Retroactive Income Tax Changes
Retroactive tax changes could affect income tax changes. Income taxes are paid in quarterly through estimates. A retroactive change could adversely affect the amounts taxpayers paid in through withholding taxes and estimated taxes all based on prior law. In contrast, estate taxes are due nine months following death so that a retroactive change might be a tad cleaner.
Example:
You own commercial real estate and are considering a Code Section 1031 so-called “like-kind” exchange. This is where you swap or exchange an investment property for another real estate investment property and do not trigger gain recognized currently for income tax purposes. Under current law you can exchange real estate instead of selling it and avoid any current income tax costs. A repeal of section 1031 may be on the tax agenda. It has been talked about before.
So, if you plan a 1031 like kind exchange you might be careful as Congress might enact a repeal (or restriction) and might make the change retroactive to January 1, 2021. You might wish to discuss with your real estate attorney whether it is feasible to incorporate into the contract documents that the transaction will be automatically void if the law changes before the transaction is consummated.
In next blogpost, we will discuss possible Capital Gain tax changes.