•Spring 2017

LAND / Land News / Market
Utilizing Section 453, there are no 45 and 180 day periods,
there are no loan to value ratios to be concerned about and the
property owner can sell his/her property and buy any property at
any time in the future. Sounds like something Bull would blow his
horn over.
Another situation that we have found with 1031 exchanges occurs
when there are multiple owners and of course, they all want to sell
and do something different. One or more of them wants to defer
taxes utilizing another 1031 and one or more wants to take the
money and run. No problem for us. The sellers that want to take
the money and run can do so and the sellers that want to defer
taxes can do so using our Section 453 tax deferral strategies.
Since I seem to be on a roll, let’s look at some other tax deferral
opportunities that property owners can benefit from by utilizing
Section 453. First, many land owners own property that will
eventually become their retirement plan. At some point in time,
the land owner would like to sell, retire and move closer to their
grandchildren so they can spoil them in an effort to get even with
their kids for being so rotten when they were growing up.
The problem for the land owners to do so could be taxes
when they sell their property. For example, let’s say for sake
of discussion that the property has been in the family for 60+
years and almost all of the sales proceeds will be considered
to be capital gains. When taking into account the 20 percent
capital gains tax, the five to ten percent state tax in 43 states and
depreciation recapture of 25 percent, that could mean a tax rate
of roughly 30 percent on the sales proceeds and that could be
an obstacle to selling the property. Section 453 can defer those
taxes and provide the land owners when they retire with a larger
retirement plan which can be passed on to their heirs if they so
desire. Hide the grandkids!
Many land owners are not aware that they can defer their capital
gains taxes and retire using Section 453, so quite a few land
owners decide to use the stepped up basis to eliminate their
capital gains tax liability. This may be a good strategy but there
are pitfalls here as well.
For example, no one knows how long the stepped up basis will
remain as part of the tax code if Congress decides to take a look
at it. In addition, what will the market value for that property be
at that point in time. It could be double the current market value
or it could be 20 percent less. And maybe most importantly, the
stepped up basis has nothing to do with the federal estate tax if
it’s applicable to the situation and can be far more devastating to
the family than avoiding capital gains tax.
Section 453 may be a great option. The land owner can
sell now, defer taxes now, generate about a six percent
appreciation every year into your savings account on the sales
proceeds and there may be estate planning opportunities for
the families as well. Of course, each situation needs to be
looked at separately but the opportunity may be there.
Another opportunity that may present itself is when
selling a great high end residential property. A 1031 is not
appropriate for a residential property but if the sale of a
great residential property will create a large tax liability, we
may be able to defer the capital gains tax and the state tax
on the sales proceeds.
A lot of US citizens own property in a foreign country. That
property could be a hunting property in South Africa to a
ranch in Argentina to a great fishing property in Norway.
Whenever a US citizen sells a property even in a foreign
country, there is a US capital gains tax to be paid if one is
generated. We can defer those US capital gains tax. So if your
family has owned a castle in Germany on the Rhine River for
the past 400 years,we can defer the US capital gains tax on
that sale. If you own property somewhere in Middle Earth,
good luck!
Although at this moment, no one knows what Congress is
going to do, here is a sobering thought. Grover Norquist of
Americans for Tax Reform believes that it would be a mistake
to make any changes in Section 1031 but he cautions that
Congress is taking a hard look and there could be changes
made and those changes will not be positive for land owners.
One of my current concerns is that no one seems to have any
ideas what to do if Section 1031 is dramatically changed or
repealed. The big qualified intermediaries seem to have no
Plan B if this happens.
I am not one to toot my own horn but maybe Bull will toot his
for me. I hope that Congress has the good sense to leave
1031 exchanges alone but if not and even if they do, Section
453 provides much needed flexibility for the land owner.
Maybe its time you get to determine how you will sell your
property instead of having to jump through IRS hoops.
Now go sell a great property and do it your way. Keep those
taxes in your pocket for the benefit of you and your family and
not give them to some member of Congress who will send
your tax dollars to his district for a useless pork project and I
don’t mean buying some hogs. °
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