Posted by Andrew Gustafson on Thu, Sep 02, 2010 @ 02:12 PM
Is a timber deed reverting to the Seller after a fifteen year period eligible for a 1031 exchange? The timber deed conveys the right to harvest standing timber for a period of time. Access to the land is granted along with rights to an unlimited harvest followed by reforestation.
Interesting question that family and corporation forest owners consider when determining how best manage their woodlands. According to Dr. William Hoover, Professor of Forestry at Purdue University and co author of Timber Tax Management, a detailed review of timber tax issues, "The nation's 10 million family forest owners account for 62 percent of the forestland in the United States, about 400 million acres."
To be eligible for a 1031 like-kind exchange, the property must be held for qualifying use, either as an investment or in a business. Next, the interests in the old property and the new property must be of similar nature or character. Fee simple is the common form of real property ownership and is not limited to a specific period of time. Given the timber deed is for fifteen years, the right represents a carve out. If the term included five year increments exceeding thirty (30) years or more, the timber deed would most likely qualify for a 1031 exchange given the IRS recognizes 30 year or more leasehold interests as real property.
When considering the sale of timberland or timber, seek the guidance of a tax professional. If the outcome is to defer the gain in a 1031 exchange, call to engage us as the qualified intermediary. We work with individuals and corporations, domestic and foreign.
Posted by Andrew Gustafson on Tue, Aug 31, 2010 @ 08:17 AM
Occasionally, I receive a phone call asking when is it too late to initiate a 1031 exchange explaining they have not deposited the check received at the closing. Another example is when the potential exchangor bought a property two weeks ago and wants to do a reverse 1031 exchange. These are all valid questions with a common denominator: lack of planning.
1031 exchanges are riddled with rules and guidelines that to the uninformed can be overwhelming. One of those rules, known as the g(6) limitations states, the exchangor can not receive, pledge, borrow or otherwise obtain the benefits of the money or other property held in the Exchange Account. This means the Exchangor can not touch the exchange funds. If the funds have been touched or deposited into their account, constructive receipt has been fulfilled effectively eliminating the possibility of a tax deferred exchange.
Alternative Circumstances:
- What if on the day of the closing or during the closing a 1031 exchange should be initiated? That is fine and we are pleased to accommodate last minute like kind exchanges.
- What if the closing has ended and the escrow company has not disbursed the exchange proceeds to the Taxpayer? A 1031 exchange can be initiated though the settlement statement should be changed to reflect the 1031.
- What if the closing has ended and the exchange proceeds check has been deposited into the Taxpayer's account. The only way to initiate a 1031 exchange is to unwind the closing. This is difficult to do especially when a lender is involved but possible.
Planning is critical to understand and take ownership of the 1031 process. Talk with your tax advisor whenever selling real or personal property held for investment or used in a business. Ignorance is no excuse.
Posted by Andrew Gustafson on Fri, Aug 27, 2010 @ 10:11 AM
The Lender requires only the wife's husband on the replacement property loan because the wife owns too many investment properties. The wife wants to defer the capital gains on the sale through a 1031 exchange. Does this impact a 1031 exchange, if so how?
It depends:
1. Is there debt on the old property?
a. If there is debt is the wife adding additional cash to offset the debt in the purchase of the replacement property?
2. If there is no debt, is 100% of the net equity or exchange proceeds from the old property sale being used towards the replacement property purchase?
Given the answer to either of these questions is yes, the wife is not receiving a benefit, consequently, a 1031 exchange makes sense.
The Lender is not requiring the husband to be on the replacement property title. He should be added to the title of the old property as far in advance of the sale as possible. Then the replacement property title would be in the name of the husband and wife. The husband's loan would be used towards the purchase in addition to the wife's 1031 exchange proceeds from the sale.
In this specific case, the wife owns the investment properties in a single member limited liability company (smllc) with the wife is the sole member. Rather than adding the husband as a member, add the husband as a tenant in common to the old property deed. The title would resemble name of smllc and her husband's name with or without percentage of ownership.
If there is debt on the old or relinquished property and the husband's loan is needed to purchase the property, then the wife will trigger mortgage boot or a tax on the debt she has not replaced. A 1031 exchange may not make sense. If no exchange, then she would pay the capital gain tax on the old property sale and purchase the new property without the 1031 exchange requirements with the help of her husband's loan.
If you have a question, Contact Us or Ask The Expert.
Posted by Andrew Gustafson on Tue, Aug 24, 2010 @ 04:37 PM
When an individual or corporate hotel/motel owner considers selling, tax implications must also be a part of the process. If the owner intends to replace with another hotel/motel, a 1031 exchange is a viable strategy to defer the gain.
One of the first steps is to seek tax counsel. Specifically, does the real, tangible and intangible personal property trigger a gain when sold? If so, then the real property can be exchanged for real property while the personal property must be exchanged for personal property of like kind or character as defined in the one of the thirteen asset classes. Furniture is exchanged for new furniture, laundry equipment is exchanged for laundry equipment, computers for computers, etc.
Typically, legal counsel for the individual or corporate owner will review the 1031 documentation and request changes that are specific to their client. Other than those changes, the exchange documents are the same as they are for a fast food franchise nursing home. The 1031 documents comply with IRS regulations.
Whether the hotel/motel is large or small, the same diligence and attention to detail is provided to ensure the 1031 exchange is properly documented and exchange proceeds are held in a non commingled, qualified escrow account under the client's employer identification number. The qualified escrow account requires dual signatures, with the client's signature matching the notarized copy.
Alternatives
Improvement Exchange - If replacement plans include improving the new hotel/motel, an improvement exchange can be accommodated.
Leasehold Improvement Exchange - An alternative to a new hotel/motel could be making improvements to one that is already owned.
Operate Outside the US - Hotels/motels sold outside the US can be replaced with hotels/motels in another foreign country and gain deferred.
Atlas 1031 would be honored to work with your tax counsel and be the accommodator of choice for all your hotel/motel transactions. Let our experience work for you. We are on call seven days a week throughout the exchange.
Posted by Andrew Gustafson on Mon, Aug 23, 2010 @ 10:50 AM
Hospitals and medical clinics can defer capital gain when selling and replacing equipment through a 1031 exchange. The equipment is personal property and any personal property used in a business is eligible for 1031 consideration.
The types of equipment includes:
- Bed, stretchers and tables;
- Endoscopy;
- Furniture;
- Imaging equipment;
- IV and infusion equipment;
- Kitchen equipment;
- Laboratory and pathology;
- Laundry;
- Maternity ward;
- Operating room;
- Patient care;
- Patient monitors;
- Physical therapy;
- Radiology;
- Respiratory equipment;
- Surgical equipment;
- Traction;
- Wheelchairs.
When considering replacing medical equipment, tax managers should consider whether there is gain associated with a sale. If there is and the replacement property is like-kind then consider deferring the gain with a 1031 exchange.
Posted by Andrew Gustafson on Thu, Aug 19, 2010 @ 10:27 AM
Farms and ranches are composed of real and tangible personal property. Depending upon the intent of the owner, land can be sold in a 1031 exchange replacing with a variety of real property choices including real estate and possibly an asset that provides cash flow such as a triple net lease property with a tenant like CVS Pharmacy. In recent years, given the historically low capital gains rate of 15%, paying the tax was and is an option.
If the owner wants to continuing their farming operations, the option starts with their accountant understanding the tax consequences of the sale. What is the value of the real estate, equipment and livestock? Are there water rights, mineral interests, gas and oil rights or easements that can be sold and gain deferred? If gain exists, the gain can be deferred by replacing with real estate and like kind personal property.
The primary residence stands on its own complying with Section 121 and the two year holding requirement to exclude either $250,000 if filing single or $500,000 if a joint return. A rule of thumb used to determine the amount of surrounding land that can be included with the residence is the area of grass typically cut around the home.
The personal property includes livestock and farming equipment. Does the owner want to replace or simpy sell and pay the tax on the gain if one exists? The owner may have losses that can offset some of the gain.
A variety of decisions are required when selling farms and ranches and whether a 1031 exchange makes sense. Always seek the input of your accountant when selling real or personal property.
Posted by Andrew Gustafson on Mon, Aug 16, 2010 @ 01:06 PM
When selling a medical, dental, chiropractic, optometry, podiatry, psychiatric, psychology or veterinary practice, consideration should be given to the tax implications. One way to defer capital gain and recaptured depreciation taxes is through a 1031 exchange.
- Ask your accountant to itemize the practice into real and tangible and intangible personal property.
- Decide whether personal property will be replaced with like-kind or similar assets.
Perhaps only the real property such as the office building will be exchanged for a vacation property that after two years will be converted into a personal residence.
If a practice is being relocated, then it may make sense to replace the tangible and intangible personal property. Customer lists, trademarks and trade names are eligible for 1031 tax deferral as long as they are replaced with a customer list, trademark and trade name.
If a veterinary practice is being sold with the intent to relocate, then specialized vehicles and equipment, if owned can be exchanged for like-kind specialized vehicles and equipment. It all depends upon whether there is a gain to defer.
These exchanges follow the same 1031 exchange rules including completion of the exchange within 180 calendar day’s post first closing. The new practice can be purchased first in a 1031 reverse exchange or the old practice can be sold first as in a 1031 forward exchange.
There are many reasons to sell a practice, perhaps it is retirement, relocation or partnership buyout. If it is the latter, the farther in advance the title for the assets is dropped to the individual partners the better the facts are to support the 1031 exchange. Partnership interests are not eligible for 1031 consideration. The title can also be changed to reflect the individual and the partnership as to their respective interests in the partnership. This enables the individual to exchange their property with the partnership. Always seek the guidance of your accountant and lawyer.
Posted by Andrew Gustafson on Thu, Aug 12, 2010 @ 09:45 AM
The Consumer Financial Protection Act of 2010 (“CFPA”)
was recently signed into law that will provide regulation for Qualified Intermediaries (“QI’s”) of 1031 tax deferred exchanges. The Federation of Exchange Accommodators (FEA) is a trade association representing companies whose primary business is acting as QI’s for 1031 exchanges. The FEA will work with the Consumer Financial Protection Bureau to draft regulations. In 2007, the FEA had asked the Federal Trade Commission to govern QI’s but the Commission declined citing the burden of oversight exceeded the benefits.
The FEA represents the interests of their members who are QI’s and affiliates of the Tenants in Common industry, banks, real estate brokers and title companies. Recent bankruptcies resulting in millions of lost exchange proceeds by a handful of QI’s have elevated the need for regulation. The FEA promotes ethical standards and conduct for QI’s, offers education to the exchange industry and to the public. More importantly, the FEA established a Code of Ethics and Standards requiring a criminal background check on those principals of member companies who oversee the transfer of exchange proceeds.
The CFPA requires the Director of Consumer Financial Protection Bureau to study and propose legislation to protect consumers using QI’s. The study must be completed within one year with a program implemented within two years following the Director’s study.
The FEA has been a proponent of federal regulation for exchange proceeds management standards and protection of client interests. The FEA’s “model law” with slight alterations has been adopted by California, Colorado, Maine, Nevada, Oregon, Virginia and Washington.
Posted by Andrew Gustafson on Mon, Aug 09, 2010 @ 08:35 AM
Technical Advice Memorandum (TAM) 200602034 expanded the scope of intangible assets eligible for 1031 exchanges into five categories:
- software;
- trademarks and trade names;
- trade secrets and know-how;
- designs and drawings;
- patents.
The TAM defines a two-step process matching the nature or character of the rights with the nature or character of the property of the intangible personal property. For an exchange of software, the ruling states the first step is achieved if both the old (relinquished) property and the new (replacement) property are software. The second step is met if both the nature or character of the underlying asset is matched by general asset class or product class.
Intellectual property exchanges for customer lists, manufacturing know-how, technical designs, and chemical formulas follow the same two-step process. The character of the ownership rights of the unregistered intellectual property is like-kind to the character or nature of the rights to the replacement property. The second step is satisfied given the general asset class or product class of the underlying intangible asset is the same.
The TAM also addresses the location of intangible personal property asset stating use predominantly in the United States is like-kind to use predominantly in the United States. Use predominantly in foreign countries is like-kind to use predominantly in foreign countries.
When selling an intangible asset and replacing with like-kind intangible asset, a 1031 exchange will defer the taxable gain. Have a comment or question, let us know.
Posted by Andrew Gustafson on Thu, Aug 05, 2010 @ 08:28 AM
What is a Certified Exchange Specialist® (CES) 
and why is it important in a 1031 exchange? In 2003, the Federation of Exchange Accommodators (FEA) established the Certified Exchange Specialist® designation, creating a board level exam and yearly continuing education requirements for accommodators with a prerequisite of three years of 1031 consultation experience. The FEA is a national association of over one hundred large and small companies that provide 1031 tax deferral services. The FEA lobbies state and federal legislatures providing insight and direction to craft legislation aimed at protecting the consumer. There are currently two hundred accommodators with the CES designation nationwide. The designation was created to provide a consistent level of expertise and Code of Ethics that distinguishes designees as experienced, knowledgeable and current on 1031 exchange procedures.
Engaging a Certified Exchange Specialist® provides assurance of working with an individual who specializes in 1031 exchanges. There are many companies owned by attorneys, CPAs, and title/escrow companies that provide 1031 services. They are typically not dedicated full time to 1031 exchanges. Consequently, they are not familiar with or current on Internal Revenue Service Revenue Procedures, Private Letter Rulings and Technical Advice Memorandums. Nor do they adhere to the CES’s Code of Ethics.
If your heart requires surgery, would you have a general physician complete the work or would you engage a cardiologist? 1031 exchanges are a specialty, complex and riddled with IRS rules. Seek the Certified Exchange Specialist on staff logo on web sites of those accommodators you are considering and ask good questions.
