must identify up to 3 replacement properties within 45 days
  • Only complete tax deferral if the final value of the replacement property is worth at least as much as your net sale price for the relinquished property.
  • If you trade down in value, the difference is taxable
  • Keep the same taxpayer across properties
  • You can exchange into (and out of) any state and many US territories
  • There are lots of different assets that qualify as valid replacement targets in a 1031, so think broadly

I'll stop there and see if you have additional questions or want to expand on any point. 

I would suggest looking at videos and Youtube content to start learning about this Exchange, some benefits as well as negatives, that could come up. It would be very challenging to say that a forum post would teach you everything there is to learn about the process. 

@Erasmo Alvarenga , The qualified intermediary who is required by law is the most important member of your 1031 team.  But a good 1031 experienced agent like @Lien Vuong , will also be invaluable to you getting started, knowing a lot of answers, and knowing when to have you ask other questions.  

As my old granpappy would have said - 1031 exchanges are going 2 miles deep in a two foot wide creek.  There's a lot you just have to process with the experienced folks what can help you process.

@Sean Ross thanks for the great, concise answer!  I'd love to connect for your help down the road.  Please help me with my current situation...I have been looking and looking but can't find a definitive answer...

Looking at the IRS limits, below what AGI should you NOT do a 1031 exchange? Does the price of the home matter? Does the ownership period matter, assuming it is a year or longer? I'm having a tough time finding an answer to this question! If my HoH AGI is less than $53,600 should I simply sell the property without utilizing a 1031?  Based on what I can find from the IRS, LTCG are taxed based on the following chart...

CAPITAL GAINS RATESINGLE FILERS (TAXABLE INCOME)MARRIED, FILING JOINTLYHEAD OF HOUSEHOLDMARRIED, FILING SEPARATELY
0%$0 - $40,000$0 - $80,000$0 - $53,600$0 - $40,000
15%$40,001 - $441,450$80,001 - $496,600$53,601 - $469,050$40,001 - $248,300
20%Over $441,450Over $496,600Over $469,050Over $248,300

Data source: IRS. Numbers in the chart represent taxable income, not adjusted gross income (AGI) or gross income.


    Hi @Cj Powderhorn

    The general formula to determine the amount of taxable gain that you have is your gross sale price - routine selling expenses - adjusted cost basis in the property = taxable gain.  You can multiple the amount of taxable gain by your tax bracket/rate to determine the estimated amount of tax that you would pay.  Most Qualified Intermediary fees are between $700 and $1,200, so compare the amount of tax liability to the fee and then you can determine if it makes sense to do a 1031 Exchange or just pay the tax.  You tax advisor can drill down and get much more specific with your numbers.  

    Thank you for the kind words @Cj Powderhorn and for a good question. 

    Mind if I break this answer into two parts?

    • First, let me quickly recap how long-term capital gains affect (or interact with) your income. Suppose you're filing as a Head of Household and show $50,000 in income and then face a possible $100K in long-term gains from the sale of real estate. Does this mean you have a taxable income of $150K?  Thankfully no, but it's more complicated

      Since the gap between the 15% taxable gains threshold and your income is about $3,600, then the first $3,600 of long-term capital gains would be taxed at 0%.  The subsequent $96,400 in capital gains would be taxed at 15% (federally -- of course your state tax rates must be considered).

      The 0% rate would not apply to all $100K in gains, sadly.  
    • Second, let me remind you (and the BP world) that you must also consider depreciation recapture taxes when looking at your possible tax liability. This rate is 25% and can often be quite large.  Don't just look at the capital gains.

    Finally, I want to bring a classic microeconomic insight -- what matters is not just the taxes you might pay or avoid, but what else you could do if you didn't do a 1031 exchange.  In other words, what are the opportunity costs

    Exchanges are great for tons of reasons, but they aren't a cure all and they come with some drawbacks.  1031 rules limit what you can buy, when you can buy, how much you should spend, how you treat the replacement asset, etc.  Even if you technically can defer $5000 in taxes (after 1031 fees) by doing an exchange, maybe that isn't enough compensation to offset those limitations imposed on your choices. (Now, of course it's a different story if a 1031 exchange can defer $50,000 or $500,000 in taxes...which is again often the case)

    I hope this helps. Did I fully answer your question?