Illinois REALTOR® Magazine | April 2013
By Theresa Grimaldi Olsen
A number of tax-law changes could make 2013 a challenging year for commercial REALTORS® and others who are in upper-income tax brackets.
“These are probably the most significant tax law changes in my career,” said Chris Bird, a former IRS agent turned trainer who conducts more than 125 seminars a year for real estate and tax professionals nationwide.
Two federal mandates have created this new business environment: The American Tax Relief Act of 2012 and The Affordable Care Act of 2010 otherwise known as the federal health care bill. “Fiscal Cliff” negotiations have also added uncertainty and relief to the mix.
First, there is good news, Bird said. For commercial REALTORS®, several tax breaks that could directly affect their clients have been extended through the end of 2013. However, there is no guarantee they will continue past this year. They include:
Then, there are the disappointments - tax changes that could reduce the profit margin for commercial practitioners or upper-income earners. They include:
REALTOR® John Rutledge, CRE, an asset management consultant from Wheaton, said there are options for people to avoid paying 23.8 percent in capital gains taxes — they don’t have to sell.
Some property owners may find it more beneficial to include the property in estate planning or utilize the 1031 Exchange as an alternative, he said.
Chris Bird also said an installment sale of property could eliminate or reduce the higher capital gains taxes and the 3.8 percent Medicare surcharge. In an installment sale, the seller can accept payment over a period of years instead of all at once.
The 1031 Exchange allows owners of business and investment real estate to sell their property and buy “like kind” property without paying the capital gains tax, according to the Society of Exchange Counselors.
“The 1031 Exchange is now very much back in style,” said William L. Exeter, president and chief executive officer of Exeter 1031 Exchange Services, LLC, in San Diego. “Paying taxes is just too expensive. Activity is up. We are about halfway back to the transaction volume that we had before the recession.”
Exeter said the question on everyone’s mind is whether the 3.8 percent Medicare surcharge could be deferred through a 1031 Exchange transaction. The Department of the Treasury just ruled that investors can defer this new tax using a 1031 Exchange provided the investor acquires like-kind replacement property that is equal or greater in value than what the investor sold.
Bird said the new tax changes are complex and property owners should consult their tax preparers. “Nobody should be doing this on their own,” he said.
Theresa Grimaldi Olsen is a freelance writer based in Springfield.