TO 1031 OR NOT TO 1031, THAT IS THE QUESTION...

TO 1031 OR NOT TO 1031, THAT IS THE QUESTION...

Every Certified Public Accountant was taught his first words, and they were 1031 Exchange. If you don't have to pay income taxes now and if you can defer paying those income taxes until later, do it!!! Because, and just about everyone is wrong in their thinking here, by electing a 1031 Exchange and following all of the rules in a transaction you do not have to pay the income taxes, the capital gains taxes, when selling a capital asset. What you do, and please pay attention now because this is a HUGE misconception, is reduce the basis of the acquired asset by the gain that you would have recognized if you did not elect to use a Section 1031 Exchange. So, you have a lower basis for the assets acquired and less depreciation in the future. And isn't the name of the game DEPRECIATION?

I have written many articles here about Cost Allocation Studies and Bonus Depreciation and the phase out of Bonus Depreciation because we would rather have a dollar deducted from our income today than have it deducted from our income tomorrow. It's that whole present value thing! A dollar in your hand today is worth more than a dollar in your hand tomorrow. So, we want the name of the game to be "saving income taxes" but the name of the game is really "deferring income taxes!

And, as I said, every Certified Public Accountant is taught his or her first words and those words are 1031 Exchange. If you can pay a dollar of income taxes tomorrow instead of today, then we are better off because of the PRESENT VALUE OF MONEY!

We just had a client come to us and they were going through a Section 1031 Exchange, and they were going to pay a lot of income taxes. We ended up paying less income taxes by not doing a Section 1031 Exchange, having a higher basis for the assets acquired, taking a lot more Bonus Depreciation, and saving them income taxes today that they won't have to pay until tomorrow, or a lot of tomorrows from now. The name of the game is just timing, and, in this case, the client improved the property substantially enough, that there was enough Bonus Depreciation to offset the gain hat was not deferred by a Section 1031 Exchange and I am considering the taxpayer, a Real Estate Professional, not limiting him to a loss of $25,000 per year.

Do you see how many elements go into doing this computation and how many things go into the decision of how to save paying taxes today and paying them tomorrow and tomorrow and tomorrow? Oh sure, there are ways to save our clients from ever paying income taxes on a transaction, but it isn't my job to discuss them here. All I wanted to bring to your attention today is that by using Section 1031 of the Internal Revenues Code will not always be the best way to save income taxes today. There are other computations that should be considered. You do not only have one tool in your tool belt. You have many tools in your toolbelt and you should choose them wisely or else you could be costing your client a lot of money.

I did not write an article here yesterday as my computer got sick. They took it to the computer hospital on Wednesday and returned it yesterday, Thursday. So, if you were looking for an article from me on Thursday, you won't find one. What would we do without modern technology? What would we do if we didn't have computers and cell phones and scanners and all of the modern technology that we have today. We would talk to each other. We would have conversations and we would communicate more clearly. I would much rather pick up the telephone and have a conversation with someone rather than send a text to them. You answer their questions on the spot and the conversation flows so much more smoothly!!!?