New York Times, How a Tax Benefit for Developers Could Backfire in the Pandemic:
Something remarkable is percolating in the commercial real estate market: Investors may end up losing millions in tax savings on gains from the sale of their properties because of the coronavirus pandemic.
Like-kind real estate exchanges, also known as 1031 exchanges (after the provision in the Internal Revenue Code), allow investors to sell a commercial property and pay no tax on the gains as long as the money from that sale is reinvested in other real estate. It could be a similar building, land or even air rights.
The provision was preserved in the overhaul of the tax code that was signed in 2017 by President Trump, who made his wealth in real estate development, while investments in other areas, like art and classic cars, were stripped of their special tax status.
To reap the benefit, real estate investors need to identify a replacement property 45 days after the sale of the original property and close on the purchase within 180 days. If the criteria are met, the investors can defer taxes on the gains from the sale of the property. The deferral can extend until the investor’s death, at which point the capital gains tax is wiped out.
If the criteria are not met, the investors face not only an enormous tax bill for the gains but additional taxes for deductions taken while they owned the building. That can amount to millions of dollars for some properties.
As lockdowns complicated closing deals, the real estate industry lobbied the Treasury Department to get extensions on those dates, and it obliged in early April. The department said that if either the 45- or 180-day deadline fell between April 1 and July 14, it would be moved to July 15 — the new deadline, too, for filing income and other federal taxes for 2019 and the first half of 2020.
But the guidance lacked clarity on some key issues underlying disaster relief for like-kind exchanges, and the extension could do more harm than good to certain sectors of the commercial real estate market, like retailing and entertainment, that are already under economic pressure.
June 10, 2020 in Coronavirus, Tax, Tax News | Permalink
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