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Commercial tax deferment strategies

On Behalf of | Jan 7, 2020 | Real Estate Law

Pennsylvania residents and business people with significant commercial property holdings understandably want to strategically identify the best path to maximizing their return from and minimizing unnecessary tax burdens on their investments. For many years, the 1031 exchange offered people an enticing opportunity to avoid capital gains taxes when they sold or exchanged select property. The rules for these exchanges changed with the enactment of the new tax code.

According to the Internal Revenue Service, the previous tax code allowed individuals to benefit from 1031 exchanges for real property, intangible property and personal property items. The Tax Cuts and Jobs Act restricts the use of 1031 exchanges to real property only, except in the case of any exchange or disposal initiated prior to the new law taking effect.

Forbes explains that with the change to 1031 exchanges, the IRS introduced a new program that does have unique benefits over the 1031 exchange. Called the Qualified Opportunity Fund, this program allows for greater diversification in a portfolio and delivers far greater flexibility. Transactions may be facilitated via direct wire transfer and without any funds tracing. There is no requirement for an intermediary with a transaction under the Qualified Opportunity Fund as there is with a 1031 exchange.

There may be times when the 1031 exchange offers benefits over the QOF, however. These include situations in which the individual dies. With a QOF, the heir or estate may be required to pay any deferred taxes either immediately or by 2026. With a 1031 exchange, the estate may sell any asset involved and avoid tax liability up to the stated exception level.

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