The document provides an outline for a course on advanced IRC Section 1031 exchange concepts. It covers exchange terminology, definitions of like-kind property, delayed and reverse exchanges, boot, identification and exchange periods, restrictions on exchange proceeds, related party rules, and issues around vacation homes and tenant-in-common ownership structures.

2. The Power of Strategy™: Mastering Advanced § 1031 Exchange Concepts Hosted by: Asset Preservation, Inc. Presented by: William B. Hood, CPA Division Manager One Hour

3. Course Outline Exchange Terminology IRC §1031 Definition of Like-Kind Property Delayed Exchanges Identification Rules Parking Arrangements The Reverse & Improvement Exchange Revenue Procedure 2004-51 Choosing a Qualified Intermediary

4. Boot Cash Boot Constructive Receipt Direct Deeding Exchanger / Taxpayer Exchange Agreement Exchange Period Identification Period Like-Kind Property Mortgage Boot Qualified Intermediary Relinquished Property Replacement Property §1031 Exchange Terminology

5. Internal Revenue Code §1031 Non-Recognition of Gain or Loss from Exchange Solely of Kind “ 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 either for productive use in a trade or business or for investment.”

6. §1031- Exceptions 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

7. Property Held for Sale The purpose for which the property was initially acquired The purpose for which the property was subsequently held The extent to which improvements, if any, were made to the property The frequency, number and continuity of sales The extent and nature of the transaction involved The ordinary course of business of the taxpayer The extent of advertising, promotion of the other active efforts used in soliciting buyers for the sales of the property The listing of property with brokers The purpose for which the property was being held at the time of sale

8. §1031- Partnership Issues Is it a true partnership? Option #1 : (swap and drop) Partnership stays intact and acquires replacement property; refinances later Option #2 : (drop and swap) Election out of the partnership into separate undivided tenant-in-common interests Timing Issues

9. Definition of Like-Kind Property Real Property for Real Property

10. Like-Kind Property Issues What is Excluded? Qualifying Real Property Qualifying Personal Property

11. Like-Kind Issues: Holding Period Time is only one factor The Taxpayer’s intent is the key issue One Perspective: 24 months or more In PLR 8429039, the IRS stated that a minimum holding period of two years would be sufficient. Second Perspective: Minimum of 12 months Straddles two tax filing years. Over 12 months qualifies for long-term capital gain treatment. Attempt by Congress in 1989 to impose one year holding period (which didn’t pass).

12. Revenue Procedure 2008-16 Creates safe harbor for vacation home exchanges. IRS will consider a dwelling unit held for investment if certain requirements are met. Requirements: The relinquished and replacement properties are owned by the taxpayer for at least 24 months (the qualifying use period); Within each of these two 12 month periods constituting the qualifying use period the taxpayer must: Rent the property to another person or persons at fair market rent for 14 or more days (family members qualify if they use the property as the primary residence); and The taxpayer’s personal use of the dwelling unit cannot exceed the greater of 14 days or 10 percent of the time it is rented. Like-Kind Issues: Vacation Homes

13. Barry E. Moore v. Comm., T.C. Memo. 2007-134 The taxpayers never rented or attempted to rent the property The taxpayers deducted mortgage interest as “home mortgage interest” expense rather than investment interest expense. The taxpayers did not take (and probably did not qualify for) depreciation or other tax benefits associated with investment property, including deductions or maintenance expenses. Planning Strategies Substantiate investment intent Report rental income, attempts to rent property or conversion from a second home to a rental property held for investment. Treat property as held for investment on the tax return Like-Kind Issues: Vacation Homes

14. Exchanges of vacation homes held for investment are possible, provided the primary reason is holding for investment and not for personal use. Like-Kind Issues: Vacation Homes Revenue Procedure 2008-16 Moore vs. Comm. 2007-134 Range of possible vacation home exchanges. Safe Harbor Non-Safe Harbor 1 2 3 4 5 6 7 8 9 10 Conservative (“Safer”) Aggressive (“Riskier”)

15. Like-Kind Issues: Tenant-in-Common Ownership What is a typical TIC investment? Advantages of a TIC investment? Risks involved in a TIC investment Revenue Procedure 2002-22

16. Revenue Procedure 2002-22 Does not provide a safe harbor for TIC programs. Revenue Procedure offers: Guidelines for requesting advance rulings on specific co-ownership structures and proposed transactions Conditions present in proposed TIC structure under which IRS may consider a request for a ruling. “ Like-Kind” Issues: “TIC” Ownership Like-Kind Issues: Tenant-in-Common Ownership

17. The Taxpayer acquired property of greater value, reinvesting all net equity and increasing the debt on the replacement property. Analysis: There is no boot. For full tax deferral, a Taxpayer must meet two requirements: 1) Reinvest all net exchange proceeds 2) Acquire property with the same or greater debt. The Exchange Equation $60,000 - Cost of Sale $ 0 $540,000 $540,000 Net Equity $ 0 $660,000 $300,000 - Debt $1,200,000 $900,000 Value Boot Replacement Relinquished

18. The Taxpayer acquired property of a lower value, keeps $100,000 of the net equity and acquired a replacement property with $40,000 less debt. Analysis: This results in a total of $140,000 in boot. ($40,000 mortgage boot and $100,000 in cash boot = $140,000) The Exchange Equation $ 100,000 $440,000 $540,000 Net Equity $60,000 - Cost of Sale $140,000 Total Boot $40,000 $260,000 $300,000 - Debt $700,000 $900,000 Value Boot Replacement Relinquished

19. The Taxpayer acquired property of a lower value, reinvesting all net equity, but has less debt on the replacement property. Analysis: This results in $40,000 in mortgage boot. The Exchange Equation $60,000 - Cost of Sale $ 0 $540,000 $540,000 Net Equity $40,000 Total Boot $40,000 $260,000 $300,000 - Debt $800,000 $900,000 Value Boot Replacement Relinquished

20. Closing Costs What Are Exchange Expenses? A direct cost of selling real property typically including: Real estate commissions Title insurance premiums Closing or escrow fees Legal fees Transfer tax and notary fees Recording fees Costs specifically related to the fact the transaction is an exchange such as the Qualified Intermediary fees.

21. Who is a Related Party? Four Different Scenarios: 1. Simultaneous Exchange (Swap) 2. Delayed – Selling to a Related Party 3. Delayed – Purchasing from a Related Party (See Rev. Ruling 2002-83, PLR 9748006) 4. Delayed – Purchasing from a Related Party who is Exchanging (See PLR 2004-40002) Related Party Rules

22. §1031 – ¾ §121 – ¼ §1031- §121 Split Treatment Sale of a Fourplex 3 units rented 1 unit primary residence §121 Primary Residence §1031 §1031 §1031

23. SALE The Delayed Exchange with a QI Direct Deed

24. Direct Deed SALE $ The Delayed Exchange with a QI

25. Direct Deed $ PURCHASE The Delayed Exchange with a QI Direct Deed $ SALE

26. 45 Day Identification Period: The Taxpayer must identify potential replacement property(s) by midnight of the 45 th day from the date of sale. 180 Day Exchange Period: The Taxpayer must acquire the replacement property by midnight of the 180 th day, or the date the Taxpayer must file its tax return (including extensions) for the year of the transfer of the relinquished property, whichever is earlier. Delayed Exchange - Time Requirements

27. Three Property Rule: The Taxpayer may identify up to three properties of any fair market value. 200% Rule: The Taxpayer may identify an unlimited number of properties provided the total fair market value of all properties identified does not exceed 200% of the fair market value of the relinquished property. 95% Rule: If the Taxpayer identifies properties in excess of both of the above rules, then the Taxpayer must acquire 95% of the value of all properties identified. Delayed Exchange – Identification Rules

28. Identification must be: Made in writing Unambiguously describe the property Hand delivered, mailed, telecopied or otherwise sent Sent by midnight of the 45 th day Delivered to the Qualified Intermediary or a party related to the exchange who is not a disqualified person Delayed Exchange – Identification Rules

29. In a deferred exchange, U.S. Treasury Regulations, Section 1.1031 (k)-1(g)(6), require stipulations in the exchange agreement which limit the Taxpayer’s ability to receive, pledge, borrow or otherwise obtain the benefits of money or other property before the end of the exchange period. The Exchanger 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 replacement property to which the taxpayer is entitled under the exchange agreement (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 (as defined in paragraph (K) of this Section), other than the person obligated to transfer the replacement property to the taxpayer.” Restrictions on Exchange Proceeds 1.1031(k) – 1(G)(6)

30. Restrictions on Proceeds - 1.1031(k)-1(G)(6) Section 1.1031(k)-1(g)(6 ) Scenario #1 (Multiple properties within the ID Period) Scenario #2 (Multiple properties outside the ID Period) Restrictions on Exchange Proceeds 1.1031(k) – 1(G)(6)

31. Establish the Taxpayer’s intent Consult with an experienced QI and tax/legal advisor prior to closing the sale of the relinquished property. Ensure that the Sale Contract is assignable and that they Buyer is made aware of such assignment in writing. The following language is to establish three things: Intent to effect a §1031 tax deferred exchange Release the Buyer from any liabilities or costs resulting in the exchange; Notify the Buyer in writing of assignment. Highlights of a Valid Delayed Exchange

32. The QI’s Exchange Agreement must be executed prior to closing the sale. QI oversees the closing. The QI should oversee the closing to ensure §1031 is properly reflected. The taxpayer must identify the property(ies) to be acquired in accordance with the Rules of Identification. The taxpayer must close on the new property by the 180th calendar day (or their tax filing date – whichever is earlier) from the close of the relinquished property sale. Highlights of a Valid Delayed Exchange

33. What Not to do in a Delayed Exchange Christensen vs. Comm. (April 10, 1998) (Didn’t file extension to obtain full 180 days) Knight vs. Comm. (March 16, 1998) (Closed after the 180 th day) Dobrich vs. Comm. (October 20, 1997) (Backdated the Identification Notice)

34. Parking Arrangements Replacement property parked (exchange last) Relinquished property parked (exchange first) Improvement / build-to-suit exchanges Reverse and improvement exchange combined

35. Effective September 15, 2000 Provides a safe harbor for reverse exchange transactions that stay within the parameters of the Revenue Procedure. Reverse exchanges may be structured outside the safe harbor. Revenue Procedure 2000-37

36. Key Terms QEAA = Qualified Exchange Accommodation Arrangement EAT = Exchange Accommodation Titleholder (EAT cannot be a disqualified person and must be subject to federal income tax) Revenue Procedure 2000-37

37. QEAA Summary EAT must acquire legal title to the property or other indicia of ownership to be treated as beneficial ownership of the property under applicable principles of commercial law (e.g., a contract for deed). Intent - It is the Taxpayer’s bona fide intent that the property held by the exchange accommodation title holder represent either replacement property or relinquished property in an exchange.

38. Qualified Exchange Accommodation Agreement No later than five business days after the EAT’s acquisition of the replacement property, the Taxpayer and the EAT enter into QEAA. Identification of relinquished property within 45 calendar days in a manner consistent with the requirements of §1-1031(k)-1(c). 180 calendar days maximum parking term by the EAT. QEAA Summary

39. EAT may act as both QI and EAT. Taxpayer may guarantee debt or obligations and can indemnify the EAT from construction expenses. Taxpayer may loan or advance funds for acquisition. EAT can lease or enter into management agreements with taxpayer. Taxpayer can act as supervisor and/or contractor to provide means for improvements on parked property. EAT and Taxpayer may enter agreements using puts and calls at fixed or formula prices. Permissible Agreements

40. The Reverse Exchange Why Perform a Reverse Exchange? Seize the moment Protect your exchange Improve the replacement property Reverse exchange structures

41. Replacement Property Parked (Step 1) $800k Rep. Prop. Deed EAT Acquisition Lease Reverse Exchange Format Replacement Property Parked (Step 1) $700,000 Loan $100,000 Cash $800,000 Purchase Price $100,000 + $700,000

42. Replacement Property Parked (Step 2) $ Rep. Prop. Deed $ Rel. Prop. Deed Reverse Exchange Format Replacement Property Parked (Step 2) $100,000 $200,000 Equity $700,000 $200,000 Debt $800,000 $400,000 Value Purchase Price Sale Price

43. Reverse Exchange Format Reverse Exchange Format Replacement Property Parked Positives Exchange equity need not be present Allows for multiple relinquished properties Negatives Lender may have issues lending to EAT

44. Lease Rel. Prop. Deed Reverse Exchange Format Relinquished Property Parked (Step 1)

45. Relinquished Property Parked (Step 1) $ Rep. Prop. Deed $ Reverse Exchange Format

46. $ $ Rel. Prop.Deed Reverse Exchange Format Relinquished Property Parked (Step 2)

47. Reverse Exchange Format Reverse Exchange Format Relinquished Property Parked Positives Loan and purchase easier (direct loan to Taxpayer) Negatives Equity and debt should match to avoid boot Lender issues (due on sale & prepayment penalties)

48. The Improvement Exchange Why Perform an Improvement Exchange? The property to be acquired in the exchange is not of equal or greater value to property being sold. Build a new investment from ground-up. The new investment is of equal or greater value, but it needs refurbishments.

49. The Improvement Exchange Identification of Replacement Property to be Produced “… if a legal description is provided for the underlying land and as much detail is provided regarding construction of the improvements as is practicable at the time identification is made.”

50. The Improvement Exchange Receipt of Replacement Property to be Produced “… if not within the provisions of Section 1031(a) if the relinquished property is transferred in exchange for services (including production services). Thus, any additional production occurring with respect to the replacement property after the property is received by the taxpayer will not be treated as the receipt of property of like-kind.”

51. Step 1 $ Rep. Prop Deed Rel. Prop. Deed Construction Agreement $ The Improvement Exchange

52. Rep. Prop. Deed The Improvement Exchange Step 2

53. The Improvement Exchange How do the Numbers Work Out? $230,000 Draw 2f oundation $930,000 Exchange Value $100,000 Draw 1 site work $600,000 Lot Purchase (cash purchase) Replacement Property $70,000 Cost of Sale $930,000 Net Equity to QI $0 Debt $1,000,000 Sales Price Relinquished Property

54. The Improvement Exchange Making improvements on property already owned by and affiliate or party related to the Taxpayer See PLR 200251008 See PLR 200329021 See PLR 200901004

55. Revenue Procedure 2004-51 An Exchange of Real Estate Owned by a Taxpayer for Improvements on Land Owned by the Same Taxpayer Does Not Meet the Requirements of §1031. See Decleene v. Commissioner, 115 T.C. 457 (2000); Bloomington Coco-Cola Bottling Co. v. Commissioner, 189 F.2d 14 (7th Cir. 1951). Rev. Rul. 67- 255. 1967 2 C. B. 270, Holds that a Building Constructed on Land Owned by a Taxpayer is Not of a Like-Kind to Involuntarily Converted Land of the Same Taxpayer.

56. Non-Safe Harbor Parking Arrangements DECLEENE V. COMMISSIONER The Tax Court issued a decision on built-to-suit exchanges. The party constructing the property in DeCleene did not possess the benefits and burdens of ownership of the property while it was being constructed.

57. Non-Safe Harbor Parking Arrangements TAM 200039005 Without any safe harbor applying, the issue of QI’s agency status was relevant. The IRS concluded the QI had no independent role in the transaction and was considered the Taxpayer’s agent. As a result, the Taxpayer was deemed to have acquired the replacement property on the QI’s acquisition of title.

58. Why Exchange? Sale vs. an Exchange $189,960 TOTAL TAX DUE +$66,960 plus State Tax (CA 9.3%) +$85,500 plus Federal Capital Gain (15%) $37,500 Recaptured Depreciation (25%) 3rd CALCULATE CAPITAL GAIN TAX DUE $720,000 equals CAPITAL GAIN -$80,000 minus Cost of Sale -$400,000 minus Net Adjusted Basis $1,200,000 Sales Price 2nd CALCULATE CAPITAL GAIN* $400,000 equals Net Adjusted Basis -$150,000 minus Depreciation +$50,000 plus Capital Improvement $500,000 Original Purchase Price (Basis) 1st CALCULATE NET ADJUSTED BASIS

59. Why Exchange? Sale vs. an Exchange Note: 25% x $150,000 = $37,500 * 15% x $570,000 = $85,500 * 9.3% x 720,000 = $66,960 $3,280,000 Gross Equity x 4 $820,000 Gross Equity = Net Equity 6th ANALYZE REINVESTMENT – EXCHANGE $2,520,160 After-Tax Equity x 4 5th ANALYZE REINVESTMENT - SALE $630,040 equals AFTER-TAX EQUITY $189,960 minus Capital Gain Taxes Due $820,000 equals GROSS EQUITY -$300,000 minus Loan Balances -$80,000 minus Cost of Sale $1,200,000 Sales Price 4th CALCULATE AFTER-TAX EQUITY

60. Choosing a Qualified Intermediary

61. Choosing a Qualified Intermediary

62. In whose name are funds held? Are separate accounts set up for each client? Requirements for deposit and withdrawal? Where (institution) are funds held? Is the Qualified Intermediary insured by a much larger parent company? (i.e., a title company) What security can be provided in writing? Choosing a Qualified Intermediary

63. A - Seller Financing B - Replacement Property Basis C – Exchange Entities D - IRS Form #8824 Appendix

64. William B. Hood, CPA 770-641-1031 – Office 770-597-8184 – Cell [email_address] National Headquarters 800-282-1031 Eastern Regional Office 866-394-1031 www.apiexchange.com www.apiexchange.com For more information, contact: