Monthly Archives: June 2018

What is a 1031 Exchange?

imagesA 1031 exchange is derived from Section 1031 of the IRS tax code.  This section allows an investor who uses a properly structured 1031 exchange to sell a property, to reinvest the proceeds in a new property and to defer all capital gains taxes it would have had to pay on the sale. A 1031 exchange allows real estate investors to defer paying capital gains tax and instead build up their net worth through real estate investing. For example, let’s say you purchased a piece of property for $150,000 and then in a few years sell it for $550,000, which results in a net profit of $400,000.  You normally would be subject to pay income tax at capital gains rates on the $400,000 gain on the sale of this property. Using a 1031 exchange, you would be able to reinvest the full $550,000 of sales proceeds by purchasing a new property and paying no capital gains tax on the sale.

To be able to qualify for a 1031 exchange, the new property purchased must be like-kind property of the property that was sold. According to the IRS, “Both properties must be similar enough to qualify as like-kind.  Like-kind property is property of the same nature, character or class. Quality or grade does not matter.  Most real estate will be like-kind to other real estate. One exception for real estate is that property within the United States is not like-kind to property outside of the United States.”

There are other restrictions besides the like-kind property criteria.  A 1031 exchange can only be performed between investment properties. You can’t do a 1031 exchange using personal property.  You can also delay the exchange, which often occurs, because a third party acts as a qualified intermediary between you and the prospective buyer.  According to the tax code, you have 45 days from the date you sell the property to identify up to three potential replacement properties. The identification must be in writing, signed by you and delivered to a person involved in the exchange, such as the seller of the replacement property or the qualified intermediary.  The second deadline to meet for a 1031 exchange is that the replacement property must be acquired and the exchange completed no later than 180 days after the sale of the original property.

A 1031 exchange offers a great tax benefit but there are rules that must be followed. If you are selling real estate investment property, consult with GKG CPAs as to the options you have in executing a 1031 exchange.

Brian Reilly, Senior Accounting Manager

 

 

Withholding Surprises

39909000910_751bf52b33_bWith the passage of the Tax Cuts and Jobs Act that was enacted on December 22, 2017, tax rates and tax deductions were impacted starting January 1, 2018. Before the month of January was over, employees saw a change to their tax withholdings, with a majority seeing a little extra in their paycheck.

The law changes beginning in 2018 affect the tax returns that individuals will file in 2019. Some of the major changes impacting tax returns of employees are limiting the deduction for state and local taxes; excluding deductions for employee business expenses and miscellaneous itemized deductions; the disallowance of a deduction for personal exemptions; and an increase in the standard deduction.

Annually, the Internal Revenue Service encourages taxpayers to consider checking their tax withholdings. Reviewing the amount of taxes withheld can help taxpayers avoid having too much or too little federal income tax taken from their paychecks. Most taxpayers do not check their withholdings year to year because the amount withheld is typically sufficient to cover their annual tax liability. For 2018, this may be a mistake.

On May 16, 2018, the IRS issued an informational release (IR 2018-120) similar to prior years. However this release is warning taxpayers that with all of the changes in the new law, withholdings should be checked to avoid surprises. Each taxpayer’s tax circumstances are unique, and the IRS’s release is an urge to perform a “paycheck checkup” as soon as possible. Having too little tax withheld could result in an unexpected tax bill or penalty. If a taxpayer will lose deductions on their 2018 return, perhaps the little extra in the paycheck is going to compound their problems.

New York State labor law requires employers to notify employees of the rate of pay and the regular pay day designated by the employer. In addition, an employer must either post or notify their employees in writing of the employer’s policy regarding sick leave, vacation, personal leave, holidays and hours of work. There is no requirement at this time that employers send notices to employees about the changes in the rules governing individual income tax and their potential impact on their withholdings. Annually, the IRS and New York State simply ask that employees consider completing a new W-4. If a new or corrected withholding allowance certificate is not complete, the withholdings allowances from the prior year will continue. New York State also has their own withholding tax form (Form IT-2104) because they recognize the differences between New York State law and Federal Tax law can lead to different allowances. Not reviewing New York State withholding based on the changes to federal law may also be an error.

Since employees may be unaware of the necessity to review their withholdings, informing them of their need to check their withholdings could prevent misunderstandings should employees discover they are under-withheld when filing their 2018 tax returns. Employers may get a rash of complaints from employees blaming HR Departments of errors. It’s the employees’ tax liability, but the employer’s responsibility to withhold the tax. Early notification can help prevent misplaced complaints or withholding surprises.

Contact John Rosenberger, CPA at GKG CPA’s (jrosenberger@gkgcpa.com) to get more information on this topic or contact John to be added to GKG’s monthly electronic newsletter.