2. Agenda / Topic’s of Discussion:Agenda / Topic’s of Discussion:
• Deferred Exchange TerminologyDeferred Exchange Terminology
• Basic’s of Deferred ExchangesBasic’s of Deferred Exchanges
• Time FramesTime Frames
• IdentificationIdentification
• Like-KindLike-Kind
• ExamplesExamples
• Other IssuesOther Issues
3. Definitions / Terminology:Definitions / Terminology:
• 1031 Exchange and Safe Harbor1031 Exchange and Safe Harbor
• Qualified Intermediary and ExchangeQualified Intermediary and Exchange
Accommodator TitleholderAccommodator Titleholder
• Boot and Capital GainBoot and Capital Gain
• Identification and Exchange PeriodsIdentification and Exchange Periods
• Tax Basis and Fair Market ValueTax Basis and Fair Market Value
• Relinquished and Replacement PropertyRelinquished and Replacement Property
4. Common Misconceptions:Common Misconceptions:
• Property held for investment or productive use in a tradeProperty held for investment or productive use in a trade
or business –or business – yesyes, qualify for deferral treatment, qualify for deferral treatment
• Simultaneous transaction – no, not necessarySimultaneous transaction – no, not necessary
• Same type of assets exchanges – no, not necessarySame type of assets exchanges – no, not necessary
• Capital gains tax isCapital gains tax is eliminatedeliminated – no, just– no, just deferreddeferred
• Extension of time to completed exchange – no, unlessExtension of time to completed exchange – no, unless
presidential order in rare cases of declared emergenciespresidential order in rare cases of declared emergencies
• Livestock of different sexes – no, must be of the same sexLivestock of different sexes – no, must be of the same sex
• Tenancy-in-Common interests –Tenancy-in-Common interests – yesyes, qualify for gain, qualify for gain
deferraldeferral
5. Basic’s of a Deferred Exchange::
• Sale of Relinquished or Purchase of Replacement PropertySale of Relinquished or Purchase of Replacement Property
• Identification of Replacement PropertyIdentification of Replacement Property
• Purchase of Replacement or Sale of Relinquished PropertyPurchase of Replacement or Sale of Relinquished Property
• Equal or greater value & invest all cash proceeds (Napkin Rule)Equal or greater value & invest all cash proceeds (Napkin Rule)
• Use of Qualified Intermediary or Exchange AccommodatorUse of Qualified Intermediary or Exchange Accommodator
TitleholderTitleholder
• ““Common Ownership” (same party selling and purchasing)Common Ownership” (same party selling and purchasing)
Depending whether the exchange is a forward or reverse transaction
7. 1031 Time Frames (Deadlines):1031 Time Frames (Deadlines):
• 45 days to identify replacement property45 days to identify replacement property
• 180 days to close transaction180 days to close transaction
• Deadlines are firm regardless of whether the dateDeadlines are firm regardless of whether the date
falls on a weekend or holidayfalls on a weekend or holiday
• Time frames start when the benefits and burdensTime frames start when the benefits and burdens
are transferredare transferred
8. Rules for Identification:Rules for Identification:
• Three Property Rule; one to three properties without; one to three properties without
regard to fair market value - (most common)regard to fair market value - (most common)
• The 200% Rule; any number of properties provided that; any number of properties provided that
the aggregate fair market value of the replacementthe aggregate fair market value of the replacement
property does not exceed 200% of the fair market valueproperty does not exceed 200% of the fair market value
of the relinquished propertyof the relinquished property
• The 95% Rule; any number of properties as long as the; any number of properties as long as the
acquisition of the replacement property represents 95%acquisition of the replacement property represents 95%
of the identified propertiesof the identified properties
10. Example A:Example A:
First Variation Relinquished Replacement
Fair Market Value $ 450,000 $ 600,000
Net Equity $ 200,000 $ 200,000
Debt $ 250,000 $ 400,000
The taxpayer is acquiring property of greater value,
reinvesting the entire net equity and increasing the
mortgage on the replacement property.
Analysis: There is no boot and none of any realized gain
would be recognized currently as taxable gain.
11. Example A (continued):Example A (continued):
Second Variation Relinquished Replacement
Fair Market Value $ 450,000 $ 600,000
Net Equity $ 200,000 $ 150,000
Debt $ 250,000 $ 450,000
The taxpayer keeps $50,000 of the exchange proceeds, reinvesting only
$150,000 as a down payment on the replacement property.
Analysis: There is $50,000 of “cash boot” which results in the recognition
of a current taxable gain of $50,000.
12. Example A (continued):Example A (continued):
The taxpayer acquires property of a lower value and while reinvesting all
equity in the replacement property, acquires less debt in the process.
Analysis: The taxpayer has reduced the debt by $100,000 (“mortgage
boot”) which results in the recognition of current taxable gain of
$100,000.
Third Variation Relinquished Replacement
Fair Market Value $ 450,000 $ 350,000
Net Equity $ 200,000 $ 200,000
Debt $ 250,000 $ 150,000
13. Example B:Example B:
Hurko, LLC sells a shopping center through a Qualified
Intermediary for $875,000 with an adjusted tax basis of
$375,000. Within the mandatory identification period (45 days)
Hurko, LLC identifies land valued at $925,000 and ultimately
takes title within 180 days of the sale. At the time of the sale, the
shopping center (relinquished property) was encumbered by a
$300,000 mortgage. The land (replacement property) upon
transfer to Hurko, LLC will have a $325,000 mortgage. Hurko,
LLC received no cash upon the sale of the relinquished property.
Assume this fact pattern demonstrates an acceptable tax deferred
gain that satisfies the requirements set forth in IRC Section 1031!
Prepare schedules that reflects Hurko, LLC’sPrepare schedules that reflects Hurko, LLC’s
realized, recognized and tax deferred gains as well asrealized, recognized and tax deferred gains as well as
the substituted basis in the replacement property!the substituted basis in the replacement property!
14. Example B (continued):Example B (continued):
Sales price of relinquished property $ 875,000
Less: adjusted basis <375,000>
Realized gain on sale $ 500,000
Proceed of the sale from the relinquished property $ 875,000
Less: mortgage balances at the time of the sale <300,000>
Net cash proceed from the relinquished property $ 575,000
Net cash proceeds from relinquished property $ 575,000
Plus: mortgage on replacement property 325,000
Plus: additional cash used to purchase replacement property 25,000
Subtotal purchase price of the replacement property 925,000
Less: gain on sale of the relinquished property <500,000>
Substituted adjusted basis of the replacement property $ 425,000
15. Example B (continued):Example B (continued):
Adjusted basis of relinquished property $ 375,000
Plus: additional cash used to purchase replacement property 25,000
Plus: additional mortgage on replacement property 25,000
Substituted basis of replacement property $ 425,000
16. Comprehensive Example C (continued):Comprehensive Example C (continued):
Jodi, LLC gives up property with an adjusted basis of $250,000
(with a fair market value of $400,000) that is subject to a
mortgage of $75,000 (that is assumed by Lauren, LLC). In return
for this property, Jodi, LLC receives property with a fair market
value of $300,000 (adjusted basis of $200,000 to Lauren, LLC)
and cash of $25,000. Assume this fact pattern demonstrates an
acceptable tax deferred gain that satisfies the requirements set
forth in IRC Section 1031!
Let’s discuss the tax consequences for both partiesLet’s discuss the tax consequences for both parties
(Jodi, LLC and Lauren, LLC) involved in this like(Jodi, LLC and Lauren, LLC) involved in this like
kind exchange!kind exchange!
17. Comprehensive Example C (continued):Comprehensive Example C (continued):
Jodi, LLC’s realized gain = ?__________
Jodi, LLC’s recognized gain = ?__________
Jodi, LLC’s basis in the real property received = ?__________
Lauren, LLC’s realized gain = ?__________
Lauren, LLC’s recognized gain = ?__________
Lauren, LLC’s basis in the real property received = ?__________
18. ““Lightening Round”Lightening Round”
• Related party rules;Related party rules; IRC Section 1031(f)IRC Section 1031(f)
• Not all partnersNot all partners want a deferred exchangewant a deferred exchange
• Tenancy-in-commonTenancy-in-common
• PropertyProperty never used in a trade or businessnever used in a trade or business
• Condo / Co-opCondo / Co-op development and sale transactionsdevelopment and sale transactions
• NettingNetting boot and financingsboot and financings
• TimingTiming; how long do you need to hold the; how long do you need to hold the
propertyproperty
• OtherOther issues, concerns, matters recently raisedissues, concerns, matters recently raised
Jodi, LLC’s realized gain = $150,000 (400K proceeds or 300K + 25K + 75K less 250K basis)
Jodi, LLC’s recognized gain = $100,000 (&lt; of realized gain or boot received $25K + $75K)
Jodi, LLC’s basis in the real property received = $250,000 (FMV received of $300K less postponed gain of $50K or $250 basis + $100K gain - $100K boot received)
Lauren, LLC’s realized gain = $100K ($400K proceeds - $300K basis - $75K of debt assumed - $25K cash paid)
Lauren, LLC’s recognized gain = Zero / $0 (entire realized gain is postponed / boot was paid!)
Lauren, LLC’s basis in the real property received = $300K (FMV of property received $400K – postponed gain of $100K or taking its basis of $200K and adding to it the $75K of debt assumed and the $25K of cash paid)
