1031 Exchange Tips and Information Newsletter

Andy Gustafson

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2010 October - 1031 Exchange Tips and Information Newsletter

Posted by Andy Gustafson on Jan 24, 2011 12:26:00 PM


October 2010  
Seven 1031 Exchange Mistakes to Avoid
In This Issue
Seven Mistakes to Avoid
Quick Links
 
 
 

Featured Properties
 
 
 
 
 
 
Top Blog Articles 
 
 
 
 
 
 
 

Keep Abreast of Frequently Asked Questions  

Summary of recently asked questions



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Dear Andrew,     
Andrew Gustafson, CES®
Andrew Gustafson, CES®


Thanks to Don V. in Lubbock, Texas for pointing out many of the links were inoperative.  Your patience is appreciated.
 
A tough lesson to learn is that ignorance is no excuse especially with the Internal Revenue Service.  1031 exchanges are riddled with rules supported by IRS memorandums and revenue procedures. 
 
The featured article summarizes seven mistakes 1031 exchange mistakes to avoid.  When reviewing consider the impact of not being informed.  
 
The 1031 market is once again active with strong commercial activity including sale of land and buildings.  Many owners are selling and using the exchange proceeds to improve the replacement property.  Land already owned can be improved in a leasehold improvement exchange.
 
If you have a question, call 850.496.0090 or andgus@atlas1031.com.
Seven 1031 Exchange Mistakes to Avoid

1.  Lack of knowledge about the process and its requirements. 
 
The sooner you understand and take ownership of the many requirements of a 1031 exchange, the smoother your transaction will be.
 
a. The net equity and mortgage of the new property must be equal to or greater than the old property.  The difference is called equity or mortgage boot and is taxable.
 
b. The first dollar received at the old property closing is taxable.  That means you can receive your deposit back or dollars used to refurbish the property, but they are taxable.
 
When you are considering selling real or personal property held for investment or in a business and have intentions of replacing the asset, contact your accountant and a qualified intermediary.  If you don't have either, place it on your to do list and get some names from your circle of professionals.  
 
2.  Selecting an unqualified qualified intermediary. 
 
Would you ask a medical doctor to perform a surgical procedure without the proper credentials and experience?  Three key characteristics of a good qualified intermediary include:  expertise, security and transparency. 
 
a. Expertise with a type of exchange is one element while another is the Certified Exchange Specialist® (CES®) designation.  The CES reflects a minimum of three years of 1031 consultations and a thorough knowledge of the 1031 procedures.
 
b. Security of the exchange proceeds is critical.  Is the accommodator following prudent investment standards by holding the funds in non-commingled accounts?  Are the funds held in liquid money market accounts that are FDIC insured?  Is your signature required or personal identification number required to authorize the disbursement of the exchange proceeds?
 
c. Transparency is verification of the security.  Can you view your funds online 24 x 7 x 365?  Can you speak with the custodial bank to confirm your funds are in an account under your social security or employee identification number?

3.  Missing critical deadlines.
 
a. Know your 45th and 180th calendar days.  Mark them on your calendar.  The IRS is not forgiving except under specific guidelines set forth by the IRS such as a Presidential Disaster declared in the county where the old or new property is located.  There are additional exceptions, but don't miss your identification and completion end dates.
 
b. The letter identifying your replacement property candidates must be received by the qualified intermediary no later than 11:59 PM on the 45th calendar day post closing.  Fax is acceptable but email is not.  The letter can also be delivered to your escrow agent, but ideally it is faxed to the accommodator.
 
c. The letter must specifically identify by address or map and cannot be generally stated.
 
d. Be sure to identify at least two, if not three, properties as a contingency.  There is no going back to update or post date the identification letter.

4.  I want my money back. 
 
A common misconception is once the exchange documents are signed, HUD settlement statement reflects a 1031 exchange and the proceeds are deposited being held by the qualified intermediary.  The funds cannot be returned until the 46th calendar day post closing.  This is one of those unpleasant conversations when I explain that it is the IRS requirement that prevents the return of the funds because of the decision not to purchase a replacement property.
 
a. If the decision is not to identify replacement property, then the exchange terminates on the 46th calendar day at 12:00 AM.
 
b. Once property is identified and the replacement property is not purchased, the funds must be held until the 180th calendar day post closing.

5.  Using a disqualified person as your accommodator. 
 
The accommodator or qualified intermediary must be a party who is independent of the Exchangor.
a. The accommodator cannot be the Exchangor or of lineal descent.
 
b. May not be an agent of the Exchangor (Realtor, Attorney, Accountant, or Employee) two years prior to the sale unless they have provided only title closing or 1031 services in the past.
         i. Attorney is disqualified if the law firm provided other than title closing or 1031 services.


6.  Wanting different titleholder on the old and new properties.  
 
 The tax return that sells is the tax return that purchases, according to the same taxpayer requirement.  If the wife is on title to the old property, the wife should purchase the new property and then quit claim the husband to the new property is that is the desired outcome on the title.


7. You want to sell your old property to a related party or purchase the new property from a related party. 

There are specific requirements to understand when selling or buying from a blood relative, not in-law or entity that is a 51% owner where the Exchangor owns the minority. 

a. If selling or buying from a related party, the buyer/seller must hold the property for two years; otherwise the sale will trigger the tax on the deferred gain.

b. If buying from a related party, the seller must also be exchanging into another property.

In summary, don't make the mistake of not being informed.  Planning is critical supported by selecting an accommodator who asks probing questions to uncover issues that are typically misunderstood.  Ignorance is no excuse.

Tags: 1031, 1031 exchanges, 1031 exchange rules, 1031 exchange

2010 July - 1031 Exchange Tips and Information Newsletter

Posted by Andy Gustafson on Jan 24, 2011 12:20:00 PM


July 2010  
Changing Landscape of Internal Revenue Code §1031
In This Issue
PLR 200901020
CCA 200911006
Ocmulgee Fields, Inc.
Quick Links

Keep Abreast of IRS Updates

 

Click here for case of Goolsby v. Commissioner; T.C. Memo 2010-64, April 1, 2010.

 



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Dear Andrew,     
Andrew Gustafson, CES®
Andrew Gustafson, CES®


In 2009, the landscape of 1031 tax deferred exchanges were impacted by a number of private letter rulings (PLR), chief counsel advisories (CCA) and Court rulings.  Here is a short summary of the facts and impact of recent decisions and rulings affecting Internal Revenue Code §1031.
PLR 200901020
In this private letter ruling, the Tax Court ruled that residential density development rights are like-kind to real property when they are in perpetuity and real property under state law.  The facts are that the property owner contracted to sell parcels of property.  In the contract was a put option entitling the seller to transfer some or all of their residential development rights in a phased development plan.  The exercised option would require the buyer to sell certain hotel development rights back to the seller.  Once established the development rights were considered real property under state law, the PLR declared that the development rights qualify as like-kind property given the rights were in perpetuity, and directly related to the Exchangor's use of the property.  The Court concluded the Exchangor had met this criterion.

CCA 200911006
In this chief counsel advisory, the IRS reversed its long-held position and agreed that trademarks, trade names, newspaper mastheads and customer-based intangibles can be like-kind.  The CCA asserted that these intangibles may qualify for §1031 consideration if they can be separately valued from a business's goodwill.  Treasury Regulations §1.1031(a)(2)(c)(1) requirements of "nature and character" still must be met; consequently, not all trademarks,  trade names and mastheads are like-kind.
 

Ocmulgee Fields, Inc.
In this Court ruling, the Tax Court disallowed an exchange when the replacement property was acquired from a related party.  The facts are the Exchangor engaged a Qualified Intermediary to transfer relinquished property under an exchange agreement.  The Qualified Intermediary sold same property to an unrelated third party and used the exchange proceeds to acquire the replacement property related party transferring title to the Exchangor.  The IRS rejected the exchange stating the intent was a series of transactions fabricated to avoid basis shifting and had not established the "lack of tax avoidance" exception under §1.1031(f)(2)(c).  The Tax Court agreed with the IRS citing Teruya Bros., Ltd. (2005), noting the basis shift resulted in $1.8 million gain deferral at 15% rather than 34%.
For clarification or to discuss compliance of a 1031 exchange under consideration, please call 850.496.0090 for a free 30-minute consultation. You can also view our IRS Updates to see the latest decisions and rulings affecting Internal Revenue Code §1031
 
Tax Court summaries provided by Federation of Exchange Accommodators.

Tags: 1031 exchanges, Internal Revenue Service, 1031 exchange rules, 1031 exchange

2010 May - 1031 Exchange Tips and Information Newsletter

Posted by Andy Gustafson on Jan 24, 2011 11:52:00 AM

e-Newsletter Articles/Table Of Contents
Federal Capital Gains Tax Rate to Rise 
Check Out the New and Improved Atlas 1031 Website including a 1031 Blog
Like-Kind Exchange (LKE) Program 
Entrust Self Directed IRA
45-Day and 180-Day Extensions for Disaster Areas in Massachusetts, Rhode Island, West Virginia, New Jersey, North Dakota and Mississippi

ARTICLES

Federal Capital Gains Tax Rate to Rise

If you are considering selling an investment property, you may want to consider the impact of cashing out in 2010. Next year, the capital gains tax rate is expected to be higher than its current, historically low rate of 15%.

With the recent health care reform, the Medicare payroll tax has placed an additional 3.8% tax increase on capital gains and other investments, for single filers with income over $200,000 and joint filers with income over $250,000 starting in 2013. The capital gains tax is scheduled to rise to 20% at the end of the 2010 tax year, when the Bush tax cuts expire. 

Check Out the New and Improved Atlas 1031 Website! 

We are excited to announce our new website featuring improved navigation, graphics and remarkable content including  Frequently Asked Questions, Foreign Persons, Expanded IRS Updates, Blog and a Like-Kind Exchange (LKE) program

Track Atlas 1031 updates on Twitter, LinkedIn and Facebook.

Like-Kind Exchange (LKE) Program

Atlas 1031's LKE program solution is designed for Fortune 500 leasing, rental, distribution, oil and gas, transportation and companies with 100 or more assets or equipment that are routinely replaced. The solution seamlessly interfaces with your company's Fixed Asset application to:

  • Maintain and calculate federal and multi-state depreciation schedules
  • Match assets and track details of each like-kind exchange
  • Provide dedicated implementation and support staff
  • Offer extensive reporting capabilities
  • Automate interaction with qualified intermediary
  • The outcome is a cost savings that provides additional cash flow for current and new business operations. Let us use a sampling of your Fixed Asset data to present a simulation of the application.

    Entrust Self-Directed IRA 

    Considering a self-directed IRA? Are you aware that your Roth or traditional IRA, SIMPLE, SEP, Health Savings Account and individual 401k can purchase and hold:

  • Precious metals
  • Real estate
  • Promissory notes
  • Private Placement Notes
  • Judgments/Structured Settlements
  • Tax Sale Certificates
  • Self directed retirement accounts are not for everyone, but they can be a worthwhile wealth building tool. The Entrust Group is a third party custodian for nearly $3 billion in managed assets. Let me know if you are interested in learning more about a self directed IRA

    45-Day and 180-Day Extensions for Disaster Areas

    The IRS has issued extension Notices for the following disaster areas (the Covered Disaster Areas) for storms beginning on March 12th (disaster date):

  • Massachusetts: Bristol, Essex, Middlesex, Norfolk, Plymouth, Suffolk and Worcester
  • Rhode Island: Kent, Newport, Providence and Washington
  • West Virginia: Fayette, Greenbrier, Kanawha, Mercer and Raleigh
  • New Jersey: Atlantic, Bergen, Cape May, Essex, Gloucester, Mercer, Middlesex, Monmouth, Morris, Passaic, Somerset and Union
  • Beginning April 23 in Mississippi: Attala, Choctaw, Holmes, Monroe, Oktibbeha, Union, Warren and Yazoo

    Service provides relief for those affected by early-April severe weather in North Dakota.
    [Note that the IRS may add additional areas later as FEMA adds them. If you are near the Covered Disaster Area, check the disaster announcement website for updates. The FEA will not issue announcements if more areas are added.]

    Both of the following criteria must be met to get the extension under Revenue Procedure 2007-56, section 17:

    (1) The taxpayer is located in the Covered Disaster Area or is otherwise an affected taxpayer as defined in the Notice, regardless of where the relinquished property or replacement property is located, or otherwise has difficulty meeting the exchange deadlines under the conditions in Revenue Procedure 2007-56, section 17; AND

    (2) The relinquished property was transferred (or the parked property was acquired by the EAT in a reverse exchange under Revenue Procedure 2000-37) on or before the disaster date listed above. 

    If the taxpayer meets these criteria, THEN any 45-day or 180-day deadline that falls on or after the disaster date is extended to 120 days from such deadline. Note the date may not be extended beyond one year of the due date (including extensions) of the tax return for the year of the disposition of the relinquished property (typically, if an extension was filed, 9/15 for corporations and 10/15 for other taxpayers).

  • Please see Revenue Procedure 2007-56, Section 17, and the notice below for further details. 

    http://www.irs.gov/newsroom/article/0,,id=108362,00.html 

    This year has experienced a number of changes to the Internal Revenue Code impacting Section 1031 exchanges. Recent changes include:

  • The primary residence exclusion of $250,000 and $500,000 no longer includes "nonqualified" time prior to being converted to a primary residence.

  • The state of Alabama imposes a withholding requirement when selling real and associated personal property by non-residents of the state.

    The Housing Assistance Tax Act of 2008

  • The Housing Assistance Tax Act of 2008, signed by President Bush on July 30, 2008, includes a modification to the Section 121 exclusion of gain on the sale of a primary residence. This modification may affect taxpayers who exchange into a residential property, and then later convert the property to a personal residence, as explained below. 

    Under Code Section 121, a taxpayer can exclude up to $250,000 ($500,000 for married couples filing jointly) of gain realized on the sale of a principal (primary) residence if they have owned and occupied the residence for two years during the five year period preceding the date of sale. Gain related to depreciation deductions taken on the property since May 6, 1997 is not eligible for exclusion.

    Effective January 1, 2009, the exclusion will not apply to gain from the sale of the residence that is allocable to periods of "nonqualified use." Nonqualified use refers to periods that the property is not used as the taxpayer's principal residence. This change applies to use as a second home as well as a rental.

    How does this affect 1031 planning? Suppose the taxpayer exchanged into the residence and rented it for four years, and then moved into it and lived in it for two years. The taxpayer then sold the residence and realized $300,000 of gain. Under prior law, the taxpayer would be eligible for the full $250,000 exclusion and would pay tax on $50,000. Under the new law, the exclusion would have to be prorated as follows (the example does not take into account deprecation taken after May, 1997, which is taxable anyway). 

  • Four-sixths (4 out of 6 years) of the gain, or $200,000, would be ineligible for the $250,000 exclusion. 

  • Two-sixths (2 out of 6 years) of the gain, or $100,000, would be eligible for the exclusion.  Summary of New Alabama Withholding Requirements

    On August 1, Alabama joined the list of states that impose a withholding requirement on the sale or transfer of real property and associated tangible personal property by non-residents of the state. The requirement is codified at Ala. Code s. 40-18-86 (the "Statute"). The Statute provides that withholding tax is required on a sale of Alabama real property unless a seller can meet specified conditions to qualify as a resident of the state and provide the buyer an affidavit swearing to same. Unless the seller qualifies as a resident under the Statute, the buyer must withhold and remit tax in the amount of 3 or 4 percent of either the purchase price or the seller's gain (provided seller completes an Affidavit of Seller's Gain - Form NR-AF2). While the Statute did not specifically address how the withholding requirement applies to a transaction that is part of a 1031 exchange, the Alabama Department of Revenue ("ADOR") issued forms and instructions in implementing the Statute that provide guidance on the issue. Specifically, a 1031 exchange where there is a complete non-recognition of gain is exempt from the withholding requirement. A 1031 exchange where gain is partially not recognized is subject to the withholding requirement only to the extent of the recognized gain. If the exemption applies, the seller should execute and provide buyer a Seller's Certificate of Exemption (Form NR-AF3) but this document is not filed with ADOR. ADOR instructions and forms can be accessed at: http://www.revenue.alabama.gov/incometax/nonresidentwh.htm.


    Provided by the Federation of Exchange Accommodators.

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  • Tags: 1031 exchanges, 1031 exchange rules, 1031 exchange