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.
Louisiana allows taxpayers to deduct federal income taxes from their state taxable income. The Combined Rate accounts for State and Local tax rates on capital gains income, the 3.8 percent Surtax on capital gains and the marginal effect of Pease Limitations.
Louisiana’s deduction for federal taxes is equal to your total federal income tax liability on your return after subtracting any non-refundable tax credits (equal to line 55 on Form 1040). These states allow some or all of federal income tax paid to be deducted from state taxable income. Standard deduction and personal exemptions are combined: $4,500 for single filers and married taxpayers filing separately; $9,000 for married taxpayers filing jointly and heads of household.
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.
Louisiana is a community property state, which means that most property acquired during a marriage is shared equally by both spouses. This includes wages, income from investments, and real estate bought while married. Some assets, however, are considered separate property, such as those acquired before marriage, received as gifts, or inherited. Couples can opt out of these community property rules by creating a matrimonial agreement, but it must be approved by a judge.
If you’re doing a 1031 exchange in Louisiana, community property laws can play a big role. To qualify for tax deferral, the IRS requires that the same taxpayer who sells the property also purchases the replacement property. For community property, this means both spouses must be involved in the exchange process, giving their consent and participating in the transaction. This ensures everything is properly handled for tax purposes and avoids potential conflicts.
Disregarded Entities
In some cases, property might be owned through a “disregarded entity,” like a single-member LLC. The IRS sees the property as being owned by the individual member for tax reasons. However, if the property is community property, both spouses’ ownership stakes need to be addressed. This can make the exchange more complex since both spouses may need to actively participate in the transaction to meet IRS requirements.
Divorce Implications for 1031 Exchanges
In the event of a divorce, Louisiana courts divide community property equally. This division can affect the ability to perform a 1031 exchange, as the property may need to be sold or transferred to one spouse. If one spouse wishes to retain the property post-divorce, they may need to buy out the other's interest. This transaction must be carefully structured to maintain eligibility for a 1031 exchange. Transfers of property between spouses or former spouses related to the cessation of marriage are generally not subject to tax under IRC Section 1041, but this does not apply to 1031 exchanges, which require careful structuring to ensure tax deferral.
Louisiana’s community property laws require thoughtful planning when handling 1031 exchanges. From ensuring both spouses are on board to navigating divorce settlements, these transactions can be intricate. Working with knowledgeable professionals, like Deferred.com, and having the right documentation can make all the difference in keeping the process smooth and IRS-compliant.
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