Hefty Tax Bills Ready To Bite R/E Investors Using So-Called "Tax-Free" 1031 Exchange Deals; Many Close To F'closure w/ Little Cash, Equity To Pay IRS

Crain's New York Business reports:

• During the real estate boom, hundreds of landowners reaped enormous gains on the sales of property and, under Rule 1031 of the U.S. Tax Code, deferred paying taxes on those profits by buying new properties of equal or greater value within 180 days.

• With the value of many of those purchases down 30% to 60% and with some targeted for foreclosure, the owners find themselves in a bind. If they are forced into a foreclosure, they would not only lose out on that transaction, but would have to pony up huge capital-gains taxes on their earlier sales. As a result, many owners who conducted 1031 exchanges during better economic times are feeling trapped in their money-losing investments.

• “Ordinarily, they would be tempted to just give the property back to the bank and take the loss,” says Lou Weller, a principal at Deloitte Tax. “But if they do that, they have to consider the taxes involved.”

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• Foreclosures aren't the only threat looming on the horizon for 1031 owners. During the market boom, debt was cheap and plentiful, and many buyers relied heavily on borrowings to fund their deals. With property values down, often below the value of the mortgages, these owners find themselves with little or no equity to cover the taxes that are due on their earlier transactions, according to Mr. Weller.

For more, see Tax deals return to bite owners (Big gains made under IRS rule now being erased by falling prices) (may require paid subscription; if no subscription, TRY HERE, then click link for the story).