A 1031 exchange is a tax strategy that allows you to defer paying capital gains taxes when you sell an investment property, as long as you reinvest the proceeds into a new, like-kind property. This means you can sell one property and buy another similar one without immediately paying taxes on any gains from the sale.
These like-kind exchanges are covered under Section 1031 of the Internal Revenue Code (hence the name "1031 Exchanges") and apply to federal capital gains taxes. However, each state has their own tax code, and may have different rules for real estate tax withholdings, the ability to complete a tax-deferred sale, or the rules around like-kind exchanges. Below we'll dive deep into these state-level specifics.
The Combined Rate accounts for Federal, State, and Local tax rate on capital gains income, the 3.8 percent Surtax on capital gains and the marginal effect of Pease Limitations (which results in a tax rate increase of 1.18 percent).
Beginning June 1, 2017, taxpayers cannot claim the personal exemption if their adjusted gross income exceeds $250,000, or $500,000 for those filing jointly.
Many states recognize and follow the federal rules for a qualifying 1031 exchange. We recommending reviewing these resources for 1031 exchanges at the federal level - learn about the rules for an exchange, the key deadlines you must meet, and why you are required to work with a Qualified Intermediary like Deferred.com.
In most cases, the rules for a 1031 exchange are no different for Illinois relative to the rest of the country. However, Illinois does have some special considerations when it comes to Illinois land trust, particularly how the interest in the land trust is treated for tax purposes. According to Rev. Rul. 92-105, a taxpayer's interest in an Illinois land trust is considered real property for the purposes of a 1031 exchange. This is significant because, under Illinois state law, a beneficiary's interest in a land trust is typically characterized as personal property.
In many other states, the distinction between real and personal property in trusts can be more straightforward, but Illinois's specific treatment of land trusts allows for a beneficial interpretation under section 1031 of the Internal Revenue Code. This means that if you're using an Illinois land trust to facilitate a 1031 exchange, the beneficiary's interest in the trust can be exchanged for other real property without recognition of gain or loss, provided all other requirements of section 1031 are met.
This ruling is particularly advantageous for investors looking to leverage the flexibility and privacy benefits of a land trust while still participating in the tax-deferral benefits of a 1031 exchange. It's a unique feature of Illinois real estate law that can be a powerful tool in the right circumstances.
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