1031s 101


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1031s 101

  1. 1. 1031s:101 Nuts & Bolts ofLike-kind E hLik ki d Exchanges
  2. 2. Rick Chess, Esquire qChess Law FirmDavid Gorenberg, Esquire, CES® Gorenberg EsquireCitibank 1031 Exchange Service
  3. 3. Important DisclosuresThis presentation does not constitute legal or tax advice. Citibank and itsemployees do not provide tax or legal advice and are not responsible foradvising customers on the laws or regulations pertaining to any 1031exchange transaction. Citibank and its employees will not make anyrepresentations regarding the tax consequences of any 1031 exchangetransaction. It is the customer’s responsibility to seek tax and legal advisors inconnection with any 1031 exchange transaction.IRS Circular 230 Disclosure: To the extent that this material or any yattachment concerns tax matters, it is not intended to be used and cannot beused by a taxpayer for the purpose of avoiding penalties that may be imposedby law.Citibank, N.A.,Citibank N A Member FDIC Citibank and Arc Design is a registered FDIC.trademark of Citigroup Inc.
  4. 4. Why Exchange?4 ©2012 David Gorenberg & Rick Chess
  5. 5. Taxation 101 • Generally, all income is taxable, unless specifically exempted y, , p y p by law. • Even illegal income, such as stolen or embezzled funds, must be reported on Line 21 of Form 1040. Source: Department of Treasury, Internal Revenue Service, Publication 525.5 ©2012 David Gorenberg & Rick Chess
  6. 6. IRC Section 1031 • “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.” • §1031 provides for deferral of taxes, not complete elimination.6 ©2012 David Gorenberg & Rick Chess
  7. 7. §1031 in a NutshellTo obtain complete deferral of capital gains taxes,the taxpayer should: •Purchase replacement property that is equal or greater in value to th t the relinquished property li i h d t •Have equal or greater equity in the replacement property •Have equal or greater debt on the replacement property l t t •Receive nothing except like-kind property •Avoid constructive receipt of exchange proceeds •Use a qualified intermediary7 ©2012 David Gorenberg & Rick Chess
  8. 8. Like-Kind Property Foreign real property is not like-kind to U.S. real property.8 ©2012 David Gorenberg & Rick Chess
  9. 9. Time Restrictions• 1984 Congress amends Section 1031 - 45 day identification period - 180 day exchange period runs concurrent - Or due date of tax return, whichever is earlier - Calendar days not business days days, - No extensions Identification Period Exchange PeriodDayD 0 Day D 45 Day D 1809 ©2012 David Gorenberg & Rick Chess
  10. 10. Identification Requirements •Signed by taxpayer, and in writing •Delivered •QI or seller of replacement property •Unambiguously described g y •Legal description •Street address •Distinguishable name (e.g., Mayfair Apartment Building) •May be revoked or amended, with same May amended formality as above10 ©2012 David Gorenberg & Rick Chess
  11. 11. Identification Rules 3 Property Rule – up to 3 properties, without properties regard to FMV; or 200% Rule – any number of properties, so long as aggregate FMV does not exceed 200% of FMV of relinquished properties; but 95% Exception – if first two rules violated, must acquire 95% of FMV of all identified properties11 ©2012 David Gorenberg & Rick Chess
  12. 12. Less-than-Fee Interests in Real Property that Qualify for Exchanges• Leases with at least 30 years remaining, including renewal options• Vendee’s interest in a land sale contract; not the vendor s vendor’s interest• Undivided interest in one property for an undivided or 100% interest in another property• Remainder interest in real property• Timber rights, riparian rights, mineral rights i l i ht – As determined by state law12 ©2012 David Gorenberg & Rick Chess
  13. 13. Common Less-than-Fee Exchanges • Timber Rights • Tenants in Common • Mineral Rights • Transferrable Development • Oil Rights Rights • Riparian Rights Ri i Ri ht • Others13 ©2012 David Gorenberg & Rick Chess
  14. 14. Like-Kind Personal Property • Livestock of the same sex • Automobiles for automobiles • Buses for buses • Manufacturing equipment for manufacturing equipment • 13 general asset classes; OMB Standard Industrial Classification (SIC) Manual identifies 4-digit product classes; New North American Industry Classification System (NAICS) is 1400 pages • Exchanges within product class14 ©2012 David Gorenberg & Rick Chess
  15. 15. Equipment Exchanges q p g ≈ ≈15 ©2012 David Gorenberg & Rick Chess
  16. 16. Common Personal Property Exchanges •Aircraft Ai ft •Artwork •Collectibles •Equipment •Fleet Vehicles •Intellectual Property •Licenses, Franchises, Patents, Trademarks •Livestock •Others16 ©2012 David Gorenberg & Rick Chess
  17. 17. Common Personal Property Exchanges -F Franchises often sold with Real Estate hi ft ld ith R l E t t •FFranchises may be exchanged hi b h d for other franchises • Nature of the franchise must also be like-kind • Re/Max is not like-kind to Ramada • Re/Max is like-kind to Century 2117 ©2012 David Gorenberg & Rick Chess
  18. 18. Oil, Gas & Mineral Exchanges Estates in Land: -Fee Simple: owner is entitled to the entire property, Fee without conditions, in perpetuity -Mineral Estate: owner is entitled to only the mineral interests in the property, in perpetuity -Mineral Lease: lessee is entitled to explore for and remove minerals from the property, usually for a finite term or until the minerals have been exhausted -Mineral Royalty: the right to receive income from the minerals recovered by the lessees For 1031 exchange purposes, taxpayers may exchange among these interests freely18 ©2012 David Gorenberg & Rick Chess
  19. 19. Regulations 1.1031 - safe harbors • 1.1031(k)-1(g) – (2) Security or Guarantee Arrangements • Determination of whether the taxpayer is in actual or constructive receipt of the exchange funds is made without regard to existence of mortgage, standby letter of credit, third party guarantee, etc. – (3) Qualified Escrow Accounts and Qualified Trusts • Determination of whether the taxpayer is in actual or constructive receipt of the exchange funds is made without regard to whether the funds are held in a Qualified Escrow Account or Qualified Trust – QEA – Escrow holder is not a disqualified person; escrow agreement contains “(g)(6)” limitations t t i “( )(6)” li it ti – QT – Trustee is not a disqualified person; trust agreement contains “(g)(6)” limitations – (4) Qualified Intermediary – QI is not considered an agent of the taxpayer; is not a disqualified person; QI enters into “exchange agreement” that contains the “(g)(6)” limitations – (5) Interest and Growth Factors • Determination of whether the taxpayer is in actual or constructive receipt of exchange funds is made without regard to the fact that the taxpayer is or may be entitled to receive any interest or growth factor with respect to the deferred exchange.19 ©2012 David Gorenberg & Rick Chess
  20. 20. Regulations 1.1031 - (g)(6) Limitations• (i) An agreement limits a taxpayers rights as provided in this paragraph (g)(6) only if the agreement provides that the taxpayer has no rights rights, except as provided in paragraphs (g)(6)(ii) and (g)(6)(iii) of this section, to receive, pledge, borrow, or otherwise obtain the benefits of money or other property before the end of the exchange period.• (ii) The agreement may provide that if the taxpayer has not identified replacement property by the end of the identification period the taxpayer period, may have rights to receive, pledge, borrow, or otherwise obtain the benefits of money or other property at any time after the end of the identification period.• (iii) The agreement may provide that if the taxpayer has identified replacement property, the taxpayer may have rights to receive, pledge, borrow, or otherwise obtain the benefits of money or other property upon or after – (A) The receipt by the taxpayer of all of the replacement property to which the taxpayer is entitled under the exchange agreement, or – (B) The occurrence after the end of the identification period of a material and substantial contingency that – • (1) Relates to the deferred exchange, • (2) Is provided for in writing, and • (3) Is beyond the control of the taxpayer and of any disqualified person ( defined in paragraph (k) of thi section), other th (as d fi d i h f this ti ) th than the person obligated to transfer the replacement property to the taxpayer.20 ©2012 David Gorenberg & Rick Chess
  21. 21. Federal Regulations of QIs21 ©2012 David Gorenberg & Rick Chess
  22. 22. State Regulation of QIs • Enacted • Pending – California – Arizona – Colorado – New Jersey – Connecticut – Oklahoma – Idaho – Texas ≈ Bill Died – Maine – Nevada – Oregon – Virginia – Washington22 ©2012 David Gorenberg & Rick Chess
  23. 23. Your Questions23 ©2012 David Gorenberg & Rick Chess
  24. 24. Contact InformationDavid Gorenberg, Esquire Richard B. "Rick" Chess, EsquireCertified Exchange Specialist® Managing PartnerDirector, 1031 Exchange ServicesCitibank, N.A. Chess Law Firm, PLC1650 Market Street, Suite 3550 2727 Buford Road, Suite DPhiladelphia, PA 19103 Richmond, VA 23235Office: 267.385.3624 804.474.9879 OfficeFax: 866.767.8201 804.241.9999 CellMobile: 856.905.0407 rick@chesslawfirm.comE-mail: david.gorenberg@citi.comwww.1031exchange.citibank.com www.chesslawfirm.com 1031.exchange@citi.com @ 855.253.1031 Thank You!24 ©2012 David Gorenberg & Rick Chess