TAXATIONCHAPTER 14             1
1031 EXCHANGESI’ll exchange this      house…                     …for this fourplex.                               2
SELLING OR EXCHANGEMr. Walker has a 10-unit apartment building. Theunits sell for $700,000 with selling costs of$56,000. I...
Taxes owed:  Gain            400,000x Tax Rate           15%  Taxes            60,000              4
Net equity or cash out  Net SP                     644,000– Loans                      200,000  Equity                    ...
G = SP - SE – ABIn disposition of investment property there arethree ways to handle the gain:  1. Realize the gain.  2. Re...
TWO PARTY EXCHANGESMost people think of a two-party exchange. This iswhere A and B exchange properties, and A getsB’s prop...
THREE PARTY EXCHANGESIn a three-party exchange, we have a person whowants to exchange (E), a seller (S), and a buyer(B). T...
S            E             BAnybody can be the center (hub) of the exchange,except the exchanger.When a client who wants a...
BUY–UP RULEIf the exchanger has traded up in value and up inequity, then the exchange is totally tax deferred.Trade-up mea...
Mr. Evans wants an exchange and Mr. Samsonwants to sell his property. Mr. Evans’ FMV is$500,000 with loans of $300,000. Mr...
Mr. Evans went up in value and equity, thus E hasa tax differed exchange.                                     12
Mr. Evans wants to make an exchange and Mr.Samson wants to sell his property. Mr. Evans’FMV is $500,000 with loans of $300...
Mr. Evans went down in value of $100,000 andequity remained the same, therefore E has ataxable event.                     ...
Mr. Evans wants to make an exchange and Mr.Samson wants to sell his property. Mr. Evans’FMV is $500,000 with loans of $300...
The trade–down in value of $100,000 will be ataxable event. The gain will be long–term CapitalGains, and will pay $20,000 ...
ENTITY RULEThe way the exchanger holds the property goinginto the exchange is the way the exchanger musthold the property ...
There are three basic ways to hold property:#1: Individual.#2: Partnership#3: Corporation                                 ...
A and B are in partnership, the AB Company.They are not getting along, so they decide to split.The partnership AB owns one...
As soon as the exchange is completed they puttitle of the property in their own names.This now becomes an invalid exchange...
STEP-TRANSACTIONA step-transaction are two transactions wherethe second transaction would not have donewithout doing the f...
INVESTMENT PROPERTY RULEThe property must be held for trade or business orresale.Mr. Brown buys a building for his real es...
Ms. Knight buys a 10-unit apartment building forinvesting. Thus, the building would qualify for a1031 exchange            ...
You can NOT exchange the following:  1. Stock in trade or Inventory.  2. Stock or bonds.  3. Interest in partnershipThe an...
Mr. Bullen buys 5 rental properties. He buys anew property each year for 5 years. Lot 3, intract 35; lot 8 in tract 35, lo...
1     2       3       4      5        6 12    11     10      9      8          7 13    14      15     16     17         18...
Is this a valid exchange?What makes you think it is a valid or invalidexchange?                                     27
NO.He has inventory. 5 lots in thesame tract is a subdivision.Subdivisions are consideredinventory, not investmentproperty...
LIKE-KIND RULEYou must exchange like-kind property.The are two types of properties:  1. Personal Properties.  2. Real Prop...
PERSONAL PROPERTYThree easy questions on like-kind personalproperties.                                    30
Question #1Can you have a valid 1031 exchange by exchanginggold coins for gold bullion?                                   ...
Question #2Farmer Boise exchanges his bull for a cow. Isthis a like–kind exchange?                                     32
Question #3Mr. Anderson has a bowling alley and wants toexchange it for a pool hall. Is this a validexchange?             ...
ANSWERS TO QUESTIONS 1, 2, &            3Question 1    NOQuestion 2    NOQuestion 3    NO                      34
REAL PROPERTYThree simple questions on like–kind realproperties.                                    35
Question #4Mr. Ford wants to exchange an orchard for anoffice building. Is this a like–kind property? .                   ...
Question #5    Mr. Rooks wants to exchange a 50-year lease    for a rental house. Is this a like–kind    exchange?      50...
Question #6Mr. Minor wants to exchange mineral rights for acommercial building, is this a like-kind exchange?             ...
ANSWERS TO QUESTIONS 4, 5, & 6Question 4    YESQuestion 5    YESQuestion 6    YES                      39
REAL PROPERTY1.   Vacant land.2.   Improved real estate.3.   Leases (30 years or more).4.   Mineral and Water rights.     ...
Simply stated, any piece of real property for anypiece of real property, held for investment. .                           ...
NO-CHOICE RULEThe exchanger who qualifies for a 1031 tax-deferred exchange has no choice: the exchangercannot recognize th...
Mr. Haydon exchanged a property that had a$50,000 loss in 1992. He sold some stock that had$75,000 gain. He would like to ...
NO-LOSS RULEIn conjunction with the no-choice rule it statesthat no loss can be recognized.                               ...
MONEY CONTROL RULEAt no time can the exchanger have control overthe buyer’s money.                                    45
DELAYED EXCHANGE1. 45 days to designate new property.2. 180 days to close escrow.3. Cannot file tax return until escrow cl...
BOOTFMV Boot – difference in value.Mortgage Boot – difference in loansEquity – difference in loans                        ...
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Chap14b

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Chap14b

  1. 1. TAXATIONCHAPTER 14 1
  2. 2. 1031 EXCHANGESI’ll exchange this house… …for this fourplex. 2
  3. 3. SELLING OR EXCHANGEMr. Walker has a 10-unit apartment building. Theunits sell for $700,000 with selling costs of$56,000. It has an adjusted basis of $244,000 andan existing loan of $200,000. Find the gain, taxesowed, and the net equity. SP 700,000– SE 56,000= Net SP 644,000– AB 244,000= Gain 400,000 3
  4. 4. Taxes owed: Gain 400,000x Tax Rate 15% Taxes 60,000 4
  5. 5. Net equity or cash out Net SP 644,000– Loans 200,000 Equity 444,000– Taxes 60,000 Net Cash out 384,000 5
  6. 6. G = SP - SE – ABIn disposition of investment property there arethree ways to handle the gain: 1. Realize the gain. 2. Recognize the gain. 3. Defer the gain. 6
  7. 7. TWO PARTY EXCHANGESMost people think of a two-party exchange. This iswhere A and B exchange properties, and A getsB’s property and B gets A’s property AB BAIn real life this seldom (or never) happens. 7
  8. 8. THREE PARTY EXCHANGESIn a three-party exchange, we have a person whowants to exchange (E), a seller (S), and a buyer(B). There are two ways to complete thisexchange.1. ES SE BE2. S S BE ES 8
  9. 9. S E BAnybody can be the center (hub) of the exchange,except the exchanger.When a client who wants a 1031 tax–deferredexchange, in the listing, a statement shouldinclude that the client wants to make a 1031 tax–deferred exchange and should be stated in themultiple listing service (MLS). 9
  10. 10. BUY–UP RULEIf the exchanger has traded up in value and up inequity, then the exchange is totally tax deferred.Trade-up means the new property must be equal toor greater in value than the old property. If theexchanger withdraws any cash, the cashwithdrawn will be taxable.Any trade down is a taxable event. 10
  11. 11. Mr. Evans wants an exchange and Mr. Samsonwants to sell his property. Mr. Evans’ FMV is$500,000 with loans of $300,000. Mr. Samson’sFMV is $700,000 and loans of $400,000. E S Trade Down FMV 500,000 700,000 0– L 300,000 400,000= E 200,000 300,000 0 11
  12. 12. Mr. Evans went up in value and equity, thus E hasa tax differed exchange. 12
  13. 13. Mr. Evans wants to make an exchange and Mr.Samson wants to sell his property. Mr. Evans’FMV is $500,000 with loans of $300,000. Mr.Samson’s FMV is $700,000 and loans of $400,000. E S Trade Down FMV 500,000 700,000 0– L 300,000 200,000= E 200,000 200,000 0 13
  14. 14. Mr. Evans went down in value of $100,000 andequity remained the same, therefore E has ataxable event. 14
  15. 15. Mr. Evans wants to make an exchange and Mr.Samson wants to sell his property. Mr. Evans’FMV is $500,000 with loans of $300,000. Mr.Samson’s FMV is $400,000 and loans of $400,000. E S Trade Down FMV 500,000 400,000 100,000– L 300,000 200,000= E 200,000 200,000 0 15
  16. 16. The trade–down in value of $100,000 will be ataxable event. The gain will be long–term CapitalGains, and will pay $20,000 in Federal Taxes. 16
  17. 17. ENTITY RULEThe way the exchanger holds the property goinginto the exchange is the way the exchanger musthold the property coming out of the exchange. 17
  18. 18. There are three basic ways to hold property:#1: Individual.#2: Partnership#3: Corporation 18
  19. 19. A and B are in partnership, the AB Company.They are not getting along, so they decide to split.The partnership AB owns one building. Each onefinds another building they want. AB Companyexchanges one building for two buildings. But thepartnership now owns two buildings.So far, so good. 19
  20. 20. As soon as the exchange is completed they puttitle of the property in their own names.This now becomes an invalid exchange. 20
  21. 21. STEP-TRANSACTIONA step-transaction are two transactions wherethe second transaction would not have donewithout doing the first transaction. 21
  22. 22. INVESTMENT PROPERTY RULEThe property must be held for trade or business orresale.Mr. Brown buys a building for his real estatebusiness. Thus the building is being held for histrade. Thus, the building would qualify for a 1031exchange. 22
  23. 23. Ms. Knight buys a 10-unit apartment building forinvesting. Thus, the building would qualify for a1031 exchange 23
  24. 24. You can NOT exchange the following: 1. Stock in trade or Inventory. 2. Stock or bonds. 3. Interest in partnershipThe answer to what is an investment and what isinventory is determined by the taxpayer by thetaxpayer’s intent and actions. 24
  25. 25. Mr. Bullen buys 5 rental properties. He buys anew property each year for 5 years. Lot 3, intract 35; lot 8 in tract 35, lot 13 in tract 35, lot 21in tract 35 and lot 6 in tract 35. He exchanges lot3 for another lot in Northern California. 25
  26. 26. 1 2 3 4 5 6 12 11 10 9 8 7 13 14 15 16 17 18 24 23 22 21 20 19 TRACT 35 Mr. Lentz owns the lots in the tractlot marked in green: 3, 6,8, 13 and 21. He exchanges lot 3 for another lot in Northern California. 26
  27. 27. Is this a valid exchange?What makes you think it is a valid or invalidexchange? 27
  28. 28. NO.He has inventory. 5 lots in thesame tract is a subdivision.Subdivisions are consideredinventory, not investmentproperty. 28
  29. 29. LIKE-KIND RULEYou must exchange like-kind property.The are two types of properties: 1. Personal Properties. 2. Real Properties.Personal property and real property are NOTlike–kind. 29
  30. 30. PERSONAL PROPERTYThree easy questions on like-kind personalproperties. 30
  31. 31. Question #1Can you have a valid 1031 exchange by exchanginggold coins for gold bullion? 31
  32. 32. Question #2Farmer Boise exchanges his bull for a cow. Isthis a like–kind exchange? 32
  33. 33. Question #3Mr. Anderson has a bowling alley and wants toexchange it for a pool hall. Is this a validexchange? 33
  34. 34. ANSWERS TO QUESTIONS 1, 2, & 3Question 1 NOQuestion 2 NOQuestion 3 NO 34
  35. 35. REAL PROPERTYThree simple questions on like–kind realproperties. 35
  36. 36. Question #4Mr. Ford wants to exchange an orchard for anoffice building. Is this a like–kind property? . 36
  37. 37. Question #5 Mr. Rooks wants to exchange a 50-year lease for a rental house. Is this a like–kind exchange? 50 year Lease. 37
  38. 38. Question #6Mr. Minor wants to exchange mineral rights for acommercial building, is this a like-kind exchange? Minerals in the Ground 38
  39. 39. ANSWERS TO QUESTIONS 4, 5, & 6Question 4 YESQuestion 5 YESQuestion 6 YES 39
  40. 40. REAL PROPERTY1. Vacant land.2. Improved real estate.3. Leases (30 years or more).4. Mineral and Water rights. 40
  41. 41. Simply stated, any piece of real property for anypiece of real property, held for investment. . 41
  42. 42. NO-CHOICE RULEThe exchanger who qualifies for a 1031 tax-deferred exchange has no choice: the exchangercannot recognize the gain or loss. 42
  43. 43. Mr. Haydon exchanged a property that had a$50,000 loss in 1992. He sold some stock that had$75,000 gain. He would like to write his loss of$50,000 off against his gain of $75,000, leavinghim with a net profit leaving him with a net profitof $25,000 to pay taxes.Since it was an exchange, he cannot write off theloss. 43
  44. 44. NO-LOSS RULEIn conjunction with the no-choice rule it statesthat no loss can be recognized. 44
  45. 45. MONEY CONTROL RULEAt no time can the exchanger have control overthe buyer’s money. 45
  46. 46. DELAYED EXCHANGE1. 45 days to designate new property.2. 180 days to close escrow.3. Cannot file tax return until escrow closes. 46
  47. 47. BOOTFMV Boot – difference in value.Mortgage Boot – difference in loansEquity – difference in loans 47
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