Stock gains into 1031 exchange?

13 Replies

I have publicly traded stock which I'd like to sell without getting hammered on taxes.

Is there anything equivalent to a 1031 exchange which would allow me to roll-over capital gains from the stock sale directly into a real estate investment?

This MIGHT work

https://homeguides.sfgate.com/use-stocks-buy-renta...

a 1031 though clearly excludes stocks.. 

Finally, certain types of property are specifically excluded from Section 1031 treatment. Section 1031 does not apply to exchanges of:

  • Inventory or stock in trade
  • Stocks, bonds, or notes
  • Other securities or debt
  • Partnership interests
  • Certificates of trust

https://www.irs.gov/newsroom/like-kind-exchanges-under-irc-code-section-1031

@Sherri Schmonsky Great question! As @Matt K. stated this strategy is specifically excluded from 1031. But under the new TCJA (Tax Reform) there is opportunity to roll gains from stock into what is called “designated opportunity zones.” If held long enough (around 10 years) you can permanently exclude gain from stock. Makes it even better than 1031. 

There is still plenty of gray area on with these new rules and others in tax and legal have written more in depth analysis. @Ashish Acharya comes to mind. 

@Sherri Schmonsky ,  Everyones nailed it - No 1031 available for stocks.  However you may want to explore the contribution of those stocks into a tax deferred account of some sort.  

Thank you everyone! I knew 1031 was not an option, but looking for options to utilize the funds for real estate investment and decrease the tax hit. Thanks for all your insight and resources. 

Originally posted by @Account Closed :

@Sherri Schmonsky Great question! As @Matt K. stated this strategy is specifically excluded from 1031. But under the new TCJA (Tax Reform) there is opportunity to roll gains from stock into what is called “designated opportunity zones.” If held long enough (around 10 years) you can permanently exclude gain from stock. Makes it even better than 1031. 

There is still plenty of gray area on with these new rules and others in tax and legal have written more in depth analysis. @Ashish Acharya comes to mind. 

 I agree with josh.

As I research more, I have relalized that you can defer 100% taxes but only avoid 15% of the capital gain if you invest the fund in the qualified zones. 

You have to recognize 85% of the gain on the sale of stock in 7 years after you reinvest.  

However, the gain on the reinvested capital gain can be completely avoided if the reinvestment is held for 10 years.

You have 180 days to reinvest you capital gain and you can invest just a gain or half the gain or any amount. 

If this is too much hassles, do you have any no performing capital loss asset that can offset the gain ? 

You can roll stock gains into a qualified opportunity fund. I would youtube Qualified Opportunity Funds to learn more. I know for a fact there are several videos laying out the ins and outs of them. You can completely avoid gains tax all together by deferring or rolling into the fund. The nice thing is if you have a good CPA or tax advisor you don't have to roll the whole gain into the fund. Just the tax amount and enough of the gain to offset your AGI. Per 1400Z(2)(a) your rollover is deferred by lowering your AGI by the offset amount invested into the fund. Depending on your investment in the stocks...short term gain vs long term gain your tax rate would be reduced anyway. 

If you hold the opportunity fund investment for 5 years you get a 10% setup in the basis on the original amount invested and another 5% at the 7 year mark. By year 10 you get a full step up in basis to Fair Market Value at time and the gains incurred on the investment are tax free as well. 

The way to look opportunity funds is like this in my opinion...Use uncle sams tax that you would have to send them anyway to earn a return tax free. 

@Ashish Acharya The 7 year mark is assuming the person chooses to sell in 7 years. If held the full 10 years 1 day+ they would avoid the tax completely (potentially...assuming the investments grow as they should) based on the FMV and the gains would tax free as well.

Originally posted by @David Sillaman :

@Ashish Acharya The 7 year mark is assuming the person chooses to sell in 7 years. If held the full 10 years 1 day+ they would avoid the tax completely (potentially...assuming the investments grow as they should) based on the FMV and the gains would tax free as well.

 David, there are two aspects.

1) The original deferral can be only the 15%. You have to pay 85% tax on the capital gain on the original reinvestment in 7 years. This is the gain that you initially wanted to defer by investing in the QOZ funds. 

2) The capital gain from the reinvestment in the QOZ funds can be avoided if held for 10 years. 

Hope that makes sense. 

If investors are still holding their interest in the fund on Dec. 31, 2026 then, regardless of if they continue to hold the interest in the fund, they are required to recognize and pay taxes on the deferred gain on that day, subject to any increases in basis they may have received for holding the property for five years or more. If investors continue to hold the interest in the fund after Dec. 31, 2026, for at least a total of 10 years, they receive a step up in basis in the interest so their basis equals the fair market value; therefore, they are not taxed on any appreciation in their interest. In order to receive a 10 percent increase in basis, the investor must invest in a fund by 2021 and in order to receive an additional 5 percent increase in basis, the investor must make an investment in a fund by 2019.

Essentially deferring the tax completely on the initial investment and after 10 years realizing the gains on the investment as tax free at that point and moving forward. 

Keep in mind any investment in an OZ Fund has to be new construction or a "significant" renovation which is 100% of the purchase price. So for most typical 1031 exchange property this will not work.

Example: Sell stock for $500k capital gain, contribute that into a Qualified Opportunity Zone Fund (QOZ Fund) and then either build a new apartment building or buy one for $250k for example and put $250k of renovations into it.

Best bet might be new construction if you want real estate. You can also buy businesses and equipment in these zones. As mentioned before if you hold the assets in the QOZ for 10+ years you only pay tax on 85% of the initial capital gain from the stock sale in your example and you can defer it until 12/31/2026.

All appreciation and depreciation on the investment real estate if you hold it for 10+ years are tax free.

Originally posted by @David Sillaman :

@Ashish Acharya The 7 year mark is assuming the person chooses to sell in 7 years. If held the full 10 years 1 day+ they would avoid the tax completely (potentially...assuming the investments grow as they should) based on the FMV and the gains would tax free as well.

David- Anshish is correct on this. 

There are 2 pieces: 

1. The Originally deferred gain 

2. The newly developed gain in the purchased property bought in the QOZ

If you hold til 7 years your original gain receives a 15% step up in basis, and so now you will only pay tax on 85% of that original gain. This original gain NEVER goes away.

Actually, on December 31 2016 REGARDLESS of if the property is sold or not, there is a taxable event of recognition on that original gain. 

However- If you hold it til year 10 any NEW gain that has accumulaton in the property since you rolled your original gain into it.....is now 100% tax free. 

Example: 

Tomorrow you roll $100k of gain into a QOZ fund 

Year 7 your taxable gain receives a 15% step up in basis. Now your gain is $85k. 

December 31, 2016 you need to recognize and pay gain on that $85k of gain. 

Unrelated: 

The property you purchased with that $100k of initial gain is now worth $250k 

You have held it for 10 years 

You can now sell that property and that $150 of newly developed gain is 100% tax free