PA exchange question

[joanmcq]

The TB states PA does not allow for nonrecognition of gain on like kind exchanges. Just to double check, if a PA resident does a 1031 of a PA property for a TIC share, he would pay taxes on the gain in PA, but have a higher basis for PA purposes in the TIC. And if he moves to a state that does recognize gains when he sells the TIC, he may pay gains again depending on that states rules.

[John of PA]

Tic?

Can you please define your abbreviation TIC?

[Golden Rocket]

Recognize Gain?

Joanmcz I'm afraid you are correct. The fact that PA would tax this transaction would result in a higher basis for the new property ONLY if it were sold in PA. States are notorious for not reciprocating on items other than wages.

I think as a general rule, most states assume Federal law as a baseline, and then mold their tax structure by enacting changes. So if the TIC were in some other state, like CA, then CA would assume Federal Basis unless there are differences by CA statute.

But here's an idea. For low-income taxpayers, certain states have marginal rates higher than federal. Your state, for example, could be one of them. It might be better to elect conventional treatment rather than like-kind treatment for Federal purposes. The effect on Federal taxes at capital gains rate could be as low as 5%. Then anything paid to PA you would have to take on the chin under any circumstance.

But then when the TIC was sold, the new state would begin with Federal basis. Having already paid on the gain means a higher basis in that state when the property were sold.

This won't work in the majority of cases, but it will work sometimes.

[joanmcq]

Tic

TIC = Tenant in Common interest. The newest promotion for 1031 properties. Tired of being a landlord, but not want to pay tax on all that gain? Just swap it for a TIC share of a commercial building somewhere. You get the profit/losses and we take care of everything for you!!!!!

[Golden Rocket]

Remic?

Joan, for tax purposes, does this work like a REMIC?

[joanmcq]

Not sure; the gist from what I've read seems to be the divided interest is a proper substitute for another property. Most accountant oriented discussion of these things stresses making sure the mechanics of the exchange are followed, and wondering if there will be problems with this set up in the future. How does a REMIC work in a 1031?

[John of PA]

interesting post

Interesting post GR and Joan.

[wexeter]

1031 Exchange in PA into a TIC

Yes, you are correct. PA does not recognize the 1031 exchange. PA property sold would be taxable under PA law at (I believe) 3.07% currently while the Federal taxes would be deferred under Section 1031. The basis in the like-kind replacement property would be increased for PA reporting purposes.

The TIC is not taxed as a REMIC. It is treated as a direct fractional ownership of investment real property (the investor is on recorded title) and would be reported on Schedule E like any other rental property.