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For Legal Professionals

  1. 1. Shhhhh. Don’t tell D ’t t ll anyone. Your clients are eligible for g interest free loans from the US and State Governments… …for as long as they’d like. …for as many times as they’d f ti th ’d like.
  2. 2. Of the approximately $200 Billi i commercial real Billion in i l l estate transactions during 2008, it is estimated that 20-25% could have benefited from Section 1031 treatment. Only 3% did.
  3. 3. What’s In It For You? • Absolutely P t f Y Ab l t l Part of Your Fiduciary Responsibility Fid i R ibilit – Legal Ramifications on the Sale of Investment/Trade or Business Property are Key!! • Clients Will Appreciate Your Resourcefulness & Knowledge 1031 Savvy Attorneys are HEROS! • Section 1031 has Wide Applicability in Your Practice – Help Your Clients strategize the sale and repurchase of their holdings. – Property portfolios may be realigned tax free free. – An EXCELLENT Wealth Building Strategy Using Uncle Sam’s Money
  4. 4. What’s In it For Your Clients?
  5. 5. What’s In it For Your Clients? • Section 1031 Is NOT Just for Commercial Investors and the Wealthy: Many individuals have Exchangeable Assets… – Raw Land – E Excess Land (What is customary?) L d – Second Homes (If planned correctly) • Mixed Use Properties (B&B’s, Home Offices & Mixed Use) • Personal Property – Horses/Livestock – Coin Collections – Airplanes & Coin Collections – Heavy Equipment Used For Business
  6. 6. About Our Firm • Practice began in 1981; incorporated in 1987 • Exchanges are our exclusive line of business – Thousands of Exchanges worth hundreds of millions • Background of principal: – 9 yrs engineering, 25 yrs of real estate & development and 30 years facilitating Section 1031 • Dedicated & Knowledgeable Staff • Member of Federation of Exchange Accommodators • Nationwide practice; 48 states and counting counting…
  7. 7. Today We Will Explore… • What is Section 1031? • Section 1031’s misconceptions • How to recognize when to use Section 1031? • Who qualifies for an Exchange? • What Qualifies For an Exchange? • How t report an E h H to t Exchange • How states handle an Exchange • Exchanges and partnerships • Real-life Examples of Our Exchanges • Alternative Exchange Strategies
  8. 8. Primary Objectives of This Course • Provide a Basic Section 1031 Education P id B i S ti Ed ti • Provide Tools & Information Enabling You to Better Serve Your Clients S Y Cli t • Assist You In Recognizing the Strategic Applications of S ti f Section 1031 and t E l d to Explore Alternative Replacement Strategies
  9. 9. Primary Objectives of This Course • Help You to Understand How Section 1031 Integrates Into Your Client’s Overall Financial Goals & Objectives • How to report an Exchange • We will Demonstrate our Ability to Become Your Section 1031 Resource in the Future
  10. 10. Pop Quiz!! • Section 1031 Basics • 10 Minutes To Complete • You Will Be Amazed at How Much You Will Learn!
  11. 11. What Is An Exchange? • Method to sell Investment and/or Trade or Business Property p y and replace it with New Property that doesn’t trigger any tax. • Its essential elements are: The Client must: • Give a Deed (or a Bill of Sale); • Get a Deed (or a Bill of Sale); and • Don’t handle Cash
  12. 12. The Five Critical Elements 1. Intent 2. 2 Form and Documentation 3. Control of Funds 4. Like-Kind P 4 Lik Ki d Properties ti 5. Time Limits
  13. 13. The Regulation - Section 1.1031(k)-1 “A deferred exchange is defined as an exchange in which, pursuant to an agreement, the taxpayer transfers property held for productive use in a trade or business or for investment (the ‘relinquished property’) and subsequently receives QI property to be held either for productive use in a trade or business or for investment (the ‘replacement property’).” t ’) ”
  14. 14. An Exchange at a Glance Exchange Documents Relinquished Property • Agreement With QI • Assignment of Contract • Notification of Assignment • Settlement Instructions QI Replacement Property • Assignment • Notification • Settlement Instructions
  15. 15. Section 1031(a)(1) “No gain or loss shall be recognized on the exchange of property held for productive use in trade or business or for investment if such property is exchanged solely for property of like kind which is held either for productive use in a trade or business or for investment.” Section 1031 Works ONLY with Investment/Trade or Business Property YOU MUST PROVE INTENT!
  16. 16. Exceptions to Section 1031 (Sec.1031(a)-(2)) • Stock in trade or other property held primarily for sale • Stocks, bonds or notes • Other securities or evidences of indebtedness or interest • Interests in a partnership • Certificates of trust or beneficial interest • Choses in action (litigation rights) ( g g )
  17. 17. What is Investment Purpose? • Investment is the passive holding of property for more than a temporary period with the expectation of appreciation • Real estate (even if unproductive) held by a non dealer for future use or increment in value is held for investment and not primarily for sale (Reg. 1.1031(a)-1(b)) • Thus property held for sale in the immediate future is not held for investment
  18. 18. What are the benefits of an Exchange? 1. 1 Full capital gains tax deferral (Exchange goes Even or Up in Value) 2. The ability to use Uncle Sam’s money to enhance holdings 3. Compounding effect 4. Estate planning 5. Exchange into passive holdings 6. Solve 6 Sol e problem of joint o nership ownership 7. Increase cash flow
  19. 19. Three Essential Elements: Properties Must Be Exchanged • Not Sold Properties Must Be Like-Kind • Real Estate • Personal Property Held By Same Taxpayer • Relinquished & Replacement
  20. 20. Replacement Property Rules Reg 1.1031(k)-1-(c)(4) • The Three Property Rule - The Exchangor may identify up to three (3) properties, without regard to value; or • The 200% Rule - The Exchangor may identify more than three properties, provided their combined fair market values does not exceed 200% of the value of the Relinquished Property; or • The 95% Rule - The Exchangor may identify any number of properties, provided the Exchangor acquires 95% of those properties (by value). • Properties received before the 45th day do not have to be identified, but must appear on one of the ID’s after Day 45.
  21. 21. Like-Kind Requirement: • The term “like-kind” refers to the nature or character of the property and not to its grade or quality (Reg 1.1031(a)-1(2)(b)) • Real property cannot be exchanged for personal property (Reg 1.1031(a)-1(2)(b)) • Qualifying personal property can be exchanged for property of a similar character (NAICS (formerly SIC) Codes must match; the Code must fall within Sector 31, 32 or 33 of NAICS; last digit g cannot be a 9.) (Regs 1.1031(a)-2, et seq.)
  22. 22. Examples of Like-kind • Improved real property for Unimproved real property (Reg 1.1031(a)-1(2)(b)) • Lease for >30 years (Reg 1.1031(a)-1(2)(c)) • Partial interest for a whole interest • O property for more than one One t f th property and vice versa
  23. 23. What is Like Kind? ANY REAL PROPERTY IS LIKE KIND WITH ANY OTHER REAL PROPERTY…. Single Family Dwelling Apartment Building
  24. 24. What is Like Kind? ANY REAL PROPERTY IS LIKE KIND WITH ANY OTHER REAL PROPERTY…. Multi-family Dwelling Single Family Dwelling
  25. 25. What is Like Kind? ANY REAL PROPERTY IS LIKE KIND WITH ANY OTHER REAL PROPERTY…. Land Development Single Family Dwelling
  26. 26. What is Like Kind? ANY REAL PROPERTY IS LIKE KIND WITH ANY OTHER REAL PROPERTY…. Single Family Dwelling Commercial Property p y
  27. 27. Personal Property (Regs 1.1031(a)-2, et seq.) • Same General Asset Class or Product Code • North American Industry Classification System • Sector 31-33: Manufacturing – Examples: C Construction Equipment, Well Drilling Equipment, Logging Equipment, Commercial Vessels, Commercial Laundry Equipment – See ce sus go / a cs
  28. 28. Timing is everything! • The Exchange Period begins on the transfer of the Relinquished Property – This is Day #0 • Exchangor must identify qualified Replacement Property within 45 days of closing (the “Identification Period”) • Exchangor must acquire within 180 days, or due date of the tax f return (counting extensions) for the tax year of the sale (the “Exchange Period”) (Reg 1.1031(k)-1(b), et seq.) • There are no extensions unless a federal disaster is declared in the vicinity of the taxpayer or the property.
  29. 29. Can Anyone Handle An Exchange? • No! It must be a “Qualified Intermediary”(QI) as Qualified Intermediary (QI) defined by regulation: see Regs 1.1031(k)-1(k), et seq. • Cannot Be the Exchangor or a Relative (Sec. 267(b) or Sec. 707(b)(1)) • Cannot be an Agent of the Taxpayer – One who has acted as employee attorney accountant investment employee, attorney, accountant, banker, broker or real estate agent within the past 2 years – The QI Handles All Aspects of the Exchange and Should be Involved EARLY in the Process
  30. 30. What does the QI do? Regs 1.1031(k)-1(g)(4), et seq. • Creates Exchange Agreement; signed by Taxpayer. g g g y p y • Has Legal Standing in the transaction • Notice of the Assignment required to be given to Buyer and Seller, with Closing Instructions to both Settlement Agents. • Banking, Safeguarding & Delivery of Exchange Funds • Assurance of Critical Deadlines Including the 45 & 180 Day g y Deadlines • Final accounting for tax purposes
  31. 31. Straight Talk About Section 1031 & t e Q Industry the QI dust y • Several failures during 2008-2009 costing taxpayers MILLIONS in Exchange funds. • QI’s are unregulated therefore EXTREME due diligence is required. • BIGGER IS NOT BETTER • A few bad apples….
  32. 32. Are They Kidding? From a recent F t Webinar given by a national, well known Qualified Q Intermediary.
  33. 33. • Client s Client's funds in segregated accounts using their own taxpayer ID. • C e t as online access to t e o Client has o e their own accou t account. • Client MUST log in and approve funds transfers, EWI can NOT move money without this approval. y pp • Surety bond and E&O insurance.
  34. 34. Who Qualifies for an Exchange? Owners of investment property and business property may qualify for a Section 1031 deferral. Individuals, C Corporations, S corporations, partnerships (general or limited), limited liability corporations limited) corporations, trusts and any other taxpaying entity may set up an exchange of business or investment properties for business or investment properties under Section 1031.
  35. 35. Does Your Situation Qualify?
  36. 36. The Five Most Common Section 1031 p Misconceptions All 1031 Exchanges must involve swapping or trading with other property owners......
  37. 37. The Five Most Common Section 1031 Misconceptions p It’s required that all types of 1031 exchanges must close simultaneously......
  38. 38. The Five Most Common Section 1031 Misconceptions p "Like-kind" means purchasing the same type of property which was sold.......
  39. 39. The Five Most Common Section 1031 Misconceptions p 1031 Exchanges must be limited to 1 exchange and 1 replacement property.......
  40. 40. The Five Most Common Section 1031 p Misconceptions A Section 1031 is NOT a path to cash.
  41. 41. What about the States? • All states but PA allow a Section 1031 within or outside the state • Most states follow the Federal rules closely. closely • Some states require a Waiver of withholding • Other states w/ income taxes don’t bother don t • Land Gains Tax in VT: Old & New properties must be in-state; New Property takes Old Holding Period • Some states have a formal Waiver; others permit a Seller Affidavit
  42. 42. NH & Disregarded Entities – Beware! • NH has recently been auditing Exchanges • Disallowing a change of name for the g g acquisition of Replacement Property • R Resulting i HUGE t bill f E h lti in tax bills for Exchangors • Do NOT change the name of entity or g y taxpayer between the sale and the purchase
  43. 43. What is “New Money” (Basis Additions): • The Taxpayer picks up new basis for all “New Money New Money” that is added to the transaction. • “New money” = N t new cash + N t i “N ” Net h Net increase i d bt in debt • “Strike Price” = Sales price – costs • Taxpayer gets increased basis if the New property + acquisition costs p p y q = or exceeds the Strike Price
  44. 44. What is “Boot? • If the Price + costs of the New Boot Triggers Property is less than the Price – TAX… TAX costs of the Old, Boot results. • Boot can be avoided by exchanging even or up …The Exchange Could Still Work! • Boot is property of an Unlike Kind; Cash Boot is net cash; Mortgage Boot is less net debt.
  45. 45. IRS Form 8824 – Reporting an Exchange
  46. 46. 08 123 Main Street, City, State; 4 Family Rental 456 Main Street, City, State; Single Family Rental 1 2 1997 Property Information 6 1 2008 & Exchange Dates 7 16 2008 11 28 2008 Related Party? YES Line 8, NO Line 12 Part II Part III Related Party - Sec. 267(b) or Sec. 707(b)(1)
  47. 47. Joe Related Taxpayer Brother XXX-XX-XXXX Related Party 789 Main Street, City, State, Zip Information Must remain NO for two tax years Related Party - Sec. 267(b) or Sec. Sec 707(b)(1) If 9 or 10 is YES, 11 C is most probable answer (attach statement)
  48. 48. Multi-asset Exchanges “Boot” FMV Old basis + “New money” “N ” Eg. A building for vacant land
  49. 49. Exchanges That Cross 2 Tax Years: • Reported for the year of the sale of the Old Property • July 5 + 180 days (or Nov. 17 + 45 days) = Jan. 1st • Election under Reg. 1.1031(k)-1(j) (Coordination of Sec. 1031 & 453): • Provided the Client had a bona-fide intention to exchange at the start of the Exchange Period
  50. 50. Can a Failed Exchange Be Fixed? • IRS Regulations allow a sale to be rescinded within the same tax year if the parties are restored to their original positions (Rev Rule 80- 58) – Un-close with the Buyer. – Re-close with the Buyer properly, using a Q.I. • Can make buyer nervous, will want compensation
  51. 51. Section 1031 Exchanges for p Partnerships • Exchange Must be at the Entity Level • Drop & Swap Technique Does Not Work • IRS Is Now Asking on Form 1065: “At any time during the tax year, did the partnership distribute to any partner a tenancy-in-common or other undivided interest in partnership property?” Question #14
  52. 52. Section 1031 Exchanges for Partnerships (2) • Swap & Drop Technique Does Not Work Either • IRS Is Also Asking on Form 1065 “Check this box if, during the current or prior tax year, the partnership distributed any property received i a lik ki d t hi di t ib t d t i d in like-kind exchange or contributed such property to another entity (including a disregarded entity)” Question #13
  53. 53. Section 1031 Exchanges for Partnerships – What to Do? • Identify Partners Who Want To Depart • Close on the Asset, Reserve Boot • Departing Partners -> Cash • Remaining Partners -> Like Kind Replacement > Like-Kind Property • This Preserves the Partnership EIN# and Holding p g Period
  54. 54. Section 1031 Exchanges for Partnerships – What to Do? • Identify Partners Who Want To Depart • Close on the Asset, Reserve Boot • Departing Partners -> Cash • Remaining Partners -> Like Kind Replacement > Like-Kind Property • This Preserves the Partnership EIN# and Holding p g Period
  55. 55. Section 1031 or Section 1033? • Section 1031 Can Be Used in concert or a Substitution for Section 1033 • Section 1033 Has Strict Guidelines for Replacement • Section 1031 Has Shorter time Frames for Performance, Performance and; • Is More Flexible in Choices of Replacement p y Property • Before Cash is Accepted, Call a QI!!
  56. 56. The Power of Section 1031 What happens when both participate in 3 typical real estate transactions… …with radically different approaches?
  57. 57. Hypothetical Example Assumptions Courtesy of Grubb & Ellis Commercial Real Estate Services
  58. 58. First Transaction - Today Courtesy of Grubb & Ellis Commercial Real Estate Services
  59. 59. Second Transaction – In 5 Years Courtesy of Grubb & Ellis Commercial Real Estate Services
  60. 60. Third Transaction – In 10 Years Courtesy of Grubb & Ellis Commercial Real Estate Services
  61. 61. Fourth Transaction – In 15 Years $361,336 $507,000 $108,400 $152,100 ($21,680) $ 0 $448,056 $659,100 $2,240 $2 240 $3,296 $3 296 Courtesy of Grubb & Ellis Commercial Real Estate Services
  62. 62. Summary of Wealth Building Benefits 4th Transaction $448,056 $659,100 Cumulative Increase 49.3% 119.7% Courtesy of Grubb & Ellis Commercial Real Estate Services
  63. 63. Summary of Increased Cash Flow At 15th Year Courtesy of Grubb & Ellis Commercial Real Estate Services
  64. 64. The After-Tax Analysis (a sale in Year 15) • Owner #1 (in Year 15) – Has Property worth $448,056; all taxes have been paid • Owner #2 (in Year 15) – Has property worth $659,100, with $136,810 tax due • Net Result (after tax): – Owner #2 has $74,234 more wealth than Owner #1, and has received $92,779 more income than Owner #1. – But why would Owner #2 ever pay the tax when s/he can exchange over & over, using THE POWER OF SECTION 1031?
  65. 65. Reverse Exchanges – Choice of Entity • The EAT Can Be an Individual or an Entity – Using an Individual is Very Dangerous (Liability/Bankruptcy/Death) • For Protection the Entity Should be an LLC or C-Corp LLC C-Corp • Can Convey LLC Membership y p • Fiscal Tax Year • No Tax Filing in • Could Save Transfer Taxes (Not NH) Middle of Exchange • Better Audit Trail
  66. 66. Reverse Exchanges – Transfer Taxes • Most S States ( (Including NH) C ) Charge 2 Transfer Taxes: f • Property Conveyed to the EAT • Property Conveyed out of the EAT • ME and VT Offer a Waiver of The Second Tax • Waiver MUST be Applied For BEFORE the Second Closing • NH Collects Taxes on ALL Deeds With Few Exceptions
  67. 67. Business Sales – The Bucket List • If the client is selling and then buying EXACTLY the same type of business (B & B for B & B, etc.), a MULTI-ASSET EXCHANGE can be considered; very complex… • Most clients are changing course, so allocate the assets: • Bucket #1: Residential RE try to maximize $ using Section 121. • Bucket #2: Commercial RE – this figure gets exchanged. • Bucket #3: FF & E, goodwill, etc. – this gets sold & taxed. • Bucket #4: Inventory advance deposits, etc. – transferred at cost Inventory, deposits etc cost.
  68. 68. Section 1031 & Section 121 Rev. Proc. 2005-14 • Home office, farm, excess land, etc.: Allocate Residential vs. Business percentage, use same % as on past returns. • If there has been no past depreciation of a part of the residence, attempt to maximize the Section 121 portion for the client’s best interest (the Adjusted Cost Basis of this asset + $250K or $500K). • Do not push the allocation past the FMV of the residence; use municipal allocations for guidance. • Balance of the Buyer’s offer for the commercial portion can be exchanged.
  69. 69. A Note on Second Homes (Rev. Proc. 2008-16) • Properties MUST be Held For Investment Purposes, Therefore: • Most Second Homes WILL NOT QUALIFY • Homes Must Be Rented for a Minimum of 14 Days • Personal Use is Limited to 2 Weeks or 10% of Time Rented, Whichever is Greater • 24 Months of Business Use (Rev Proc. 2008-16) • The Tax WILL be Due if IRS Finds the Property is Used as a Second Home
  70. 70. Break Time…
  71. 71. The Most Common Exchange Types • Delayed Exchange (Regs 1.1031(k)-1, et seq ) 1 1031(k) 1 seq.) – The client sells his property, identifies Replacement Property options within 45 days, then purchases the property(ies) within 180 days. • Reverse Exchange (Rev. Proc 2000-16 & 2004-51) – The client purchases (with a Single Purpose Entity) the Replacement Property before his current property is sold. The client then has 180 days to close on his Relinquished Property Property. • Build-to-Suit (Reg 1.1031(k)-1(e), et seq.) – The client wishes to purchase and improve Replacement Property(ies) with p p p p y( ) the proceeds from the sale of his Relinquished Property. This is accomplished with a Single Purpose Entity, a/k/a an Exchange Accommodation Titleholder (“EAT”).
  72. 72. Case Studies The case studies outlined are presented as a representation of the 5 most common types of Section 1031 exchanges exchanges. Please note that the case studies have been simplified and several essential steps d l ti l t have been omitted for clarity. Click on the case study you would like to review.
  73. 73. Case Study 1 ABDC-Delayed Exchange (Existing Property) Direct Format
  74. 74. CAMPGROUND FOR SEVERAL SINGLE FAMILY RESIDENCES One campground exchanged for 16 new properties… …including 2 new campgrounds.
  75. 75. 6 PROPERTIES FOR A DOZEN CONDOMINIUMS Sold six properties to aggregate funds to buy… …over a dozen brand new condo units.
  76. 76. CONVERTING INVESTMENT PROPERTY TO PERSONAL RESIDENCE Exchange for your dream home, rent it for two years… …convert it to your primary residence. Note changes in Section 121 after 1/1/09 make the non-primary residence time periods taxable.
  77. 77. Case Study 2 ACBD-Delayed/Simultaneous Exchange (Existing Property) Reverse Format - Exchange Last
  78. 78. ACQUIRE A RENTAL PROPERTY FOR A FAMILY MEMBER Purchase a Home for the Kids …charge Fair Market Rent. h F i M k tR t Sell Multi-family Investment Property ..After two (2) years, begin gifting the property.
  79. 79. BUYING A NEW PROPERTY BEFORE THE OLD PROPERTY SELLS Taxpayer Negotiates the Purchase of a Significant New Property… …but is unable to sell a piece of existing property in time to do the deal… …Park the New Property in an EAT; 180 more days are available to sell the Old Property and complete the P t d l t th Section 1031 Exchange….
  80. 80. Case Study 3 ACBD-Delayed, Build-to-suit (or Improvement) Exchange Direct Format Di t F t
  81. 81. COMMERCIAL PROPERTY FOR RAW LAND WITH IMPROVEMENTS Taxpayer sells an existing commercial property… …EAT buys a vacant lot and builds a new building with the funds… p y …and delivers to Taxpayer as improved, within 180 days….
  82. 82. Case Study 4 ACBD-Delayed/Simultaneous Build-to-suit Exchange Reverse F R Format - E h t Exchange Last L t
  83. 83. INDUSTRY SPECIFIC BUILDING ON IDENTIFIED PROPERTY 180 Days (total) are available – Rev Proc 2000-37 EAT Builds a new building to Taxpayer’s specs, using borrowed funds… b df d ..Taxpayer takes occupancy.. …then sells existing property.. …...And, Exchanges with the EAT to finish the transaction…
  84. 84. Case Study 5 Delayed Exchange (Existing Property) Reverse Format - Exchange First
  85. 85. BUY INVESTMENT PROPERTY ABUTTING A PRIMARY RESIDENCE: Taxpayer deeds F & C rental property to EAT… ..EAT borrows equity from taxpayer or the bank.. ..Equity $$ used to Purchase abutting shore front land … …EAT sells rental property to a Buyer to pay off the debt..
  86. 86. 4 $ p e Qua cat o $imple Qualification Questions…
  87. 87. 1. 1 What’cha Got? 2. Howd ya 2 Howd’ya Get It? 3. 3 What else ‘ya Got? ya 4. What’cha Want?
  88. 88. 1. What’cha Got? – How has the property been used in the client’s hands? – Has there been personal use of the property? (Rev Proc 2008-16) – Does the property include personal property or other intangibles? – What is the Purchase Price Allocation?
  89. 89. 2. Howd’ya Get It? y – As the result of a previous Exchange? – Is the property from an estate or family, or was it gifted? – How long has the property been owned? – What is the Adjusted Cost Basis?
  90. 90. 3. What else ‘ya Got? – Is there other property being sold? – Are there other property rights or easements? – Any excess land associated with their primary residence? – Does the transaction need to be bigger, smaller or done in stages? – “Find “Fi d a way to make it bigger; find a way t k bi fi d to make it smaller” Warren G. Harding
  91. 91. 4. What’cha Want? – What is the short term/long term strategy for the property? – Ideally the value should be even or up. – An important element of building wealth is the use of untaxed funds. funds – Diversify in type, location, quantity & quality of the Replacement Property. – In an Exchange, the adjusted cost basis shifts first, followed by the cash or debt.
  93. 93. Tenants - In - Common TENANTS-IN-COMMON (TICs) OFFER A STRESS FREE ( ) OPTION TO OWN INVESTMENT GRADE REAL ESTATE Tenants-in-common Any Real Property
  94. 94. Why Use TICS in an Exchange? Courtesy of Grubb & Ellis Commercial Real Estate Services
  95. 95. What is a TIC? Courtesy of Grubb & Ellis Commercial Real Estate Services
  96. 96. Direct Ownership vs. TIC Conventional Direct Ownership 1031 Tenant-in-Common Property Exchange Property Exchange Lower returns on less desirable properties Higher returns on institutional-quality properties Difficult to comply with Section 1031 45 day ID Easy to comply with Section 1031 45 day ID rules rules; Exchangor must find properties when properties are pre-identified Difficult to match Section 1031 exchange debt Easy to match Section 1031 exchange debt and and equity equity Investor must negotiate and arrange loan Prearranged financing Expensive and time-consuming property Professional proven property management in management place. You receive a monthly or quarterly income check. Cash flow, depreciation, and appreciation Cash flow, depreciation, and appreciation potential potential Ability to use the Section 1031 exchange again Ability to use the Section 1031 exchange again Ability to refinance and distribute proceeds “tax Ability to refinance and distribute proceeds “tax free” free”
  97. 97. Who is a Typical Securitized TIC Investor? Courtesy of Grubb & Ellis Commercial Real Estate Services
  98. 98. Diversification Courtesy of Grubb & Ellis Commercial Real Estate Services
  99. 99. Property Gallery Courtesy of Grubb & Ellis Commercial Real Estate Services
  100. 100. Real Estate TICS • Undivided Fractional Ownership in Real Estate • Can Be “Grade A” • Can Be Single Tenant, No Debt Investments • Senior Care Facilities • Nationwide Retailers • Student Housing • Medical Office Buildings Courtesy of Grubb & Ellis Commercial Real Estate Services
  101. 101. • Single Tenant • No Debt • VERY Healthy Company • Single Tenant • No Debt • Thrives During Downturn
  102. 102. How Does it Work? 1. Client sells investment property. 2. Proceeds transferred to QI (Edmund & Wheeler) 3. Client and advisor identify potential properties through a myriad of sources within their 45-day ID period. 4. Client is granted a reservation. 5. Client and advisor fill out necessary paperwork to close. 6. Client is on title and receives a deed to the property. 7. Client assumes % interest of non-recourse financing (1) 8. Client receives % interest of the income generated from the property. 9. At the sale, the client receives % share of any and all potential profits. Courtesy of Grubb & Ellis Commercial Real Estate Services
  103. 103. Umbrella Partnership Real Estate Investment Trust (UP-REIT) Exchange! Any Real Property
  104. 104. What Is An UPREIT? • Similar to a Mutual Fund For Real Estate Investors. • Allows Exchanging Real Property Into Operating o s c a g g ea ope ty to Ope at g Partnership (OP) Shares of Existing REITs • REITS can convert existing properties into TICs allowing 35 gp p g ownership positions; then • TICs are then converted back to REIT shares and investors then hold shares in the REIT’s entire portfolio. p • Portfolio is professionally managed with 95% of the net income to investors.
  105. 105. Section 721 Exchange Overview • Instead of Selling and Exchanging, The Investor Contributes Property to a Partnership • Receives Operating Partnership (OP) units. units
  106. 106. UPREIT Benefits • Transaction completed on a tax-deferred basis. If shares go to an estate the ultimate recipients will receive a stepped up basis. • Transaction can be structured enabling property owner to convert an interest in a specific property into a larger, more balanced portfolio held by the UPREIT. • Allows an interest in illiquid individual properties to become more easily saleable.
  108. 108. A Viable Alternative Investment for "like-kind" 1031 Exchange. Oil & Gas Lease AN EXTREMELY VIABLE ALTERNATIVE FOR AN EXCHANGE. EXCHANGE • Working and Royalty Interest • Leasehold Interest Allows the Right to Search for and Produce Oil and Gas • Fractional Owners Have the Same Rights as a Single Owner and Can subdivide or Offer for Sale on the Open Market
  109. 109. Oil & Gas Lease Characteristics • Liquidity • Active Secondary Market • Life f P d ti Lif of Production • Supported by Qualified 3rd Party Reports • Annual Return • Average 15% - 18% Over Term • Tax Treatment • 15% Tax Free Depletion Allowance • Valuation • Valued on the Amount of Potential Production
  110. 110. Oil & Gas Lease Benefits • Immediate Economic Closing With Predictable Cash Flow • Ability to Participate in the Future Production • Highly Liquid Individual Fractional Ownership • Diversification By Investing In One or Several Qualified Working Interests in Different Markets
  112. 112. The Structured Sale The St t d S l i Th Structured Sale is a method for selling appreciated assets such as th d f lli i t d t h real estate and businesses that allows sellers to: • Defer capital g p gains taxes to future y years • Collect a stream of guaranteed payments over a set number of years In Addition: • Makes the transaction safer for the seller • Doesn't require the seller to acquire new property. This method was developed in 2005 and is becoming a sought after method for tax deferral when selling a business or real estate.
  113. 113. The Structured Sale & Section 1031 • Identified as an Alternative Strategy In Exchange Agreement • Gives Buyer Full Title • Can Be Used When Replacement Properties Cannot Be p p Identified and/or Purchased in the 45/180 Day Time Restraints • Can Be Used For Taxable “Boot”
  114. 114. The Structured Sale & Selling a Business • There is Inherent Risk Associated With a Typical Installment Sale • The Structured Sale Provides a Safe Alternative • Can Be Used in an Exchange for non “like-kind” Items like g goodwill and FF&E, or; • Can be used for the entire transaction amount if the client wants to exit the real estate class
  115. 115. The Structured Sale
  116. 116. How Do You Summarize 122 Slides?
  117. 117. Section 1031 is the same as an interest- free loan f f l from the th Government G t
  118. 118. Section 1031 is used in less than 10% of the transactions that it should be!
  119. 119. Accounting Professionals owe it to their clients to understand this powerful tool!
  120. 120. Section 1031 is about Relocation and Reallocation of Assets without Paying Capital y g p Gains!!!
  121. 121. Any U S Real Property U.S. Can Be Exchanged For Any Other U.S. Real Property!
  122. 122. Section 1031 can be y used to dramatically increase the value of holdings by leveraging g y g g Uncle Sam’s money.
  123. 123. Ask the 4 Questions 1. What’cha Got 2. Howd’ya Get It? y 3. What Else ‘ya Got? y 4. What’cha Want?
  124. 124. Every t E tax-paying entity i tit qualifies f a S ti lifi for Section 1031 Exchange!
  125. 125. Personal property can g also be Exchanged. “Like-kind” is literal!
  126. 126. There are replacement options available for p Section 1031 Understand Them!
  127. 127. Tenants-In-Common Management-Free Real Estate Investments in Grade A Properties
  128. 128. UPREIT Exchange into a Real g Estate Investment Trust
  129. 129. Oil & Gas A timely alternative to y owning real estate with g the same benefits and flexibility.
  130. 130. Structured Sales An annuity based “Paycheck” for failed exchanges and business transfers.
  131. 131. Also…with Section 1031 alone: • Must employ a Qualified Intermediary • Time limits of 45 and 180 days • Properties must be “Like-Kind” Like Kind • Business or Investment Purpose • Relinquished and Replacement Properties held by y same taxpayer • Exchanges can be done either forward (Cases #1 & #3) or reverse (Cases #2 #4 & #5) #2,
  132. 132. Congratulations! You are now a member of the elite, the proud, the educated…. Edmund & Wheeler, Inc. Alumni Association Membership has it’s benefits!