1031 Exchanges  © 2007 Jeffrey R. Peterson
DISCLAIMER <ul><li>THE FOLLOWING INFORMATION IS A GENERAL DISCUSSION.  IT IS NOT INTENDED, AND SHOULD NOT BE RELIED UPON, ...
DISCLAIMER <ul><li>This is not tax or legal advise. </li></ul><ul><li>No attorney client relationship shall be created. </...
CIRCULAR 230 DISCLOSURE <ul><li>TO ENSURE COMPLIANCE WITH REQUIREMENTS IMPOSED BY THE IRS, WE INFORM YOU THAT ANY INFORMAT...
What is the Idea Behind §1031 <ul><li>Desire not to tax investors on a “ theoretical gain ” </li></ul><ul><li>Allow capita...
Benefits of §1031 <ul><li>Capital gains rates are now, generally, 15%. </li></ul><ul><li>Depreciation recapture rates are ...
Tax Regulations <ul><li>IRC §1031 (a)(1) states that “no gain or loss shall be recognized on the exchange of property  hel...
TAX DEFFERAL <ul><li>Relinquished Property Value  $1,000,000.00  </li></ul><ul><li>Cost Basis   $500,000.00  (500 * 15% = ...
Basic Requirements <ul><li>To qualify, the Relinquished Property conveyed and the Replacement Property received must both ...
Real Property <ul><li>Different types of “real property” are like-kind: </li></ul><ul><ul><li>Office Buildings </li></ul><...
State Law Controls What Is  Real Property <ul><li>You must look to the state laws where the property is located to determi...
Foreign Real Property   <ul><li>Real property located in the United States and real property located outside the United St...
Non-Qualifying Property <ul><li>Property you use for  personal purposes , such as your home and your family car. </li></ul...
Non-Qualifying Property <ul><li>Goodwill .  </li></ul><ul><li>The exchange of the “goodwill” or going concern value of a b...
Non-Qualifying Property <ul><li>Cost segregation Section 1245 property is not like-kind with Section 1250 property. </li><...
45 Day  Identification Period <ul><li>Any Replacements received within the 45 day identification period are deemed to have...
Identification Rules <ul><li>You only need to satisfy  one  of these rules : </li></ul><ul><li>3-PROPERTY RULE :  Identify...
180 Day  Exchange Period <ul><li>The replacements must be received within  the earlier of :   </li></ul><ul><li>(i) 180 da...
Time frames Day 0 Day 180 Day 1 45 Day Identification Period Maximum  135 Days remaining in the  Exchange Period 180 Day E...
XII.  The 180-Day Exchange Time Period May Not Be 180 Days Long The replacement property must be received within the earli...
Federal Return Date <ul><li>April 15 th   may not be the taxpayer’s federal tax return filing due date. </li></ul><ul><li>...
Consequences of Conducting a Partial Exchange and Receiving a Portion of the Proceeds or Other Property If you receive mon...
Partial Exchanges   <ul><li>Balance  Value ,  Equity  and  Debt . </li></ul><ul><ul><li>“ Up or Equal”  in…. </li></ul></u...
What is the Idea Behind §1031 <ul><li>What is an Exchange? </li></ul><ul><li>Can you pay off debt on property that you own...
TICS <ul><li>Can not exchange into a partnership or a Real Estate Investment Trust ( REIT ) </li></ul><ul><li>Tenants in c...
Complex Exchanges   <ul><li>Construction Exchanges-Making Improvements to the Replacement Property </li></ul><ul><li>Rever...
Reverse Exchanges <ul><li>Parking Arrangements Rev. Proc. 2000-37 </li></ul><ul><li>Exchange Accommodation Title holding C...
BACK LEG – Parking the Replacement Property   <ul><li>Must identify the relinquished properties that will be sold within 4...
FRONT LEG – Parking the Relinquished Property   <ul><li>Equity in replacement property must exist at the time of purchase ...
RECENT CHANGES AND DEVELOPMENTS <ul><li>Primary Residences-New Rules for Making Your Replacement Property into Your Home <...
SAME TAXPAYER REQUIREMENTS <ul><ul><li>Same taxpayer gives up a Relinquished Property and receives a Replacement Property....
SAME TAXPAYER REQUIREMENTS (continued) <ul><li>Husband and Wife Issues </li></ul><ul><li>Taking title in a “ Limited Liabi...
SAME TAXPAYER REQUIREMENTS (continued) <ul><li>Taking title in a “ Limited Liability Company ”  </li></ul><ul><li>The IRS ...
The Napkin Test <ul><li>A. Equity Requirements </li></ul><ul><li>B. Value Requirements </li></ul><ul><li>C. Debt Relief </...
Debt Relief <ul><li>Debt Relief occurs when a mortgage or loan is paid off (or assumed by the purchaser) at the transfer o...
Failed 1031 Exchange May Qualify for Installment Sale Treatment  under IRC Sec. 453 <ul><li>It is possible that a seller (...
IRC 453 (6) Like-kind exchanges <ul><li>In the case of any exchange described in section 1031(b) -- </li></ul><ul><li>(A) ...
§121 REGULATIONS REGARDING “PRINCIPAL RESIDENCE”   Date that Replacement  Property was received to complete 1031 exchange ...
Contact Information <ul><li>Jeffrey R.  Peterson </li></ul><ul><li>  Commercial  Partners Exchange Company, LLC  200 South...
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Jeff Petersons Basic 1031 Power Point

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This presentation covers some of the basic requirements for doing a 1031 exchange.
How do you save money in taxes and compound and build wealth over time?
What can you exchange?
What are the time-frames of deadlines?
How do you get started?

(c) 2005-2009 Jeff Peterson

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Jeff Petersons Basic 1031 Power Point

  1. 1. 1031 Exchanges © 2007 Jeffrey R. Peterson
  2. 2. DISCLAIMER <ul><li>THE FOLLOWING INFORMATION IS A GENERAL DISCUSSION. IT IS NOT INTENDED, AND SHOULD NOT BE RELIED UPON, AS AN OPINION OR ADVICE ON ANY LEGAL, TAX OR INVESTMENT ASPECTS OF 1031 EXCHANGES. AN OWNER CONSIDERING A 1031 EXCHANGE SHOULD CONSULT WITH AND INVOLVE HIS OR HER OWN ADVISOR, ATTORNEY OR ACCOUNTANT. </li></ul>
  3. 3. DISCLAIMER <ul><li>This is not tax or legal advise. </li></ul><ul><li>No attorney client relationship shall be created. </li></ul><ul><li>Sellers should consult with his or her own independent tax or legal advisor. </li></ul>
  4. 4. CIRCULAR 230 DISCLOSURE <ul><li>TO ENSURE COMPLIANCE WITH REQUIREMENTS IMPOSED BY THE IRS, WE INFORM YOU THAT ANY INFORMATION CONTAINED IN THIS PRESENTATION IS NOT INTENDED OR WRITTEN TO BE USED, AND CANNOT BE USED, FOR THE PURPOSE OF: </li></ul><ul><ul><li>(I) AVOIDING PENALTIES UNDER THE INTERNAL REVENUE CODE; </li></ul></ul><ul><ul><li>OR </li></ul></ul><ul><ul><li>(II) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY TRANSACTION OR MATTER ADDRESSED HEREIN. </li></ul></ul>
  5. 5. What is the Idea Behind §1031 <ul><li>Desire not to tax investors on a “ theoretical gain ” </li></ul><ul><li>Allow capital to flow to best “ Like-kind ” investment </li></ul><ul><li>Stimulate the economy </li></ul><ul><li>Encourage investment </li></ul>
  6. 6. Benefits of §1031 <ul><li>Capital gains rates are now, generally, 15%. </li></ul><ul><li>Depreciation recapture rates are 25%. </li></ul><ul><li>State income taxes differ from state to state. </li></ul>
  7. 7. Tax Regulations <ul><li>IRC §1031 (a)(1) states that “no gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like kind which is to be held for productive use in a trade or business or for investment .” </li></ul>
  8. 8. TAX DEFFERAL <ul><li>Relinquished Property Value $1,000,000.00 </li></ul><ul><li>Cost Basis $500,000.00 (500 * 15% = 75) </li></ul><ul><li>Adjusted Basis after depreciation $350,000.00 (150 * 25% = 37.5) </li></ul><ul><li>State Income Tax ? _____________ </li></ul><ul><li>_________________________________________________________ </li></ul><ul><li>Tax deferral in excess: $112,500.00 </li></ul>
  9. 9. Basic Requirements <ul><li>To qualify, the Relinquished Property conveyed and the Replacement Property received must both be: </li></ul><ul><ul><li>Qualifying Property - held for productive use in a trade or business or for investment </li></ul></ul><ul><ul><li>Like-kind Property – real property for real property </li></ul></ul>
  10. 10. Real Property <ul><li>Different types of “real property” are like-kind: </li></ul><ul><ul><li>Office Buildings </li></ul></ul><ul><ul><li>Industrial Warehouses </li></ul></ul><ul><ul><li>Retail Stores </li></ul></ul><ul><ul><li>Multi-family Apartment Buildings </li></ul></ul><ul><ul><li>Farms </li></ul></ul><ul><ul><li>Raw Undeveloped Land </li></ul></ul><ul><ul><li>Factories </li></ul></ul><ul><ul><li>Shopping Centers </li></ul></ul><ul><ul><li>Leasehold interest of 30 years * including options to renew </li></ul></ul>
  11. 11. State Law Controls What Is Real Property <ul><li>You must look to the state laws where the property is located to determine if it constitutes real property. </li></ul><ul><ul><li>Time-share Interests </li></ul></ul><ul><ul><li>Mobile Homes </li></ul></ul><ul><ul><li>Windmills </li></ul></ul><ul><ul><li>Houseboats (without a motor attached to the dock) </li></ul></ul><ul><ul><li>Water rights, mineral interest, oil and gas royalties </li></ul></ul>
  12. 12. Foreign Real Property <ul><li>Real property located in the United States and real property located outside the United States are not considered like-kind property. </li></ul>
  13. 13. Non-Qualifying Property <ul><li>Property you use for personal purposes , such as your home and your family car. </li></ul><ul><li>Dealer Property , stock in trade or other property held primarily for sale, such as inventories, raw materials, and real estate held by dealers. </li></ul><ul><li>Stocks, bonds, notes, or other securities or evidences of indebtedness, such as accounts receivable. </li></ul><ul><li>Partnership interests . (note a business entity may conduct an exchange) </li></ul><ul><li>Certificates of trust or beneficial interest. * Illinois land trusts </li></ul><ul><li>Choses in action. </li></ul>
  14. 14. Non-Qualifying Property <ul><li>Goodwill . </li></ul><ul><li>The exchange of the “goodwill” or going concern value of a business for the goodwill or going concern value of another business is not a like-kind. </li></ul>
  15. 15. Non-Qualifying Property <ul><li>Cost segregation Section 1245 property is not like-kind with Section 1250 property. </li></ul><ul><li>Significant tax benefits can be derived from utilizing shorter recovery periods and accelerated depreciation methods for computing depreciation deductions </li></ul><ul><li>Property is separated into individual components or asset groups having the same recovery periods and placed-in-service dates in order to compute depreciation. </li></ul>
  16. 16. 45 Day Identification Period <ul><li>Any Replacements received within the 45 day identification period are deemed to have been identified. </li></ul><ul><li>Replacements received after the 45th day, must be properly identified in writing during the 45 day identification period . </li></ul>
  17. 17. Identification Rules <ul><li>You only need to satisfy one of these rules : </li></ul><ul><li>3-PROPERTY RULE : Identify three or fewer replacements. Most common Identification rule utilized. </li></ul><ul><li>200% RULE : Identify any number of replacements; however, the total value of those properties identified may not exceed 200% of the value of your relinquished property. </li></ul><ul><li>95% Rule : Identify any number of replacements as long as you end up receiving at least 95% of the value of all properties identified. Note: This rule is not used very often. </li></ul>
  18. 18. 180 Day Exchange Period <ul><li>The replacements must be received within the earlier of : </li></ul><ul><li>(i) 180 days after the closing of the relinquished property; or </li></ul><ul><li>(ii) the due date for your tax return for the taxable year in which the transfer of the relinquished property occurs, including extensions *. </li></ul>
  19. 19. Time frames Day 0 Day 180 Day 1 45 Day Identification Period Maximum 135 Days remaining in the Exchange Period 180 Day Exchange Period Day of closing
  20. 20. XII. The 180-Day Exchange Time Period May Not Be 180 Days Long The replacement property must be received within the earlier of: (i) 180 days after the closing of the relinquished property; or (ii) the due date for your tax return for the taxable year in which the transfer of the relinquished property occurs, including extensions . Day 0 Day 180 Day 1 180 Day Exchange Period The replacement property must be received within the earlier of: (i) 180 days after the closing of the relinquished property; or (ii) the due date for your tax return for the taxable year in which the transfer of the relinquished property occurs, including extensions . Due date for tax return
  21. 21. Federal Return Date <ul><li>April 15 th may not be the taxpayer’s federal tax return filing due date. </li></ul><ul><li>S corporations and C corporations are due March 15. </li></ul>
  22. 22. Consequences of Conducting a Partial Exchange and Receiving a Portion of the Proceeds or Other Property If you receive money or non like-kind property (“boot”) in an exchange on which you realize a gain, you have a partially nontaxable exchange. You are taxed “dollar for dollar” on the gain you realize, but only to the extent of the money and the fair market value of the non like-kind property that you receive.
  23. 23. Partial Exchanges <ul><li>Balance Value , Equity and Debt . </li></ul><ul><ul><li>“ Up or Equal” in…. </li></ul></ul><ul><li>There are two types of “boot”: </li></ul><ul><ul><li>Cash Boot – receive cash </li></ul></ul><ul><ul><li>Mortgage Boot </li></ul></ul>
  24. 24. What is the Idea Behind §1031 <ul><li>What is an Exchange? </li></ul><ul><li>Can you pay off debt on property that you own? </li></ul><ul><li>Can you construct improvements on property that you own? </li></ul><ul><li>Bloomington Coca Cola Bottling Co. v. Comm'r , 189 F.2d 14 (7 `s Cir. 1951) </li></ul>
  25. 25. TICS <ul><li>Can not exchange into a partnership or a Real Estate Investment Trust ( REIT ) </li></ul><ul><li>Tenants in common – new version of an old concept </li></ul><ul><li>Own a fraction of the whole real property </li></ul><ul><ul><li>Are these a good investment </li></ul></ul><ul><ul><li>Are these arrangements disguised partnerships </li></ul></ul><ul><ul><li>What is the long term exit strategy </li></ul></ul>
  26. 26. Complex Exchanges <ul><li>Construction Exchanges-Making Improvements to the Replacement Property </li></ul><ul><li>Reverse Exchanges Within the Safe Harbor of Rev. Proc. 2000-37 and Beyond </li></ul><ul><li>Options for Parking Arrangements of 180 Days or More </li></ul>
  27. 27. Reverse Exchanges <ul><li>Parking Arrangements Rev. Proc. 2000-37 </li></ul><ul><li>Exchange Accommodation Title holding Company (“ EAT ”) takes title to property and holds it for up to 180 days </li></ul><ul><li>More costly and complicated </li></ul>
  28. 28. BACK LEG – Parking the Replacement Property <ul><li>Must identify the relinquished properties that will be sold within 45 days. </li></ul><ul><li>Parking the new replacement property for …. </li></ul><ul><li>Gets the new property into your hands after you have closed on the sale of the Relinquished Property. </li></ul>
  29. 29. FRONT LEG – Parking the Relinquished Property <ul><li>Equity in replacement property must exist at the time of purchase equal to the amount of net proceeds that will result from the sale of the relinquished property. </li></ul><ul><li>Deed Tax may be paid twice. </li></ul>
  30. 30. RECENT CHANGES AND DEVELOPMENTS <ul><li>Primary Residences-New Rules for Making Your Replacement Property into Your Home </li></ul>
  31. 31. SAME TAXPAYER REQUIREMENTS <ul><ul><li>Same taxpayer gives up a Relinquished Property and receives a Replacement Property. </li></ul></ul><ul><ul><li>Continuity of Investment - How to Title the Replacement Property in a Different Manner Than the Relinquished Property was Held. </li></ul></ul>
  32. 32. SAME TAXPAYER REQUIREMENTS (continued) <ul><li>Husband and Wife Issues </li></ul><ul><li>Taking title in a “ Limited Liability Company ” </li></ul><ul><li>Partnership Issues </li></ul>
  33. 33. SAME TAXPAYER REQUIREMENTS (continued) <ul><li>Taking title in a “ Limited Liability Company ” </li></ul><ul><li>The IRS has ruled that for purposes of Section 1031 a single member limited liability company will be disregarded as an entity separate from its owner consistent with the general treatment of such entities under federal income tax law. </li></ul>
  34. 34. The Napkin Test <ul><li>A. Equity Requirements </li></ul><ul><li>B. Value Requirements </li></ul><ul><li>C. Debt Relief </li></ul>
  35. 35. Debt Relief <ul><li>Debt Relief occurs when a mortgage or loan is paid off (or assumed by the purchaser) at the transfer of the Relinquished Property. </li></ul><ul><li>Debt relief can be “offset” by; </li></ul><ul><li>(i) New Debt; if exchanger can replace the old debt with an equal or larger new loan on the Replacement Property; or </li></ul><ul><li>(ii) More Cash: if the exchanger increases the amount of cash invested in the Replacement Property by at least the amount of debt relief. </li></ul>
  36. 36. Failed 1031 Exchange May Qualify for Installment Sale Treatment under IRC Sec. 453 <ul><li>It is possible that a seller ( intending to conduct a 1031 exchange, but failing to identify or properly receive replacement property ) to be able to defer the income tax consequences from the failed 1031 exchange into the following income tax year. </li></ul><ul><li>If the deferred exchange where the funds are held by a qualified intermediary fails, the seller should still be entitled to installment sales treatment when the proceeds or nonlike-kind property are received. </li></ul><ul><li>This can be much better than recognition of the gain in the income tax year in which the relinquished property is closed. </li></ul><ul><li>The provisions of IRC §453 specifically contemplate that the installment sale rules and the like-kind exchange rules of IRC §1031 may apply to the same transaction . </li></ul><ul><li>§453(f)(6) provides that in the case of an exchange which only partly satisfies the nonrecognition of gain rules under §1031 because of the receipt of boot, the taxpayer’s ability to use installment sale treatment with respect to the boot is determined by excluding from the installment sale computations (i) any qualifying like-kind property received by the taxpayer and (ii) the gain not recognized as a result of such like-kind property. </li></ul>
  37. 37. IRC 453 (6) Like-kind exchanges <ul><li>In the case of any exchange described in section 1031(b) -- </li></ul><ul><li>(A) the total contract price shall be reduced to take into account the amount of any property permitted to be received in such exchange without recognition of gain, </li></ul><ul><li>(B) the gross profit from such exchange shall be reduced to take into account any amount not recognized by reason of section 1031(b), and </li></ul><ul><li>(C) the term &quot;payment&quot;, when used in any provision of this section other than subsection (b)(1), shall not include any property permitted to be received in such exchange without recognition of gain. </li></ul><ul><ul><li>Similar rules shall apply in the case of an exchange which is described in  section 356(a) and is not treated as a dividend. </li></ul></ul>
  38. 38. §121 REGULATIONS REGARDING “PRINCIPAL RESIDENCE” Date that Replacement Property was received to complete 1031 exchange Rent Replacement Property for two or three years * Live in the Replacement Property as your principal residence for at least two years Hold the Replacement Property for at least five years Sell Your Now Principal Residence and Exclude 250K or 500K * Note: §121 exclusion does not apply to gain attributable to depreciation deductions for periods after May 6, 1997, claimed with respect to the business or investment portion of a residence. Five year Time line
  39. 39. Contact Information <ul><li>Jeffrey R.  Peterson </li></ul><ul><li> Commercial  Partners Exchange Company, LLC  200 South Sixth  Street, Suite 1300  Minneapolis, MN  55402     (612)  643-1031 FAX (612)  643-1039 </li></ul><ul><li>[email_address] </li></ul>

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