By Joe Bevevino
All of Western Pennsylvania knows that Shell Oil Company (Shell) is going to start construction of an ethane cracker plant in 2018. We can’t begin to tell you about the mechanics of a cracker plant, but what we can tell you is that some previous business owners of land parcels near the plant site received some handsome prices for their land and buildings. That’s the good news for them! The bad news is that there are serious tax consequences as the result of these generous sale prices.
However, there is a silver lining thanks to an unlikely source – the Internal Revenue Service (IRS). Believe it or not, there is a way to defer the tax consequences of significant gains on the sale of business land and buildings. Section 1031 of the IRS regulations addresses these issues. Here’s how it works:
Assume a business land owner sells their property to Shell for $2,000,000 and generates a $1,500,000 gain. The land owner, wanting to relocate his or her existing business, identifies a similar replacement property for at least $2,000,000 within 45 days and closes on the purchase of the replacement property within 180 days. In this case, Section 1031 dictates that no gain is required to be immediately recognized on the sale of the property to Shell. Instead, the seller records a deferred gain in the amount of $1,500,000 as the seller is not required to report the gain until the replacement property is sold and is not replaced.
This is a simplified example of the workings of IRS Code Section 1031, but it can be adapted, modified, and made to fit to accommodate many versions of the sale and replacement of real estate. While the gain on the sale of the land cannot be fully eliminated, it can be deferred and with proper tax planning, can possibly be minimized and allow you to keep more of your profits.
Contact us today to assist you with your questions regarding Section 1031 or other tax matters.