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Financial Reform Bill Contains
Requirement of Study of QI Regulation.
The Dodd-Frank Wall Street
Reform and Consumer Protection Act
("Dodd-Frank Act") signed into law on July
21, 2010 creates a Bureau of Consumer
Financial Protection (the "Bureau") within
the Federal Reserve. The Bureau will
regulate consumer financial products and
services. The Director of the Bureau
must conduct a study and propose legislation
and/or regulations to protect consumers
using QIs. The study and
recommendations must be completed within 1
year after the new law takes effect, and a
program or proposed regulations must be
implemented within 2 years after the
Director's report. Mary Foster, as a
member of the Federal Legislative Committee
of the Federation of Exchange Accommodators
(FEA), worked on the insertion of this
provision in the Dodd-Frank Act, and will
continue to work with the FEA in assisting
the Director of the Bureau to create
regulation that will promote the security of
client exchange funds. Mary is also
Past President and former Board Member of
the FEA. Click
here to see entire release from the FEA.
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New Tax
Law Changes Affecting 1031
Tax Relief,
Unemployment Insurance Reauthorization, and
Job Creation Act of 2010.
This law was enacted on
December 17, 2010, and contains the
following provisions that affect Section
1031:
Capital Gains:
The "Bush Tax Cuts" are extended for two
years through 2012. Thus, long term
capital gains will continue to be taxed at a
maximum rate of 15%. Unrecaptured
depreciation for real property will still be
taxed at 25%. The maximum tax rate for
ordinary income will remain at 35%.
The extension of the lower tax rates
continues to keep the costs of a taxable
sale lower so this should reduce the use of
Section 1031.
Bonus Depreciation:
"Bonus depreciation" is extended and
increased for investments in new
business equipment and certain real property
improvements (property with a depreciation
recovery period of 20 years or less).
The bonus depreciation is 100% for the
property placed in service after September
8, 2010 and through December 31, 2011
(through 2012 for certain longer lived
property and transportation equipment).
It is 50% for property placed in service
after December 31, 2011 and through December
31, 2012. Real property eligible for
the bonus depreciation includes new
qualified leasehold improvements (other than
structural improvements). Bonus depreciation reduces
the attractiveness of Section 1031 because
the cost of the new property can be
currently deducted against income rather
than depreciated over a period of years.
Thus, the gain from the sale of relinquished
property could be offset by the 100%
deduction of the cost of the new replacement
property. However, not all States
follow the Federal bonus depreciation rules,
so a Section 1031 exchange may be warranted
to defer State income taxes. Further,
bonus depreciation does not apply to other
real property with a recovery period in
excess of 20 years, which includes
commercial and residential real property.
It also could result in ordinary income from
depreciation recapture under I.R.C. Section
1250.
Estate Tax: The
step up in tax basis at death is restored,
at least through 2012. Thus, if a
taxpayer defers taxes through Section 1031,
then the taxpayer's heirs inheriting the
property upon the taxpayer's death will
receive a fair market value tax basis.
Medicare Contribution Tax
(Code Sec. 1411 added as part of the 2010
Healthcare Law).
Starting in 2013, "net
investment income" of individuals, estates
and trusts will be subject to an additional
3.8% tax to the extent the taxpayer's
modified adjusted gross income (MAGI)
exceeds threshold amounts. "Net
investment income" includes capital gains
from sales on investment properties and
rentals (property held in a passive
activity). Thus, it will apply to most
1031 properties held by individuals, or by
partnerships and S corporations because they
pass through the income to the individual
members or shareholders. It will not
apply to properties used in an active trade
or business or by a C corporation. The
income thresholds are $250K for married
couples and $200K for other taxpayers.
This tax should be deferred
by a 1031 exchange, although no regulations
have been issued yet. The definition
of net investment income states "to the
extent taken into account in computing
taxable income". Thus, gain deferred
under Section 1031 should not be subject to
the tax. Nor should gain from a
principal residence that is excluded under
Section 121.
e.g. Single taxpayer has MAGI
of $150,000, including $100,000 of gain from
a rental home. The tax does not apply
because the MAGI is less than $200K.
If taxpayer had MAGI of $250,000, the tax
would apply to $50,000 of the gain (the net
investment income in excess of MAGI).
If the taxpayer had MAGI of $300,000, the
tax would apply to the full $100,000 of
gain. |
