Still no 1031 in PA ?

Question

What are the strategies?

David Krulac · Answer

@Bill C.  @David Smith  I agree with @Dave Foster.  If you are going to sell the acquired property in a year or two, there is reduced benefits to doing a 1031.  I would add, as being somebody who has been doing 1031 since 1986, its not as easy as it looks, there are hoops to jump through including, but not limited to the required 45 & 180 day time frames, and most of all, if you want to see how fast 45 days can fly by, start a 1031.

When you do a 1031, presumably you have done a good to great deal with the relinquished property, a home run or at least extra bases.  So using that high standard, you want to find a really good deal on the acquired property also.  In the current economy with low interest rates, low inventory and high demand, getting that great deal is just that must harder.  We put in an offer today on a property, 3 days on the market and there are already 20 other offers!  After busting your hump on getting a great deal on the relinquished property, its hard to accept a lesser deal on the acquired property.

The point of doing a 1031 is to reinvest all of your gains without having to pay the capital gains tax  I said this in my Bigger Pockets Podcast #82, that Capital Gains tax is largely unfair and is a tax on inflation, which you and I have no control over.  Probably 99% of the public doesn't understand that principle.  Capital Gains tax should be indexed for inflation to represent a true tax on Capital Gains.  Or better yet, there are countries that do not tax capital gains at all;  as this stimulates the economy and encourages investment.  But the best use of the 1031 exchange is to be a serial exchanger, then when you pass away, your heirs get the "Stepped up Basis", which Brandon and I also discusses on BP Podcast #82. This process means you delay, delay and delay, then your heirs don't pay the tax at all.  The deferred Capital Gain tax is wiped out by the Stepped Up Basis. and that's a good thing, except for the dying part.

Dave Foster · Answer

@Bill C.,   My opinion but I think it's short sighted using bad data.  For the last 95 years cap gains have fluctuated between 13 and 35%. If you take out the oil crisis and recession in the mid 70s it's stayed between 15 - 25% pretty consistently. It's fluctuated up and down.  And it's not at historic lows now (for several periods).  So I don't know how anyone can accurately predict what cap gains will do.  But we can all guess and especially in the short term.  But does a short term increase in cap gains mean that you get hurt?

Just because cap gains go up in the short term doesn't mean I have to sell.  And the real power of avoiding cap gains through a 1031 is not the immediate relief.  The power is the deferment over years which allows you to compound that tax in your pocket many times over.

Same as the deferral in a retirement account.  If you play the short game.  just pay.  Sometimes that's the right thing to do.  But If you want the long game then a day without paying tax is a day and a half of money in your pocket.

Steve Babiak · Answer

In PA you still get to defer the federal capital gains taxes via 1031 exchange, and as @David Krulac mentioned the PA state income tax rate is not crazy high - so the 1031 exchange is still a viable strategy if your gains are significant.

You will need to also pay attention with bookkeeping due to having paid PA capital gains vs having deferred federal capital gains - not too painful as long as you are aware of this from the outset.

Kyle McCorkel · Answer

Just did my first 3 1031 exchanges last year in PA! No big deal, saved (deferred) a ton on federal taxes and ended up owing a couple thousand in PA taxes.

I’m a big believer in not letting the tax tail wag the dog. In my case it was a great time to sell some dogs and buy some cash cows. The tax benefits were just icing on the cake.

Sucks though that now my CPA needs to keep 2 sets of books, one for PA, one for federal.

Mark J. · Answer

@Steve Babiak @Sean Ross @Dave Foster

Awesome info here- thanks guys!  Looks like I have some homework to do.

I'm not sure I'll be able to use it, but hope to do one at some point as it seems like a powerful tool.

David Krulac · Answer

@David Smith  To the contrary, 1031 is a viable method within PA, as the low state tax payment is not a deterrent to the larger Federal Tax deferrals of maybe 20%.  We have done many 1031 exchanges going back decades. The cost of the intermedent is usually in the range of $1,000 to $2,000, so to be viable the Federal Tax Savings has to be more than that costs.

Judy Paley · Answer

@Mark J.

I used The 1031 Corp in PA.  Grace was very helpful as this was our first 1031 exchange and we dealing with several variables e.g., NJ to PA, single member LLCs,

Bill C. · Answer

@David Smith

Hello all,

I’m considering a 1031 in PA.

Our CPA recently advised us to just pay the taxes. His reasoning was:

1. Capital gains likely to go up so might as well lock in current rates

2. Depreciation calendar resets

What does everyone think about this?

I know your strategy will influence this decision was just curious what others’ approach is.

Thanks!

Bill Exeter · Answer

Hi @David Smith,

The 1031 Exchange is still a very viable tax-deferred strategy as mentioned above.  You would still defer the Federal capital gain and depreciation recapture taxes, and you avoid the Medicare Surcharge or Obamacare tax.

Dave Foster · Answer

@Mark J., Gov. Wolfe tried last time around in his early terms.  No headway.  As you can imagine now - removing a tax that is in place is way harder than adding a new tax for some reason :)

But the 1031 is still a very important strategy for PA investors.  One thing that everyone has forgotten here is that actual tax on gain can be miniscule compared to the cost of federal depreciation recapture.  Generally at 25%, depreciation recapture is what will kill you.  And PA investors have a tendency of holding properties longer.  Hence more depreciation to recapture.  And this is where the 1031 exchange comes in.  It still defers all federal tax and depreciation recapture.  PA is a hot bed of 1031s for us.

Still no 1031 in PA ?

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