What is a 1031 Exchange?
Simply stated, it is a way for owners of investment real estate to buy and sell property and defer payment of any capital gains taxes by reinvesting their money in other “like kind” property. These transactions are known as deferred exchanges or 1031 Exchanges. “Like kind” is a bit of a misnomer in that it can really be any type of real estate held for business or investment purposes; so, for example, an apartment building could be exchanged for vacation villa or a beachfront lot. The key is that these code provisions relate to the sale and purchase of properties held primarily for business or investment.
Section 1.1031 of the IRS Code lays out in detail the procedure for turning a sale and purchase transaction into a qualified 1031 exchange thereby deferring your capital gains tax obligations. The good news is that the provisions of this IRS code apply to the U. S. Virgin Islands.
Essential Elements of a 1031 Exchange
One of the rules is that you are not allowed to receive or touch any of the money from the sale of your relinquished property. Instead, the rules require that a “safe harbor” or Qualified Intermediary receive, hold and safeguard the proceeds of the sale until the exchange is completed. There are bonded companies that specialize in accommodating 1031 Exchanges.
The rules also require that certain time limits must be adhered to. You can identify up to three possible “replacement” properties in which to invest, but must do so within 45 days of the close of escrow on the first property. The ultimate acquisition of the replacement property must be completed within 180 days.
To defer all tax obligations, you must reinvest 100% of the sale proceeds (including any amounts used to pay off existing loans) into a “like kind” property or properties of equal or greater value than the property you sold.
The above outlines only the most basic elements of an exchange. While the rules in practice are quite simple to follow, you need expert advice to ensure that you are following all of the rules and therefore benefiting from the 1031 tax savings provisions. Get the advice of your attorney or tax consultant in selecting a Qualified Intermediary. Their fees vary and their methods for holding the exchange proceeds differ. It is also important to know if the Qualified Intermediary will be investing the funds and in what type of investments
Feds Approve Capital Tax Break Zones in the USVI – St. Thomas Source
Second, it receives a 10 percent reduction in federal capital gains tax if it holds the investment in the tax break zone for at least five years, and an additional five percent reduction if it holds the investment for at least seven years.
Third, it avoids federal capital gains tax altogether on any further appreciation in its investment in the tax break zone. That is, if the company ultimately sells its investment in the tax break zone for $35 million after seven years – a gain of $25 million – it will defer capital gains tax on the original $10 million gain until the date of the sale, reduce the amount of that capital gain by 15 percent, and pay no capital gains tax at all on the $15 million appreciated gain.
There is a long history of Congress encouraging the territories to try to spur development with tax breaks. These new tax breaks join the 90 to 100 percent breaks on corporate income tax, gross receipts tax, property tax and excise tax the territory gives through the Economic Development Commission and through the University of the Virgin Islands Research and Technology Park.
In 2016, Mapp proposed a plan to boost the economy over five years, which relied heavily on hopes of massive growth in the number of entities taking advantage of the territory’s tax break programs.
The U.S. Virgin Islands were among 18 states and territories approved in what the Treasury Department termed the “first round” of approved tax break zones. The others were: American Samoa; Arizona; California; Colorado; Georgia; Idaho; Kentucky; Michigan; Mississippi; Nebraska; New Jersey; Oklahoma; Puerto Rico; South Carolina; South Dakota; Vermont; and Wisconsin.
EDC Tax Incentives
The United States Virgin Islands (USVI) is more than just an ideal tourism destination in the Caribbean with its pristine beaches, wonderful sunshine, great duty-free shopping, and intriguing historic monuments. It is also the ideal location for doing business and maximizing your company’s profits.
The USVI offers a very unique tax incentives program for qualified businesses through the Economic Development Authority and its Economic Development Commission or EDC Program. We encourage global companies in the areas of manufacturing, service businesses, high-technology assembly plants and outsourcing companies such as call centers, as well as, other diverse businesses to qualify for the Economic Development Commission Program. Our goal is to provide the necessary incentives to make your business expansion or relocation a reality.
Our general mandate is:
- To promote the growth, development and diversification of the economy of the U.S. Virgin Islands.
- To benefit the people of the U.S. Virgin Islands by discovering and developing to the fullest possible extent the human and economic resources available.
- To establish capital and preserve job opportunities for residents of the U.S. Virgin Islands.
- To promote capital formation for economic development in the U.S. Virgin Islands.
It is also our mission to encourage and assist in the creation, development and expansion of business and industry. By locating your business or qualified portion thereof to the U.S. Virgin Islands, you may be eligible to receive the above-listed tax incentives for your business for a period ranging from 20 to 30 years.
Benefits and advantages for businesses in the EDC program can be up to:
- 90% reduction in corporate income tax
- 90% reduction in personal income tax
- 100% exemption on gross receipt tax
- 100% exemption on business property tax
- 100% exemption on excise tax payments
- Reduction in the customs duty from the standard 6% to 1%
- Tax reduction on royalty income from software developed in the USVI and sold to non-US customers
- Availability of rental space at below market rates in the St. Croix and St. Thomas Economic Development Parks
Investors in the U.S. Virgin Islands also enjoy:
- A business-friendly environment
- An educated labor force
- U.S. currency, courts and flag protection
- World-class telecommunications
- “Made in the USA” labeling
- Duty free, quota free exporting of USVI-made goods into the United States
- Shipping advantages
- Availability of prime rental space
- Easy air access to and from the United States, South America, Europe and other Caribbean Islands
Jones Act Exemption:
- The U.S. Virgin Islands is exempt from the Jones Act, a cabotage law, which requires freight moving between U.S. ports to be carried on U.S. flag vessels.
- Freight between U.S. ports (including Puerto Rico) and the U.S.V.I. may be carried on foreign flag vessels.
We encourage you to peruse this site for additional information on qualifying and applying for benefits under our program, and we look forward to serving you!