Revisiting Depreciation Recapture Issues When Cashing Out (Not 1031 Exchanging)

It is that time of year again when we field many questions regarding the reporting and tax treatment of 1031 Exchanges, or lack of 1031 Exchanges, on taxpayers income tax returns. 

There seems to be many more questions this year because many taxpayers just sold and cashed out rather than 1031 Exchanging again, and now have significant income tax liabilities. 

The one income tax issue involved with rental property that is often misunderstood is depreciation recapture.  Depreciation is mandatory if you buy and hold rental property or investment property, and the depreciation is deferred into the future upon sale of the rental property as long as you are structuring a 1031 Exchange transaction.  However, the depreciation will be recaptured upon sale if you are not 1031 Exchanging.

This is the reason that we have noticed an increase in depreciation recapture questions.  So, I thought that I would link to an discussion board post on depreciation recapture that will help explain the issue in greater detail.

1031 Tax Deferred Exchange of Internet Domain Names or URLs

I was speaking with a "Domainer" today and I thought this would be a good subject for my next blog post regarding 1031 Exchanges.  He was asking whether a Domainer could 1031 Exchange Internet domain names or website URL addresses for other Internet domain names or website URL addresses. 

What Is A Domainer?

First, you are probably asking yourself right about now what in the world is a "domainer" and what do they do.  I think you will be facinated by the technical definition.  I had to look it up for this post to make sure that I got it right, although I already had the general idea about domainers and domaining. 

Essentially, a domainer is someone that buys, sells, owns, and invests in Internet domain names or URL addresses for profit.  Domainers may buy and hold domain names/website URLs for sale or they may buy and position domain names/website URLs to product cash flow through a variety of strategies. 

Can You Defer Taxes On Sale of a Domain Name?

The question asked by this specific Domainer that called me was whether he could defer the payment of his capital gain taxes that resulted from the sale of an Internet domain name or URL address by buying (reinvesting in) another Internet domain name via a tax-deferred exchange. 

The short answer is yes.  The majority of taxpayers that are aware of 1031 Exchanges generally think that the strategy only applies only to real estate.  However, you can 1031 Exchange personal property, such as Internet domain names, as long as the Internet domain name was held for income production, investment or used in a trade or business. 

Domain names that are bought and held specifically for sale will not qualify for tax-deferred exchange treatment through a 1031 Exchange because they are treated as inventory in the Domainer's business and not as an asset used in the business or acquired and held for investment. 

Intent to Hold for Investment is Critical

The critical element in a 1031 Exchange of domain names is the Domainer's intent to hold the domain names for investment (as opposed to intent to hold as inventory for sale).  The sale and exchange of an Internet domain name that was acquired and held for investment or cash flow will qualify for 1031 Exchange treatment.  The sale of an Internet domain name that was merely bought and held with the intent to sell will not qualify for 1031 Exchange treatment. 

New Real Estate Blog and Discussion Board Launching

The Exeter Real Estate Blog has just been launched, and is looking for ideas for content.  Let us know what you would like to see in terms of content, discussion, and information.  Real estate will be discussed from all angles, including issues involved with buying, holding, managing, and selling real property. 

Still Time to Register for "Just Show Me The Money" Seminar This Week

There are still spaces left for this week's seminar entitled "Just Show Me The Money" in San Diego, California on Wednesday, January 27, 2010, but time is running out.  You still have time to register early this week if you are interested. 

The program will cover numerous ways for the small, closely held business to obtain financing either through debt financing or equity financing and the various ramifications from each.  Topics will include sources of capital as well as the amount of control that you might have to be prepared to give up with the various financing options. 

Just Show Me The Money Seminar on 1/27/2010 in San Diego

Do you own your own closely held business?  Are you having trouble obtaining financing (debt) or raising capital to expand your closely held business?  This is a common problem in today's new world where the debt and capital markets are still problematic. There are ways to raise money.  There are solutions.  But, you must be creative and think outside of the box.  You are invited to a seminar entitled "Just Show Me The Money."