1031 Exchange - USA (Property)

Thought I would share this for anyone who is interested who is thinking of investing in USA, the investor friendly 1031 Exchange.

Defer Capital Gains With a 1031 Exchange?

Here is my recent experience on this.

I recently sold 1 property in US/Atlanta which I purchased in 2011, which has seen significant capital growth.

If I did not apply the 1031 exchange I would be up for 15% capital gains tax. However if you use the 1031 exchange and use these funds to purchase investment properties etc. the capital gains tax will be deferred.

The property I sold in Atlanta became the relinquished property and with these funds I purchased 3 more properties in US in markets that are starting to rise, making my money work harder and best of all I have US$.

You still need to meet IRS criteria, critical one is to identify the replacement property/ies within 45 days. I did not find this difficult but I had some help here.

Smooth sailing with this process and the cost was $850, there can be some minor additional costs dependent on the number of properties you are closing/settling.

MTR

 

However for a resident Australian taxpayer full and final Australian CGT applies to the CGT events worldwide and if $0 US CGT has been paid there is no tax credit available. Later if and when when US tax is paid on the replacement assets the former Australian return is outside time to amend and no credit given. And CGT also applies to those assets with a different costbase to the US position. Quite complex. The "rollover" (Australian term) events under US law are disregarded here. It could lead to double taxation concerns, timing differences and also exchange rate matters of greater complexity.

The other difference relates to exchange rate. Using a simple example to illustrate.
eg Buy US property $1,000 USD and later sell it for $1,000 USD. No CGT under US law ??
But the AUD was parity when purchased and .70 when sold. So Australian CGT is a $428 profit and $73 tax payable.

And the $850 is non-deductible here.

I would imagine the ATO could easily request the 1031 data for AU taxpayers and make a project to identify undeclared income and datamatching. Its probably a IRS process already.

 

From my experience Hard to find Oz accts that understand complex US tax laws, they tend to get it wrong most of the time

Also make sure your US acct understands Oz trusts etc

Have had a few oz investors using 1031 exchange. Its been pretty damn good, wish we could do this in Australia

 

Yes. I have always wished for a broader rollover regime. Given our CGT regime and discounts it wont happen. But it does exist in a limited way.. Small business and CGT asset destruction..ie fire. But it then has time limits

 

Something else to beware of -

When you start buying your replacement property/ies you can not use any of the profit for renovation purposes

I just sold 2 properties and purchased 6 exchange properties, all required approxinately $3000 in renovation for each property. I had to use my own personal funds for this

 

@Paul@PFI do you know how the ATO treats the 1031 relinquished property when it comes to CGT? I understand you are saying CGT events worldwide trigger CGT payable in AUS.
The thing about the 1031 exchange is that the seller never receives the proceeds from closing they go to the 1031 company, in fact on the affidavit of gain it actually shows a loss on the US side as funds go to the 1031 company. Should the seller receive the funds that triggers a CGT event. Seeing its an "exchange" and not a "sale" where the seller receives funds do you know how the ATO treats this or are there any tax rulings on this that you are aware of?

@Handyandy do you know the answer to this?

 

@MTR, I am not sure its that straight forward. I really would like to see a private ruling on this or some literature from the ATO if anyone has been able to obtain it. I thought @Handyandy might know.

 

Only 15% capital gains tax in the US? And can defer paying any tax at all buy rolling the profits into the next purchase? Wow, what a dream!

Why the hell doesn't Australia follow the US on this? I thought Oz is a sheep that follows the US on everything....

 

I wish
US far more investor friendly enviroment

 

In the context of property, and an Australian resident taxpayer, if you sell or "otherwise dispose of" an asset it is a CGT event. What happens to the funds is irrelevant. Even locally the funds could go elsewhere on settlement, that doesn't mean a CGT event didn't happen.