1031 Exchange and your solar lease taxes are one of the first concerns that comes to mind for our clients when it comes to monetizing their solar lease. Because the proceeds of a solar lease buyout are taxed at a capital gains rate, solar landlords often see a reduced tax burden on the proceeds from their lease, compared to the taxation of their regular income.
A 1031 exchange is a way to defer all taxes on the sale of your solar lease. Section 1031 of the Internal Revenue Code allows for the deferral of capital gains on the sale of a property held for productive use in trade or business or for investment. To achieve full tax deferral, one must reinvest all of their proceeds in a “like-kind” replacement property and have the same or greater amount of debt on the replacement property. They can’t be used for residences or for second homes unless the property is used only for rental to third parties.
But wait a minute. If a 1031 exchange is about selling one property and buying another, how can you participate by selling your solar lease? The answer is by placing an easement under the solar site (which can simply mirror the existing easement, if there is one), it turns your solar lease sale into a real property sale, generally making it eligible for a 1031 exchange. Having an easement generally does not affect your ownership of the land, including your ability to sell it.
Any property held for productive use of trade or business or for investment can be exchanged for any other property held for productive use in trade or business or for investment – that’s the definition of “like-kind.”
The key benefit of a 1031 is that it preserves all of the equity in a property, but there are other benefits. The preservation of equity increases your purchasing power, allowing you to buy a more expensive property than if you had to pay capital gains tax on the sale of your property. It also allows you to diversify your investments without paying an immediate tax consequence.
When you sell the “relinquished” property and purchase the “replacement” property at a later date, it’s called a delayed exchange. The “exchange period” time limit to buy a new property is 180 calendar days or your next tax filing date, whichever is earlier.
Within 45 days of selling your relinquished property, you must identify the replacement property or properties. This 45-day timespan is called the “identification period” and it is part of the 180 day exchange period. You may identify up to three properties of like value or as many properties as necessary to total the fair market value of the property you are exchanging.
The proceeds of the sale are also government by the 1031 exchange rule. A qualified intermediary (QI) must handle the proceeds from the sale. You or your agents or anyone else cannot receive or manage proceeds or they will become taxable. Keep in mind also that all proceeds from the original sale of the relinquished property has to be reinvested in the new property. Any proceeds retained are taxable.
A second key rule in a 1031 exchange requires that the replacement property must have the same or higher level of debt than the relinquished property sold. If it falls short, the buyer will either have to put more money into the replacement property or pay taxes on the shortfall.
If you are unsure whether you should sell your solar lease, we understand. There is a lot to consider. That’s why we strongly encourage you to give us a call and discuss your solar lease. There is never a cost or obligation to speak with us. Landmark Dividend is highly experienced in ground lease transactions, and we freely share our vast knowledge of solar leases and the solar power industry with our clients.
If your site qualifies, Landmark Dividend is interested in buying your solar lease or leases for a significant cash payment. Even if we don’t complete a transaction, you’ll come away from the conversion with more information about your lease, especially its liquid market value. Call us today at 1-800-843-2024 or click here to submit your information online.
IMPORTANT TAX NOTICE: Landmark does not provide advice on any income tax, capital gains tax or other tax requirements or issues related to any transaction in which Landmark is a party or participant in any fashion. Use of any information obtained from Landmark or its affiliates or agents or referral by Landmark or its affiliates or agents is for general information only and does not represent tax advice either express or implied. You are encouraged to seek professional tax advice for tax questions and assistance. The information above is provided as a general introduction to the 1031 exchange process. Prospective sellers and buyers of real estate should always consult their attorney and tax advisor prior to entering into a 1031 transaction.