ORDINARY INCOME TAX in a 1031 exchange refers to the federal income tax imposed on ordinary income, as opposed to capital gains tax. Ordinary income includes, but is not limited to, wages, salaries, bonuses, and interest income.
- Ordinary income tax is typically higher than capital gains tax.
- Ordinary income received from a 1031 exchange is not eligible for tax-deferred treatment.
- Understanding the difference between ordinary income tax and capital gains tax is important for successful 1031 exchange planning.
Let’s say an investor received a $10,000 bonus from their employer. This bonus would be taxed as ordinary income and therefore be subject to ordinary income tax.
- Carefully review all income received to determine if it is considered ordinary income or capital gains.
- Consult a tax professional for advice on classifying different types of income.
- Plan your 1031 exchange carefully to ensure that all exchanged property generates capital gains and not ordinary income.
- Work with a qualified intermediary to ensure that all exchange transactions are structured to minimize ordinary income tax.
- Consider all tax implications when planning your 1031 exchange, including the impact of ordinary income tax.
- Seek professional advice from a tax expert to ensure that your 1031 exchange is structured in the most tax-efficient manner.