What Are The Options If Tax Reform Erases Like-kind Exchanges?

The complexity of commercial real estate transactions is an issue for anyone who may be thinking about getting into that field in Michigan to be mindful. The attraction of finding deals that deliver great return on investment can be significant, but to protecting your interests requires clear understanding of the legal landscape. Without that, a property that had the promise of being a gold mine could turn into a sinkhole.

Right now, there is more than murmuring about the fact that leaders in Washington are feeling pressure to reform the tax system. And one of the items that could be on the hit list is a provision of the Internal Revenue Code that many commercial real estate pros say would drain the fuel out of the real estate investment engine.

Not only do they argue that it would stymie such investment, but they say it could be deleterious to the overall economy.

The IRC section in question is known as 1031(a) -- aka, like-kind exchanges. This is the provision that allows someone to defer any capital gains tax obligation on a real estate deal as long as the profits are rolled over into another exchange of property within a certain amount of time.

It's no surprise that most in the industry decry the thought of scuttling 1031. But others in the field suggest there is an alternative strategy to defer the tax obligation. It's known as a Deferred Sales Trust, as outlined under IRC section 453.

Using this provision, a seller may be able to create a trust through which the sale of a highly appreciated property can be channeled. The trust can then hold and manage the proceeds in such a way that any capital gains obligation can be deferred until later.

The use of this kind of strategy may not be for everyone. It might not even be usable. That's why consulting with a skilled attorney is always recommended.

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