The 1033 Exchange is a tool for landowners specifically impacted by local, state and federal public works projects such as: roadways, bridges, utility projects, interstate oil and gas pipelines, flood diversions, and similar projects approved by a government entity that will or have impacted your property. If you are a landowner affected by these types of projects, we would like to introduce you to a powerful, yet little-known tool: the 1033 Exchange.
What is a 1033 Exchange?
The 1033 Exchange
This tool can not only be used in this current tax year, but it may allow you to go back up to four years and recapture tax money you’ve already paid the IRS.
Across the country, the growth of infrastructure has been breathtaking. The long-term benefits of these new roads, pipelines and transmission lines will hopefully be worth the cost. However, in nearly all of these projects, it’s the local landowner paying the biggest price today. He or she is usually helpless to prevent these projects from running right through their backyard; often across land that’s been in their family for generations.
Once the landowner has agreed to “just compensation” for the targeted property, he or she is often surprised to find the IRS knocking on the door asking for a share of these proceeds.
For more information or to get started with your 1031 Exchange, contact us!
Things to Consider:
While enduring an oftentimes painstaking negotiation process, the landowner is left with two harsh realities:
- The involuntary selling of his or her private land through eminent domain.
- Forcing the landowner to pay capital gains tax on a sale he or she never asked for or wanted.
We’re here to help. While we can’t stop the project from taking your land, we can work with you to prevent the additional loss in the form of unnecessary taxes. The 1033 Exchange can defer current taxes, and even recapture capital gains taxes paid on money received up to four years ago.
If you find yourself in this situation, you generally have a few options, which include:
- Pay the capital gains tax and use the remaining cash as you wish.
- Do a 1033 Exchange by buying a “like-kind” replacement property of equal or greater value to your proceeds. No capital gain tax is paid, but no remaining cash is leftover either.
- Do a 1033 Exchange using a DST (Delaware Statutory Trust) as your replacement property. No tax is paid, and the remaining cash is dependent on amount of leverage utilized in the DST. (If you’ve already paid taxes on money received, you would invest in the DST, file an amended tax return, and in one to three months, receive your money back from the IRS.)
In most cases, options two or three will be preferable to most people. If you do not have another piece of like-kind property to buy, or at a price you’re willing to pay, option three may be a perfect fit for you.
The IRS has allowed DSTs two big advantages when used in a 1033 Exchange:
- DSTs satisfy the “like-kind” requirement
- DSTs are allowed to use leverage resulting in landowners deferring the entire taxable gain by investing only a portion of their proceeds.
Example: You have a $1M gain on a forced sale or easement, you invest $500K into a 50% “loan- to-value” DST. The DST uses financing to purchase an additional $500K of real estate in your name. Between the $500K you invested and the $500K of financing, you now own $1M of replacement property. This defers the entire $1M of capital gains. You have now deferred every penny of tax, and you have $500K of cash in your pocket and a $500K real estate investment that’s designed to pay out a 4% to 6% annual cash flow.
*Hypothetical example for illustration purposes only. Actual results will vary.
Learn how we work to ensure a smooth transaction.
We believe that our process is what sets us apart and makes us unique. When we work with you, we truly aim to understand your goals because without a grasp on what you’d like to accomplish, we can’t navigate to the destination. We’re also proud to work with connections we already have or with the relationships you bring with you, ensuring that you feel comfortable and confident in your team. With the help of a clear vision, we can help you strive toward the horizon and achieve the growth your land and your retirement so richly deserve.