This document provides an overview of Internal Revenue Code Section 1031 exchanges, which allow taxpayers to defer capital gains tax when selling investment or business property and reinvesting the proceeds into similar "like-kind" property. Key points covered include what qualifies for a 1031 exchange, requirements and timelines, exchange terminology, strategies for forward and reverse exchanges, benefits for realtors and taxpayers, and common misconceptions about 1031 exchanges.

1. Internal Revenue Code Section 1031 Fundamental and Advance Concepts Presented by: Andrew Gustafson, CES ® Atlas 1031 Exchange, LLC www.atlas1031.com 850-496-0090

2. Instructional Objectives What is a 1031 exchange? What is and is not eligible for a 1031. Realtor benefits from recognizing a 1031. Five Reasons to initiate a 1031 exchange. Exchange terminology and requirements. Qualified use test. Forward and reverse strategies.

3. Current Law Starker v. Commissioner, 1979, exchanges may not be kept open indefinitely. In 1984, Congress added 45 and 180 calendar day time limits. In 1991, the IRS issued the identification limits and established the code requirement to use a Qualified Intermediary.

4. What is a 1031 Exchange? IRC § 1031(a)(1) No gain will be recognized on property held for productive use in business or investment when exchanged for like kind property held for productive use in business or investment.

5. What is the outcome of 1031 Exchange? Defer Federal capital gains tax State capital gains tax Recaptured Depreciation Interest free loan

6. Real Property – partial list Rental properties Land Office buildings Shopping Centers Retail Stores Golf Courses Trailer Parks Parking lots Motels Improvements to be constructed Oil, gas and mineral rights Water rights Tenants in common Timberland Conservation easements Apartments

7. Depreciable Tangible Personal Property Aircraft; Barges, vessels, tugs; Medical and dental equipment; Artwork and collectibles; Construction and farm equipment; Light and Heavy general purpose trucks; Furniture; Taxis, cars; 13 General Asset Classes.

8. Intangible Nondepreciable Personal Property Mitigation credits used by developers Airport take-off and landing rights or slots FCC TV and Radio licenses or station swaps Patents Sport Contracts Copyrights Trade marks Development rights

9. Property Excluded from 1031 Primary residence Stock, bonds or notes Partnership Interests Indebtedness Inventory

10. Realtor Benefits Two commissions are better than one 180 calendar day timeframe Distinguishes yourself from the competition Service

11. Taxpayer Benefits Defer tax payment Appreciation Depreciation Cash Flow Consolidation Diversification Relocation of Investment

12. Exchange Terminology Relinquished Property Replacement Property Qualified Intermediary or Accommodator Capital Gain Boot Tax Deferral Adjusted Basis

13. Qualified Use Test Intent must be for the production of income or investment Facts Holding period Rented Limited personal use Schedule E

14. Exchange Requirements Value and equity of new property must be equal to or greater than the old property. Debt on the new property must be equal to or greater than the old property. Exchangor does not receive cash or reduction in debt otherwise a tax is triggered. Cash offsets debt, but debt does not offset cash.

15. Constructive Receipt g(6) limitations In no event can Exchangor receive, pledge, borrow or otherwise obtain the benefits of the exchange proceeds or property held in the Exchange Account.

16. Constructive Receipt of Cash Occurs when Exchangor receives cash. Occurs when cash or other property is held by an agent on Exchangor’s behalf. What happens when Exchangor receives Earnest Money Deposit?

17. Contract Language It is the Sellers intent to initiate an IRC § 1031 Tax Deferred Exchange by assigning the property contract to the Qualified Intermediary. Buyer/Seller is aware Seller/Buyer has the option to qualify this transaction as an Internal Revenue Code Section 1031 exchange. Seller/Buyer requests

18. Contact Language (cont’d) Buyer’s/Seller’s cooperation in the event of an exchange and agrees to the assignment of this contract to Intermediary by the Seller/Buyer. Seller/Buyer agrees to hold the Buyer/Seller harmless from any and all claims, liabilities and costs of such an exchange.

19. Same Taxpayer Requirement Tax return that sells is the tax return that buys. Name on the title of the old property is the name that is on the title to the new property.

20. 1031 Timelines 45 calendar day identification post closing Three property rule Two hundred percent rule 95% exception rule 135 calendar day replacement period. No extension unless Presidentially declared disaster.

21. Identification Requirements Address, city and state, % ownership, required, parcel id suggested. In writing, signed by Exchangor, email not acceptable. Must be received by 11:59 PM of the 45 th calendar day.

22. Related Party Rules Related Party Related by blood A taxpayer whose interest in an entity is greater than 50% If exchanged with related party, special two year period is imposed. If the replacement property is purchased from a related party, they must also be exchanging and not cashing out.

23. Misconceptions about Exchanges You must swap properties Must be land for land Only for large investors or commercial Very complicated Do not have to replace debt on old property

24. Types of Exchanges Simultaneous Forward or Delayed Reverse Build to Suit Improvement Leasehold Improvement

25. Building Wealth and Deferring Taxes Sales Price $750,000 Net Sales Price Less Closing Expenses 690,000 Adj Basis of Property Depre of $50,000 400,000 Taxable Gain 290,000 Taxes Due $ 58,360 Depre Recapture Tax (25%) 12,500 Federal Capital Gains Tax (15%) 36,000 Indiana Capital Gains Tax (3.4%) 9,860 Tax Due with 1031 Exchange 0

26. Wrap Up Questions