Like Kind Exchanges, Taxes and Real Estate

Farm and Ranch Exchanges

2011-09-01T11:12:00.009-06:00

Farm and ranch exchanges present a host of opportunities and challenges for taxpayers since they often include a mix of different assets with differing requirements and concerns under Code Section 1031. In a nutshell, here are some of the issues involved in farm and ranch exchanges.

Real Estate can be exchanged for like-kind real estate held for business or investment and in most cases is without complication. A sale of “real estate” can include a variety of real estate interests all of which qualify as “real estate” under the like-kind replacement rules, including –

• Land and buildings
• 30+ year leasehold interests
• Oil & Gas, water and mineral rights
• Conservation and use rights
• Grazing rights

Replacement property can be any of the above real estate interests held for business or investment including raw land, improved property and more than one property.

Equipment included in the sale-exchange can be replaced with like-kind equipment. For farmers, almost any farm equipment qualifies as like-kind. The like-kind rules for farm equipment are described in the General Asset Classes of Regulation §1.1031(a)-2(b)(2) and the Product Classes of Sector 33 of the North American Industry Classification System (NAICS).

Center Pivot Sprinkling Systems are usually assumed to be subject to the like-kind replacement rules for equipment. But, there is an argument that a center pivot sprinkler system qualifies as a real estate improvement and, accordingly, can qualify under the like-kind rules applying to real estate when a taxpayer is replacing with real estate with sprinkler equipment on it. This won’t work if the farm that is being sold has a sprinkler system on it and is being exchanged for land without a sprinkler system. In this case Section 1245 depreciation recapture would kick-in if the sprinkler being sold is not replaced with Section 1245 equipment. Farm and ranch owners with sprinkling equipment need to consider these issues and discuss with their tax professional for exchange planning.

Breeding or Dairy Livestock can be exchanged for “like-kind livestock.” Same-sex is required under the like-kind rules; a bull cannot be exchanged for a heifer or cow and vice versa. Steers or feeder stock don’t qualify.

Personal Residence Issues are often a part of an exchange of farm or ranch property. If the owner lives in a personal residence on the farm the gain allocable to the personal residence may be tax free under Code Section 121 limited to $250,000 (single) or $500,000 (married filing jointly). Preferred practice is to bifurcate the sale into two sales with the taxpayer cashing out on the sale of the personal residence and proceeding with a 1031 Exchange of the balance of the farm sale.

Related Party transactions require special attention in a 1031 Exchange of farm and ranch property. “Related parties” include related individuals and related entities such as corporations, partnerships, LLCs and trusts. Deed swaps between related parties require that each party hold the property for 24 months to validate the exchange. A sale to a related party with replacement from an unrelated party is not considered to be a “related party exchange.” A sale to an unrelated party with replacement from a related party is not permitted if the related party is cashing out. It is permitted if the related party is also going thru a 1031 Exchange with replacement of qualifying real estate. Related parties or entities are described in Code Section 267(b) or 707(b)(1).

Talk to your tax advisor when you are anticipating a sale of farm or ranch property. Call us at 888-367-1031 or email us at 1031@1031cpas.com if we can assist with questions about an exchange of your property. See our Exchange Manual and visit us at www.1031cpas.com. 1031 Corporation is the Intermediary of choice for real estate professionals, CPAs and investors.

Do I Need To Do a 1031 Exchange of Machinery, Equipment Or Aircraft If I Can Write-Off The Entire Purchase Price In 2011?

2011-08-03T09:47:00.004-06:00

The 2010 Tax Relief Act ramped up the amount of write-off for 2011 equipment purchases. Two provisions of the Internal Revenue Code make it possible for purchasers to deduct the entire purchase cost of machinery, equipment and aircraft.

100% Bonus Depreciation - Taxpayers can deduct the entire purchase price of new equipment purchased in 2011 under the rules for “Bonus Depreciation.” Before 2011 the deduction was limited to 50% of the purchase price of the equipment. The 50% rule will apply again in 2012. The original use of the equipment must commence with the taxpayer – used equipment doesn’t count.

The Section 179 Deduction – Up to $500,000 of the cost of new or used equipment can be deducted in 2011 under Code Section 179. However, there are special rules for the Section 179 Deduction. Certain types of purchases are not eligible for the 179 Deduction, including –

• Property which is not used in a trade or business,
• Property acquired from a related party,
• Property which is leased to another user or lessee,
• Property acquired in a 1031 Exchange

The $500,000 deduction phases out for taxpayers purchasing more than
$2 million in machinery or equipment during the year. The maximum deduction and phaseout levels drop to $25,000 and $200,000 beginning in 2012. The 179 Deduction is limited to income reported for the year from the taxpayer’s trade or business and cannot result in a loss being reported. Excess deductions can be carried forward.

Sales taxes are often a motivating reason a taxpayer may want to structure a 1031 Exchange regardless of the possible first-year write-offs referred to above. For example, if a taxpayer sells an aircraft for $1 million and buys a replacement aircraft for $2 million, sales tax will apply to the $2 million purchase price of the replacement aircraft. If the taxpayer engages the services of an Exchange Intermediary to help him structure a qualifying “exchange,” the sales tax is limited to the “boot paid” - $1 million in this case. The difference in sales tax liability can obviously be significant.

These issues must be discussed with your tax professional for complete information on how these rules may affect you in your circumstances. Call us at 888-367-1031 or email us at 1031@1031cpas.com if we can help with any questions. See our Exchange Manual at www.1031cpas.com. 1031 Corporation is the Intermediary of choice for thousands of real estate professionals, CPAs and investors.

What Realtors Should Know About 1031 Exchanges

2011-08-02T14:43:00.020-06:00

Realtors are Often the First to Recognize the Potential Benefits of a Section 1031 Exchange to a seller of real estate. When a seller is going to replace qualifying real estate with replacement real estate, a Section 1031 Exchange should be suggested. It is possible for a seller to employ the services of an Exchange Intermediary at any time after a contract is executed up to the day of closing on the contract. It is too late after the closing has occurred.

Accommodation Language in the Contract. Accommodation language is usually placed in the Contract to Buy and Sell Real Estate wherein the other party to the contract is informed and agrees to cooperate with the 1031 exchange. Typical accommodation language might read as follows:

For a Seller - "A material part of the consideration to the seller for selling is that the seller has the option to qualify this transaction as a tax deferred exchange under Section 1031 of the Internal Revenue Code. Purchaser agrees to cooperate in the exchange provided purchaser incurs no additional liability, cost or expense."

For a Buyer - "This offer is conditional upon the seller's cooperation at no cost to allow the purchaser to participate in an exchange under Section 1031 of the Internal Revenue Code at no additional cost or expense. Seller hereby grants buyer permission to assign this Contract to an Intermediary not withstanding any other language to the contrary in this Contract".

Accommodation language is not mandatory and can be omitted if it puts the taxpayer at a disadvantage for other parties to know about his plan to sell and replace property under IRC §1031 and related closing pressures under the exchange 'time clocks."

Assignment of Contracts. If a Realtor knows that a buyer intends to assign the contract to an Intermediary in connection with an exchange, it is helpful to reference the buyer as "John Doe or Assigns" on the contract.

Paragraph 18 of the standard form Contract to Buy and Sell Real Estate used by Colorado Realtors contains a provision wherein the contract is not assignable by a buyer without the seller's permission unless the seller's permission is so indicated with a check in the "'shall' be assignable" box. The standard form Contract does not limit a seller's right to assign the contract.

Another way to make the contract "assignable" is for an addendum to the contract to be prepared by the Realtor making the contract "assignable." An Exchange Addendum to Contract to Buy and Sell Real Estate issued by the Colorado Real Estate Commission containing all necessary accommodation language is also available. Use of this Addendum makes contract accommodation language unnecessary and automatically provides for assignability of a contract by the buyer in an exchange transaction.

Settlement Statements. Section 1031 of the Internal Revenue Code imposes no requirements and provides no guidance with respect to preparation of settlement statements for an exchange of property. The Colorado Real Estate Commission has no special requirements concerning exchanges involving an Intermediary.

Intermediaries often instruct closers to name the Intermediary as the seller of a property on behalf of their client. This is not required by IRC §1031 and creates additional closing burdens since it requires the Intermediary to sign the settlement statements.

An occasional (but unnecessary) practice is for the title company closing on the transaction to prepare a second set of settlement statements in which the Intermediary is shown as a buyer and seller. The Intermediary's set of statements "mirror" each other as to debits and credits. The thinking here is that the settlement statements should reflect a "chain of title." This practice is not required by IRC §1031.

Our recommendation is to prepare one set of settlement statements in the normal manner which total to zero proceeds due to or from the Exchanger. The settlement statements should be made to total to zero proceeds due to or from the Exchanger by showing a debit or credit for "Exchange Funds - 1031 Corporation" as a transaction item "above the bottom line". The amount of "Exchange Funds" is the amount of funds being transferred to or from the Intermediary in connection with the closing.

Call us at 888-367-1031 or email us at 1031@1031cpas.com if we can help with any questions. See our exchange manual and visit us at http://www.1031cpas.com/. 1031 Corporation is the Intermediary of choice for thousands of real estate professionals, CPAs and investors.

Your 1031 Exchange - The Procedure

2011-07-21T10:30:00.004-06:00

1. Contact us to open an exchange file for you before your sale closes. We will consult you on the information we need to obtain from you.

2. Fax or email us a copy of your contract to sell your exchange property. 303.684.6899 or 1031@1031cpas.com

3. We will prepare an Exchange Agreement and other documents necessary for the exchange.

4. We will “step into your shoes” as a substitute seller by virtue of an assignment of your interest in your contract to sell.

5. We will contact and provide your closer with closing instructions. We will open a interest-bearing money market account in our name in trust for you. Your closer will be instructed to wire funds from the sale to this account. The cash will be held in this account until the purchase of your replacement property at which time the cash will be forwarded to the replacement property closing.

6. Search for suitable property to purchase for your exchange replacement property. More than one property can be purchased as replacement property

7. Provide us with a 45-day Identification Letter to identify prospective replacement properties if you have not completed your exchange during the first 45-days after closing on the sale of your exchange property. The letter can identify three prospective replacement properties or more than three if the total value of the identified properties does not exceed 200% of the value of the property that was sold. The letter is due by midnight of day 45. A signed contract to purchase replacement property by day 45 is desirable but not required by the Regulations.

8. Enter into a contract to purchase your replacement property and schedule a closing. Contact us prior to the closing. Fax or email us a copy of the contract. We will provide instructions to the closer and arrange for a wire transfer of exchange funds we are holding for you. The closer will be instructed to directly deed the property to you.

9. Your Exchange is Finished. We will provide you with an Exchange Report with copies of all exchange documents for your reference and income tax reporting.

10. See our Exchange Manual and Visit us at www.1031cpas.com

The Foreign Investment in Real Property Tax Act (FIRPTA in a Nutshell)

2011-06-14T11:03:00.009-06:00

Federal Requirements -

There are reporting and withholding requirements for sales of property to or by foreign persons or corporations (IRC §1445). Exchange Intermediaries should be familiar with the basic rules.

Any person who acquires an interest in U.S. real property from a foreign person or corporation must withhold and remit to the Internal Revenue Service a tax in the amount of 10% of the sales price. Form 8288 is used to report and remit the withheld amount.

Although the closer may perform the withholding and preparation of Form 8288, the burden of responsibility is on the buyer of the property. Often closers are not acquainted with these withholding requirements. Failure to withhold the tax may result in the buyer of the property being held liable for the payment of the tax and any applicable penalties and interest. A lien could be placed on the property if it is determined that the buyer failed to comply with the withholding requirement and is found to be liable for the tax.

There are exceptions to the withholding requirement.

· Withholding is not required if the buyer is acquiring the property for use as a residence and the purchase price is $300,000 or less.

· Notification of Nonrecognition Treatment - Withholding is not required if the seller of the property notifies the buyer of the property that the seller is not required to recognize any gain on the sale under Code Section 1031. It is the buyer’s duty to provide a copy of the notice to the IRS within 20 days of the closing date. However, if the buyer has reason to know that the sale is not qualifying under IRC 1031 for nonrecognition treatment; the buyer is not excused from the withholding requirement.

· Withholding Certificate - Withholding is not required if the buyer of the property files Form 8288-B (Withholding Certificate) with the IRS. This form relieves the buyer of the property from any responsibility for withholding and is the desirable method for assurance of compliance with FIRPTA. The buyer of the property should obtain a copy of this form for his files.

In an exchange involving an Intermediary, it is possible that the Intermediary may be perceived as the buyer of the property and therefore be liable for payment of the withholding tax. Even though the Intermediary does not ordinarily take title to the Replacement Property, the Intermediary can be deemed to take and convey ownership of the property by virtue of its responsibilities under the Exchange Agreement. Therefore, the Intermediary should be attentive to the FIRPTA requirements.

What if the Intermediary is assisting the foreign seller of the property with an exchange and the exchange fails or boot is recognized from the exchange? It seems prudent for the Intermediary to transfer the withholding amount to the IRS. This possibility should be provided for in the Exchange Agreement or an addendum thereto.

State Requirements -

Many states have legislation similar to FIRPTA for nonresident sellers of property. All of the concerns that apply to the federal rules also apply to the requirements of each state. Intermediaries must check the requirements of the appropriate state legislation to determine the FIRPTA requirements of each state.

Colorado requires a tax of 2% of the sale price be withheld by the closer of the property unless an affidavit is filed by the seller with the closer that the sale is exempt for various reasons, including a nonrecognition transaction. Usually the title company or an attorney is the closer of the property. A seller would be deemed to be the “closer” if the services of a professional are not used. It seems that the Intermediary in a 1031 Exchange has very little to worry about in Colorado unless the seller is the closer. In any event, the burden is on the closer and not the buyer of the property.

California requires the Intermediary to withhold and pay tax to the Franchise Tax Board at 3 1/3% on cash remaining in an exchange account at the end of an exchange, or 3 1/3% on the entire sale price if the exchangor cashes out completely from an exchange. This withholding requirement applies to all resident and non-resident individuals of California, and non-resident, non-individual tax entities. Resident non-individual tax entities are excused from withholding tax. Thus, Intermediaries must monitor the exchange closely for compliance with California FIRPTA requirements.

Other states may have similar requirements.

Call us at 888-367-1031 or email us at 1031@1031cpas.com if we can help with any questions. See our Exchange Manual and visit us at http://www.1031cpas.com/. 1031 Corporation is the Intermediary of choice for thousands of real estate professionals, CPAs and investors.

EXCHANGES OF OIL, GAS AND MINERAL INTERESTS

2011-06-08T10:08:00.009-06:00

Oil, gas and mineral interests are real estate interests which qualify for a like-kind exchange with any other qualifying real estate interest including -
- A fee interest in real estate
- Fractional ownership interests
- 30+ year leasehold interests
- Other oil, gas and mineral interests
- Conservation easements
- Transferable development rights
- Right-of-way easements
- Water rights
- Mutual irrigation ditch stock

A mineral interest is a perpetual interest on all of the minerals on a parcel of land including oil and gas, coal, gold, sand, gravel, water, etc.

There are several different kinds of ownership of oil, gas and mineral interests which include –
- Mineral rights which are a part of fee ownership of the ground.
- Mineral rights which are owned separately from ownership of the ground.
- A mineral lease granted to a lessee by the owner of the mineral rights.
- A royalty interest which can be viewed as a form of rent received by the lessor of the mineral rights.

A mineral lease gives the lessee the right to extract the mineral for a period of time, or until exhaustion of the mineral. Mineral leases are sometimes referred to as a working interest or an operating interest. The lessee is the operator who is extracting the mineral. A mineral lease can be subleased to other operators.

An exchange of a working or operating interest might include equipment or other tangible personal property which would need be viewed as a multi-asset exchange (more than one kind of property).

A production payment is a right to the mineral in place for a specified sum of money, payable out of a specified percentage of the mineral production. It is a “carved out production payment” and is not considered real property for exchange purposes.

Depletion expense can be deducted by the owner of an operating or royalty interest. There are two types of depletion: percentage depletion and cost depletion. Taxpayers use the method that yields the highest deduction.

Intangible drilling costs are operating costs to extract the mineral. Costs for fuel, preparation of a site, and wages are examples of intangible drilling costs.

Mineral property exchanges may be subject to recapture under Section 1254 if deductions were taken for depletion or intangible drilling costs on the relinquished property. The replacement property must be both like-kind and natural resource recovery property (Section 1254 property) to avoid recapture.

Call us at 888-37-1031 or email us at 1031@1031cpas.com if we can help with any questions. See our Exchange Manual at http://www.1031cpas.com/. 1031 Corporation is the Intermediary of Choice for thousands of real estate professionals, CPAs and investors.

1031 Exchanges Apply to More than Real Estate

2011-04-27T08:55:00.004-06:00

Whenever the phrase “1031 Exchange” comes up, most of us automatically think of exchanges of real estate since this is the most common type. However, 1031 exchanges are much broader than real estate and the Section 1031 rules apply to many different types of transactions described below.

Qualifying like-kind “real property” is a very broad type of asset under the “like-kind” rules of the Internal Revenue Code and Regulations. All of the following real estate interests qualify as "like-kind" to each other under Code Section 1031 -

• 100% ownership interests
• Fractional ownership interests
• 30+ year leasehold interests
• Conservation easements
• Transferable development rights
• Right-of-way easements
• Water rights
• Mineral rights
• Oil & gas interests
• Mutual irrigation ditch stock

Other types of property which are eligible for tax deferral under the 1031 Exchange rules include:

• Aircraft
• Automobiles and trucks
• Breeding livestock herds
• Information systems
• Machinery & Equipment
• Ships and boats
• Dairy cows
• Intangibles (i.e. mailing lists or client/patient files)

Sales taxes are often a motivating reason a taxpayer may want to structure a 1031 Exchange. For example, if a taxpayer sells an aircraft for $1 million and buys a replacement aircraft for $2 million, sales tax will apply to the $2 million purchase price of the replacement aircraft. If the taxpayer engages the services of an Exchange Intermediary to help him structure a qualifying “exchange,” the sales tax is limited to the “boot paid” - $1 million in this case. The difference in sales tax liability can obviously be significant.

Basic Rules. Only qualifying assets are eligible for a 1031 exchange. To qualify, the asset must be like-kind property held for business or investment purposes. Personal use property does not qualify.

Title to the replacement property must be in the same taxpayer name(s) as what was sold. In order to fully defer taxes, the replacement property must be of equal or greater value to that which was sold. If all cash proceeds are not reinvested, or a trade down in value occurs, some taxable gain will result. IRS-prescribed time requirements (45 day and 180 day requirements) must be strictly adhered to. Finally, the taxpayer cannot receive any of the net sales proceeds from the relinquished property sale.

Generally, a Qualified Intermediary is involved in the exchange to hold funds, assist the client and his tax professional and administer the exchange. While the rules of a 1031 exchange may seem challenging, an experienced Qualified Intermediary can make these hurdles easy to navigate.

Call us at 888-367-1031 or email us at 1031@1031cpas.com if we can help with any questions. See our Exchange Manual at www.1031cpas.com. 1031 Corporation is the Intermediary of choice for thousands of real estate professionals, CPAs and investors.

How To Report An Exchange Of Property Used Partly for Personal Residence and Partly for Investment Purposes

2011-04-04T20:07:00.018-06:00

Revenue Procedure 2005-14 provides guidance on tax reporting issues under IRC §121 and §1031 for exchanges of property that are combination or dual-use residential and business/ investment property.

Background - A homeowner can exclude gain from the sale of a personal residence if he owned and used the property as his principal residence for at least two of the five years preceding the date of sale (IRC §121). The maximum amount of gain exclusion is $250,000 ($500,000 married filing joint). However, the maximum amount of gain exclusion is reduced by a fraction for any rental use (non-qualified use) of the residence occurring after January 1, 2009 compared to the total years of ownership. And, any depreciation taken on the property since May 6, 1997 is not eligible for the exclusion.

Treasury Regulation 1.121-1 issued in 2002 made it clear that the IRC §121 exclusion of gain on the sale of a personal residence applies to an entire structure that is used partly as a personal residence and partly for business or investment use. The business/investment portion of a combination or dual-use residential property is also eligible for tax deferral under IRC §1031.

Accordingly, residential property may be eligible for the §121 exclusion and §1031 tax deferral under both provisions of the Internal Revenue Code simultaneously. Revenue Procedure 2005-14 gives six examples of how to report exchanges of property eligible for exclusion under IRC §121 and §1031 in varying circumstances that can be summarized by the following examples. For purposes of these examples, assume the taxpayer is single and eligible for a gain exclusion of $250,000 under IRC §121. In practice, the maximum exclusion will probably have to be reduced for non-qualified use after January 1, 2009.

Rental Property Converted from a Personal Residence in a Prior Year. IRC §121 does not require a taxpayer to be residing in a residence at the date of sale in order to qualify for the gain exclusion. If the taxpayer owned and lived in a residence in two out of the past five years, it is eligible for gain exclusion under IRC §121 even if it is presently being used as a rental. The taxpayer can exclude gain up to $250,000 under IRC §121 except for any depreciation taken on the property since May 6, 1997. Gain resulting from depreciation or gain in excess of the §121 exclusion is eligible for tax-deferral under IRC §1031. Realized gain is first excluded under IRC §121 and then deferred under IRC §1031. Cash boot of up to $250,000 received on the exchange would be tax-free under §121 even though the residence was used partly for investment/business purposes. Basis in the Replacement Property is increased by any gain excluded under IRC §121 in excess of cash received under IRC §121. This can get tricky, see Rev. Proc. 2005-14 for specifics.

Combination Property - One Property, Two Structures. If a taxpayer owns a property with a residence on it and a second structure used for business purposes, the property is a combination property. Part of the property is eligible for gain exclusion under IRC §121 and part of the property is eligible for tax-deferral under §1031. The exchange has to be accounted for as if there were two properties being sold and exchanged. The value of the Replacement Property has to be allocated between personal and business uses and realized gain is measured separately for each property. If the exchange of the business use of the Relinquished Property for business use Replacement Property results in a trade-down, there will be taxable boot on the exchange of the business portion of the Relinquished Property. Gain attributable to the business portion of the Relinquished Property cannot be excluded under IRC §121 or vice versa. Basis in the Replacement Property is measured separately for the personal residence and business portions of the property under the normal rules.

Dual Use Property - One Structure Used Partly for Residential and Business Uses. Any gain resulting from cash or debt reduction boot realized on the exchange will be tax-free up to $250,000 under IRC §121 even if the gain is allocable to or results from a trade-down on the business portion of the Relinquished Property. That is, except for any depreciation taken on the Relinquished Property since May 6, 1997. However, gain resulting from depreciation taken on the property since May 6, 1997 is also eligible for tax-deferral under IRC §1031. Variations on this theme can be summarized as follows:

All gain on the Relinquished Property up to a maximum of $250,000 can be excluded under IRC §121 except for depreciation taken on the property since May 6, 1997. Depreciation taken on the property that is allocable to the 1031 portion of the property can be tax-deferred under IRC §1031. Depreciation on the property after May 6, 1997 that is allocable to the personal residence portion of the property cannot be deferred under §1031.

Cash (or debt reduction) boot received on the exchange is tax-free under IRC §121 up to a maximum of $250,000 even if it relates to the 1031 portion of the property. (Except for post May 6, 1997 depreciation).

Gain on the exchange allocable to the personal residence portion of the property in excess of $250,000 is taxable under IRC §121 and cannot be sheltered under IRC §1031.

Revenue Procedure 2005-14 does not address closing issues on exchanges of property used partly for residential purposes and partly for investment/business uses. Treasury Department Publication 523 (1998, now replaced by new Pub. 523) instructed taxpayers with Dual-Use Property to treat the sale as two sales. Intermediaries frequently separate an exchange of dual-use property in a similar manner with separate settlement statements so that the taxpayer can cash-out on the personal residence part and roll the 1031 part thru an exchange. As a result of Rev Proc 2005-14, this is no longer necessary for Dual-Use Property. Whatever cash is pulled out of the exchange of dual use property is allocated first to the personal residence. Separate settlement statements remain desirable for sales of Combination Property since all data will have to be prorated for Combination Property.

Call us at 888-367-1031 or email us at 1031@1031cpas.com if we can help with any questions. Our Exchange Manual is also available free of charge at www.1031cpas.com. 1031 Corporation is the Intermediary of choice for real estate professionals, CPAs and investors

Thank You to Our Clients and Friends for Over 20 Years in the 1031 Exchange Business!

2011-02-24T15:20:00.021-07:00

Now that we are well into 2011, all of us at 1031 Corporation Exchange Professionals want to express our appreciation for the opportunity we have had over the last 20 years to be of service to our clients and friends.

2010 marked our 20th anniversary as an Exchange Facilitator. Beginning in Boulder County, Colorado we quickly began experiencing an opportunity to work with clients across Colorado and across the country from the east to the west coast. It has been a very gratifying experience for us and we appreciate the confidence our clients and friends across the country have expressed in us and our services.

In 2006, 1031 Corporation became a part of FirstBank of Colorado. With this partnership, clients of 1031 Corporation were able to be assured of the safety of their exchange funds in uncertain times in the industry and economy. FirstBank remains one of the top performing banks in Colorado with over 130 branches in Colorado, Arizona and California and over $10 billion in assets. We are proud to be able to offer such a high level of safety and security to our clients.

The Exchange Industry and related real estate market have seen many ups and downs over the past 20 years and we are currently emerging from one of the worst real estate downturns in recent memory. 2010 showed a steady increase in 1031 transactions and we are optimistic about the prospects for 2011.

At 1031 Corporation we are all dedicated to serving our clients at the highest level of competence and professionalism. Please accept our sincere thanks to all of you and feel free to call us at any time if we can be helpful.

Feel free to visit us and see our exchange manual at 1031cpas.com , or email us at 1031@1031cpas.com.

Exchanges of Aircraft and Equipment Can Still Save Taxes Even Though the 2010 Tax Relief Act Permits a 100% Write-Off for Replacement Purchases

2010-12-30T11:18:00.002-07:00

For Aircraft and Equipment purchased and placed in service after 09/08/10 and before 2012 the up-front §168(k) Bonus Depreciation deduction is increased to 100% by the 2010 Tax Relief Act. If a taxpayer sells aircraft or equipment during this time frame, the entire taxable income from the sale, including depreciation recapture, can be offset by the purchase of NEW aircraft or equipment during the same tax year. The replacement property has to be NEW.

Does this make a 1031 exchange of aircraft or equipment obsolete or unproductive for a taxpayer purchasing NEW replacement property? Partially but not entirely.

We recently had a client who was exchanging a $1 million aircraft for a $2 million replacement aircraft. His exchange was failing under Code Section 1031 because he couldn’t acquire the replacement aircraft within the required 180-day replacement period. But, he was saving $50,000 in sales taxes with his exchange. His sales tax was based on the boot paid for the replacement aircraft ($1 million). Had he not been doing an exchange, his sales tax would have been based on the entire cost of the replacement aircraft ($2 million). The exchange saved this taxpayer $50,000 in sales taxes.

What if the taxpayer is replacing with USED replacement aircraft or equipment? Well, maybe the taxpayer can offset a sale with the purchase cost of the replacement property under Code §179 even though it is not eligible for the bonus depreciation write-off under the 100% Bonus Depreciation rules of §168(k). But, Section 179 deductions are limited to $500,000 in total and phase out for a taxpayer with purchases in excess of $2 million for the year.

In any event, sales tax savings can be substantial and taxpayers and their advisors need to take a look at sales tax issues before they decide that an aircraft or equipment exchange will not be helpful.

Call us at 888-367-1031 or email us at 1031@1031cpas.com if we can help with any questions. Our Exchange Manual is also available free of charge at www.1031cpas.com. 1031 Corporation is the Intermediary of choice for real estate professionals, CPAs and investors.

Exchanges In Process at End of Year - Planning Opportunities

2010-11-23T10:38:00.007-07:00

Taxable Income recognized from a 1031 Exchange can be reported under the installment sale rules of IRC §453 if an exchange starts in 2010 and ends in 2011.

Taxpayers who meet the requirements of the regulations are entitled to report any gain recognized on an exchange under the installment sale method of tax accounting (See Reg. §1.1031(k)-1(j)(2)). However, the regulation applies only if the Exchange Property is eligible for like-kind exchange treatment and if the taxpayer had a bona fide intent to enter into a 1031 Exchange.

If taxpayer has entered into a delayed exchange before the end of 2010 and cashes out or receives cash after December 31, 2010, gain on the exchange can be reported like an installment sale subject to the rules of IRC §453. The Exchange is reported in 2010 but gain attributable to the cash received in 2011 is deferred under the installment sale rules until 2011 and reported on the 2011 return.

Or, if the taxpayer so elects, cash received from the Exchange can be reported in 2010 even though the cash was received in 2011. This gives taxpayers the opportunity of selecting the best year to report the gain attributable to the cash received. Since capital gains tax rates for 2011 will be higher than 2010 unless Congress elects to extend the 2010 rates, this option provides taxpayers with a tax-planning alternative which is flexible enough to accommodate whatever Congress does with the tax rates.

Talk to your tax advisor about your alternatives in this uncertain tax environment. Call us at 888-367-1031 or email us at 1031@1031cpas.com if we can help with any questions. Our Exchange Manual is also available free of charge at www.1031cpas.com. 1031 Corporation is the Intermediary of choice for real estate professionals, CPAs and investors.

Automatic Capital Gain Tax Rate Increases for 2011

2010-11-09T10:07:00.005-07:00

Capital gains on the sale of assets held more than 12 months are taxed at a lower rate than ordinary income. The Jobs and Growth Tax Relief Reconciliation Act of 2003 and Tax Reconciliation Act of 2006 temporarily reduced the tax rate on long-term capital gains until January 1, 2011. At this time, the previous rates are scheduled to be automatically reinstated. Congress has been discussing a temporary extension of the current tax rates but this possibility remains uncertain at the present time.

As a result, taxpayers face uncertainty about whether they should be planning for taxable gains in 2010 or 2011. Or, whether they should defer their taxes under Code Section 1031 with an exchange of real estate or cash-out and take their gains in 2010 before a higher tax rate becomes effective.

Tax rates on long-term capital gains on a sale of real estate now and in 2011 can be summarized as follows if there is no further action by Congress –

Now - 15% for taxpayers in a regular tax bracket higher than 15%. Zero for taxpayers in a tax bracket of 15% or lower

2011 - 20% for taxpayers in a regular tax bracket higher than 15%. 10% for taxpayers in a tax bracket of 15% or lower.

Capital gains (long-term) attributable to depreciation taken on real estate investments are taxed at a rate of 25% (15% for taxpayers in a 10% or 15% tax bracket) before the above referenced tax rates begin to apply.

Commencing in 2013, a new Medicare tax of 3.8% will be imposed on capital gains from the sale of real estate for high-income taxpayers. High-income taxpayers are taxpayers with gross income of $200,000 for individuals or $250,000 for couples. This tax will only apply to the amount of gain which causes adjusted gross income to exceed the high-income threshold.

Talk to your tax advisor about your alternatives in this uncertain tax environment. You may find that a 1031 Exchange remains desirable as an alternative to paying taxes under either rate schedule. Call us at 888-367-1031 or email us at 1031@1031cpas.com if we can help with any questions.

Give us a call at 888-367-1031 or email us at 1031@1031cpas.com if we can help with questions about how a 1031 Exchange can help you. See our Exchange Manual and visit us at http://www.1031cpas.com/ for additional information on how 1031 exchanges can help you save taxes

Section 1033 Condemnation Sales & § 1031 Replacement Rules

2010-10-05T10:33:00.010-06:00

A "condemnation sale" of property under IRC §1033 is not taxed if the taxpayer replaces with qualifying replacement property within specified time limits. Following is a summary of the more important rules to qualify for this tax treatment.

What Is A Condemnation Sale?

The involuntary conversion rules permit taxpayers who sell under the threat of condemnation to defer the gain on the sale (Code Section 1033(a) & Reg. Section1.1033(a)-1(a)). The IRS' position is that the threat of condemnation exists when the taxpayer learns through a reliable source that a governmental or quasi-governmental entity has decided to acquire the taxpayer's property, but only if there are reasonable grounds to believe that the condemnation or requisition will actually occur. The threat or imminence of condemnation thus exists if a taxpayer is faced with the alternative of either selling the property to the government, a quasi-governmental entity, or a third party; or having the property condemned.

What is a “Friendly Threat of Condemnation?”

Taxpayers often want to sell and are negotiating the sale of a property to a governmental entity and desire to take advantage of tax deferral under Code Section 1033. In order to qualify for the Section 1031 deferral, taxpayers must establish a “threat of condemnation.” One way to do this is to request from the governmental entity a “Friendly Threat of Condemnation” letter which informs the taxpayer that a condemnation is being considered if the sale negotiation falls thru. Governmental entities are usually cooperative with the taxpayer with this type of request.

What Is The Replacement Time Frame?

Taxpayers are granted three-years (IRC §1033(g)(4)) in which to replace real estate used in a trade or business (i.e. farm property). The three-year period commences with the earlier of the closing of the sale or threat of condemnation (IRC §1033(a)(2)(B)) and ends on the third anniversary of the end of the year in which the sale took place. Any other type of property disposed of in a condemnation sale is required to be replaced within two-years from the end of the year in which the sale took place. Extensions of time can be obtained by written request if necessary.

What Is Qualified Replacement Property?

For real estate used for investment or business purposes, qualified replacement property is "like-kind property" as defined under the rules of IRC §1031 tax-deferred exchanges (Reg. §1.1033(g)-1(a)). This means that any type of real property held for investment purposes will qualify for replacement of the sale of your farm land. The replacement property may be improved or unimproved under these rules. It is even possible to construct improvements on land a taxpayer is already in title on.

Does The Sale Cash Have To Be Escrowed Anywhere Under §1033?

There are no requirements for escrowing cash received from a condemnation sale under §1033. Taxpayers can use the cash as they wish. The replacement property can be 100% financed without using any of the cash you received from the sale of the condemnation property. There are no requirements for use of the condemnation sale cash for closing on replacement real estate.

How Do I Make A § 1033 Election and Report A Condemnation Sale On My Tax Return?

The condemnation sale should be reported on Form 4797 and the gain should be noted as "suspended under §1033." This will comply with the requirements for making an election to defer gain under §1033 as well as comply with the reporting requirements.

Additional Comments Regarding The Sale Of Personal Property

The §1031 and §1033 rules are generally very liberal as to what constitutes like-kind replacement property for real estate exchanges. The rules for replacement of Personal Property under §1033 are more restrictive. Under IRC §1033 replacement personal property must be "similar in use." Safe harbor like-kind replacement property for exchanges of personal property are provided under the General Asset Classes and Product Classes described below.

The General Asset Classes are found in the Regulations (§1.1031(a)-2(b)(2)). The Product Classes are found in Sectors 31, 32 and 33 (pertaining to manufacturing industries) of the North American Industry Classification System (NAICS) set forth in Executive Office of the President, Office of Management and Budget, North American Industry Classification System, United States, 2007 (NAICS Manual) as periodically updated.

Give us a call at 888-367-1031 or email us at 1031@1031cpas.com if we can help with questions about how a 1031 Exchange can help you.

See our Exchange Manual and visit us at http://www.1031cpas.com/ for additional information on how 1031 exchanges can help you save taxes.

Option Payments & Earnest Money Deposits

2010-09-15T10:36:00.003-06:00

Our Exchange clients frequently ask us about how to avoid taxable boot on an Exchange where option payments under an option contract or earnest money deposits have been received prior to the closing on the sale of their Relinquished Property. Option payments may have been received by the taxpayer months or even years in advance of a closing on the sale of the property. Earnest money deposits are commonly received when a contract to sell real property is executed and are under the same tax rules as option payments received by a taxpayer.

Money received in advance of a sale of real estate is not taxed until the sale is closed and possession of the real property is transferred to the buyer. If the option is forfeited and retained by the taxpayer payments received under the option contract are taxable as ordinary income in the year of the forfeiture. If the option is exercised and the property is sold, payments received under the option contract are taxable as part of the proceeds of sale of the property. For this reason, payments from option contracts or earnest money deposits are not reported before the sale is closed and possession is transferred to the buyer or the option or deposit is forfeited and retained by the taxpayer, whichever occurs first.
If a taxpayer wants to enter into an exchange under Section 1031 of the Internal Revenue Code and shelter the option payments received from income tax as well as the proceeds of sale of the property, this can be done at the sale/exchange closing.

To be included in the 1031 Exchange, the option money received by the taxpayer prior to the closing has to be brought to the closing table where it becomes part of the sale proceeds which are remitted to the Exchange Facilitator (Qualified Intermediary). It is unnecessary for the Exchange Facilitator to receive or hold the option money from the taxpayer prior to the closing on the sale of the real estate. It is also unnecessary for the taxpayer to bank the money in an escrow account or otherwise. It doesn’t matter where the taxpayer gets the money as long as cash is remitted to the closing in an amount equal to the payments previously received.

Give us a call at 888-367-1031 or email us at 1031@1031cpas.com if we can help with questions about how a 1031 Exchange can help you. See our Exchange Manual and visit us at www.1031cpas.com for additional information on how 1031 exchanges can help you save taxes.

The Rules of Boot in a 1031 Exchange

2010-08-02T11:10:00.006-06:00

A Taxpayer Must Not Receive "Boot" from an exchange in order for a Section 1031 exchange to be completely tax free. Any boot received is taxable (to the extent of gain realized on the exchange). This is okay when a seller desires some cash and is willing to pay some taxes. Otherwise, boot should be avoided in order for a 1031 Exchange to be tax free.

The term "boot" is not used in the Internal Revenue Code or the Regulations, but is commonly used in discussing the tax consequences of a Section 1031 tax-deferred exchange. Boot received is the money, debt relief or the fair market value of "other property" received by the taxpayer in an exchange. Money includes all cash equivalents received by the taxpayer. Debt relief is any net debt reduction which occurs as a result of the exchange taking into account the debt on the Relinquished Property and the Replacement Property. "Other property" is property that is non-like-kind, such as personal property received in an exchange of real property, property used for personal purposes, or "non-qualified property." "Other property" also includes such things as a promissory note received from a buyer (Seller Financing).

Boot can be inadvertent and result from a variety of factors. It is important for a taxpayer to understand what can result in boot if taxable income is to be avoided. The most common sources of boot include the following:

· Cash boot received during the exchange. This will usually be in the form of "net cash received" at the closing of either the Relinquished Property or the Replacement Property.

· Debt reduction boot which occurs when a taxpayer’s debt on Replacement Property is less than the debt which was on the Relinquished Property. As with cash boot, debt reduction boot can occur when a taxpayer is "trading down" in the exchange.

· Sale proceeds being used to service costs at closing which are not closing expenses. If proceeds of sale are used to service non-transaction costs at closing, the result is the same as if the taxpayer received cash from the exchange, and then used the cash to pay these costs. Taxpayers are encouraged to bring cash to the closing of the sale of their Relinquished Property to pay for the following non-transaction costs:

a. Rent prorations.

b. Utility escrow charges.

c. Tenant damage deposits transferred to the buyer.

d. Property tax prorations? Maybe, see explanation below.

e. Any other charges unrelated to the closing.

Tax prorations on the Relinquished Property settlement statement can be considered as service of debt based on PLR 8328011. Under this rationale exchange cash used to service tax prorations should not result in taxable boot. However, taxpayers may want to bring cash to the Relinquished Property closing anyway in order to resolve this issue.

Excess borrowing to acquire Replacement Property. Borrowing more money than is necessary to close on Replacement Property will cause cash being held by an Intermediary to be excessive for the closing. Excess cash held by an Intermediary is distributed to the taxpayer, resulting in cash boot to the taxpayer. Taxpayers must use all cash being held by an Intermediary for Replacement Property. Additional financing must be no more than what is necessary, in addition to the cash, to close on the property.

Loan acquisition costs with respect to the Replacement Property, which are serviced from exchange funds being brought to the closing. Loan acquisition costs include origination fees and other fees related to acquiring the loan. Taxpayers usually take the position that loan acquisition costs are being serviced from the proceeds of the loan. However, the IRS may take a position that these costs are being serviced from Exchange Funds. There is no guidance which is helpful in the form of Treasury Regulations on this issue at the present time.

Non-like-kind property, which is received from the exchange, in addition to like-kind property (real estate). Non-like-kind property could include the following:

· Seller financing, promissory note

· Furniture and fixtures acquired with purchase of real estate

· Sprinkler equipment acquired with farm land

Boot Offset Rules - Only the net boot received by a taxpayer is taxed. In determining the amount of net boot received by the taxpayer, certain offsets are allowed and others are not, as follows:

· Cash boot paid offsets cash boot received (but only at the same closing table).

Cash boot paid at the Replacement Property closing table does not offset cash boot received at the Relinquished Property closing table (Reg. §1.1031(k)-1(j)(3) Example 2). This rule probably also applies to inadvertent boot received at the Relinquished Property closing table because of prorations, etc. (see above).

· Debt incurred on the Replacement Property offsets debt-reduction boot received on the Relinquished Property.

· Cash boot paid offsets debt-reduction boot received.

· Debt boot paid never offsets cash boot received (net cash boot received is always taxable).

· Exchange expenses (transaction and closing costs) paid offset net cash boot received.

Rules of Thumb:

· Always trade "across" or up. Never trade down (the “even or up rule”). Trading down always results in boot received; either cash, debt reduction or both. The boot received is mitigated by exchange expenses paid.

· Bring cash to the closing of the Relinquished Property to pay for charges which are not transaction costs (see above).

· Do not receive non-like-kind property (or if you do, pay for it).

· Do not over-finance Replacement Property. Financing should be limited to the amount of money necessary to close on the Replacement Property in addition to exchange funds which will be brought to the Replacement Property closing.

Give us a call at 888-367-1031 or email us at 1031@1031cpas.com if we can help with questions about how a 1031 Exchange can help you. See our Exchange Manual and visit us at http://www.1031cpas.com/ for additional information on how 1031 exchanges can help you save taxes.

A Section 1031 Exchange May Be Helpful Even When a Property is Sold at a Loss

2010-07-22T14:38:00.021-06:00

In today’s real estate market sellers often have to accept a sale price which is less than what was originally paid for a property. Sellers are often dismayed to learn that even if the property is sold at a “loss” or at a foreclosure sale, income taxes may be due.

A taxable gain on the sale of property can result even though a taxpayer sells the property for less than what was paid for it when it was purchased. Income taxes are due when a taxpayer sells property at a net sale price which exceeds the “tax basis” in the property as distinguished from what was paid for the property when it was acquired.

Tax basis is comprised of the following elements for a property which is purchased:

-Purchase price paid for the property.
-Plus improvements made to the property subsequent to the purchase.
-Minus any depreciation taken on the property after purchase.
-Minus any deferred gain from a 1031 exchange when the property was acquired (if any).

Since depreciation and deferred gain from a 1031 exchange decrease tax basis, gain can result even though the property is sold for less than what was paid for it. For example, if a property that is being sold for $400,000 was acquired a few years ago for $500,000 and currently has a tax basis of less than $400,000, a taxable gain will result on the sale. A 1031 Exchange can be utilized to defer the income taxes on this gain if the investor is going to reinvest the proceeds of the sale in to replacement real estate.

The gain on the sale of property is taxed at capital gains tax rates. The maximum long-term capital gains tax rates for property held for 12 months or longer can be summarized as follows:

-25% for the amount of the gain equal to depreciation taken on the property
-15% for the remainder of the gain (20% after January 1, 2011 unless new tax law extends the 15% rate)
-Plus a possible alternative minimum tax which often occurs when a large capital gain is reported
-Plus state income taxes which will be due on the sale

Talk to your tax advisor when you are anticipating a sale of your property. You may find that a 1031 exchange can save you taxes even if you are selling the property at a loss.

If you have any questions we can help with, contact us at 888-367-1031 or email us at 1031@1031cpas.com. Our Exchange Manual is also available, free of charge at www.1031cpas.com. 1031 Corporation is the Intermediary of choice for thousands of real estate professionals, CPAs and investors.

What Is The Tax Rate on Boot Received in a 1031 Exchange? (15% or 25%?)

2010-06-21T23:37:00.002-06:00

When depreciable real estate is sold gain on the sale is taxed under the capital gains tax rules at a maximum of 25% to the extent of any depreciation taken on the property being sold. Gain in excess of the depreciation taken is taxed at a maximum rate of 15%. This depreciation is referred to as “Unrecaptured Section 1250 Depreciation". Accountants often refer to it as “25% Rate Gain.”

When depreciable real estate is exchanged and the taxpayer is reporting “boot” received on the exchange, accountants must decide if the boot is taxed at 15% or 25%. Accountants commonly think that the 25% rate must be used before any gain on the sale can be taxed at 15%. This is the way the capital gain rates are applied under the Installment Sale Rules and ordering structure of IRC §453.

However, there is no guidance issued by the IRS which applies to this issue in the case of boot being reported on an exchange of depreciable real estate. Also, Internal Revenue Reg. 1.168(i)-6 instructs taxpayers to carryover the cost and accumulated depreciation of the relinquished property to the depreciation schedule of the replacement property (referred to as “exchanged basis”).

Since the accumulated depreciation of the relinquished property is carried over to the depreciation schedule of the replacement property, isn’t it possible to argue that the 25% Rate Gain is also carried over to the replacement property and deferred until a cash-out of the replacement property?

This is certainly a taxpayer argument which is logical and has merit. And accordingly, taxpayers reporting boot on an exchange of depreciable real estate might wish to use this argument to limit the tax on boot received to 15%.

Taxpayers should always consult with their tax professional for guidance on issues such as this. See our Exchange Manual or call us at 888-367-1031 if we can help with any questions you may have about 1031 Exchanges.

Research Study Points to Investment Opportunity?

2010-06-15T07:35:00.000-06:00

Recently I received a report from Marcus & Millichap's Research Services that I found quite interesting. In the report, they point to the very real potential of further increases in homeowner delinquency rates and further declines in homeownership rates.

They estimate more than six million current homeowners owe more on their home than they are worth. Assuming no additional declines in value nearly all of them will need at least five years to just to get back to break even on their value. U.S. homeownership rate currently sits at just over 67% which is down about 2% over the highs we saw a couple years back. However, once you take into account the upside-down homeowners, the effective homeownership rate is nearly 6% lower. Markets we've all heard about - Phoenix, Miami and Las Vegas - have been hit the hardest and the biggest gap in homeownership exists.

So what does this mean for investors? M & M points out that apartment owners will be the group that benefits the most from the increase in residential defaults projected as prior homeowners become renters. According to their findings, cccupancy rates are likely to improve in late 2010 and 2011 as economic recovery gains traction. They do point out that many bank-owned homes will elevate rental competition as investors scoop up good deals and this will limit rental gains for the next 12 to 24 months. Long term, they believe, the expanded renter pool (which will also benefit from the growing echo boomer population) should contribute to increased rent growth.

I also thought it interesting that they believe the retail market might actually benefit from the increased defaults on home mortgages. They theorize that, as a portion of cash is freed up from prior larger mortgage payments, retail sales will increase. They do indicate that they continue to believe relatively modest job growth (triggered by early signs of a recovery) will cause retail fundamentals to lag the broader commercial market.

It will be interesting to see how the summer and fall months (with many political races also occuring) will impact these predictions. Talking with a number of real estate professionals, there is a real sense that the homebuyer tax credits did, indeed, provide a boost to the housing recovery (or stabilization). In addition, as some of the temporary government census jobs are dismissed, it will be interesting to see if the economy has yet gained enough traction to offset these lost positions.

So what's an investor to do? Sell now? Hang tight? Add to their portfolio? Exchange to re-position their real estate assets? While opinions vary, many experienced investors and financial profesionals believe there are winners to be had in the present economic environment. It is up to you to determine whether those opportunities exist in apartments, rental homes, retail or some other category. With just as many opinions on the direction of the economy and the impacts on real estate, this is an individual question that demands consultation with a trusted real estate expert (or a few!), reflection on your own personal finacial situation and risk tolerance and, of course, the help of a solid tax professional.

If you determine that re-position your portfolio fits your situation, you have a great advantage in the taxation question with a 1031 exchange. The professionals at 1031 Corporation would love to speak with you about the opportunies that exist to exchange your present real estate assets for ones that may position you to take advantage of future recovery. Give us a free, no obligation call today at 888-367-1031.

Leasehold Interests and 1031 Exchanges Frequently Asked Questions

2010-06-09T11:05:00.014-06:00

A leasehold interest with a term of 30 years or more is like-kind to a fee interest in real estate (Reg. §1.1031(a)-1(c)(2)). Renewal options under the lease are counted for purposes of determining if the lease has 30 years or more to run. Accordingly, a 30 year leasehold interest can be exchanged for a fee interest in real estate or vice versa - a fee interest in real estate can be exchanged for a 30 year leasehold interest.

Leasehold interests with less than 30 years remaining under the lease are not like-kind to a fee interest in real estate. But, they can qualify as like-kind to other leasehold interests with either 30 years remaining under the lease or less than 30 years.

What is the difference between a lease and a leasehold interest?

A Leasehold Interest is an interest in real estate which is acquired and possessed by a person who is the lessee of the property under the terms of a lease. The Lessor is the owner of the property. The Leasehold Interest might be bare land or land with improvements. Sometimes the leasehold improvements are in place when the lease is executed and sometimes the improvements are constructed by the lessee after the lease is executed.

A Lease is the legal instrument documenting the terms and number of years of possession by the lessee.

What is the tax basis of a leasehold interest acquired as replacement property in a 1031 Exchange?

Tax basis is the purchase cost of obtaining the lease minus the deferred gain resulting from the exchange. If improvements are constructed on the leasehold, tax basis will include the cost of such construction or improvements.

How is the tax basis of a leasehold interest depreciated?

The tax basis of a leasehold interest is amortized over the number of years the lease has to run, including options for renewal of the lease.

If I exchange bare land for a 30 year lease of a commercial building, I can amortize the tax basis attributable to the bare land over 30 years?

Yes, the tax basis of the leasehold interest is amortized over the life of the lease, including options for lease renewal.

What if the term of the lease is for 30 years plus an option to renew for an additional 30 years (60 years in total)? Am I required to amortize a commercial office building which ordinarily could be depreciated over 39 years over 60 years?

The building can be depreciated over the ;">MACRS recovery period (39 years in this case) if the life of the lease, including renewal options is longer than the MACRS recovery period (Reg. §1.178-1(b)(3)). The cost basis allocable to the land would be amortized over the life of the lease, including renewal options.

What if the term of the lease is for 20 years plus an option to renew for an additional 20 years (40 years in total) and I do not intend to exercise the renewal option?

Amortization of the tax basis of the lease over 20 years is possible if the taxpayer can establish that is “more probable than not” that the lease will not be renewed, extended or continued (Reg. §1.178-1(b)(2).

See our Exchange Manual or give us a call us at 888-367-1031 if we can help with any questions you may have about 1031 Exchanges.

Reverse & Improvement Exchange Financing

2010-05-27T10:57:00.000-06:00

Reverse 1031 exchanges involve the purchase of Replacement Property prior to the sale of the property being sold (the Relinquished Property) in a like kind exchange. Since you are not able to own a Replacement Property prior to selling a Relinquished Property, a taxpayer arranges for an Exchange Accommodation Titleholder (EAT) (usually the Qualified Intermediary) to take and hold title to replacement property until they find a buyer for his or her relinquished property.

Reverse Exchanges are also common where a taxpayer wants to acquire a property and construct improvements (an (Improvement Exchange) on it before taking title to the property as replacement property for an exchange. This is necessary if the value of the improvements is important for replacing with property of equal or greater value in order to avoid a taxable “trade-down.”

One question that naturally arises is the financing of the Replacement Property. Since the taxpayer's equity is tied up in the property not yet sold, how does one go about financing the purchase of the Replacement Property? Having the Qualified Intermediary (and EAT) owned by a bank helps....a lot.

See, the trouble is, the property is not in your name yet. So, secondary financing providers have issue with lending to an entity that isn't signing on the loan. If you want to finance 100% of the purchase price and wait to pay the loan down and amortize the loan after your relinquished property sells, most lenders are going to say it is impossible. Further, what happens when the property sells. The proceeds from that sale can't be assigned to the loan since they need to go to the Qualified Intermediary for 1031 exchange purposes.

1031 Corporation has the answers to these questions. As a bank-owned Qualified Intermediary, we can assist with Reverse and Improvement Exchange Financing through FirstBank's 130+ office locations throughout Colorado, Arizona and California. Since we are owned by a bank, we are very familiar with reverse exchange financing issues and can work with our bank officers. Having a Qualified Intermediary subsidiary, the bank officers are familiar with the terms and conditions of Reverse Exchange Financing and can work with you to provide this "bridge" in financing. In fact, FirstBank has a program that allows for long-term commercial financing at the time of Replacement property purchase. They even include a one-time assumption of the loan and waive any prepayment penalty for the Relinquished Property sale proceeds.

Call us today at 888-367-1031 if you are working through the mechanics of Reverse Exchange Financing or if you are having difficulty financing the purchase of your 1031 Exchange Replacement Property. We are uniquely positioned to assist you and would be happy to help expain the process in detail.

Estate Tax 2010

2010-05-18T12:44:00.009-06:00

Many older taxpayers work to move wealth they've generated in their lifetimes from one generation to another while minimizing tax liability through estate planning. Intergenerational transfers of wealth have a significant impact on the economy and many believe that the estate tax generates costs to taxpayers, the economy and the environment that far exceed any potential benefits that it might arguably produce. Still, the political landscape today seems to indicate estate taxes are here to stay.

When dealing with estate planning, many older generation taxpayers deed property into a family partnership or LLC. Children receive an ownership percentage "gift" each year that transfers ownership over time. The parents that have acquired the real estate are able to continue to take income from the property but their heirs receive the property without estate tax (up to $1 million in lifetime gift tax exemption). If property is sold, the LLC can utilize a 1031 exchange to sell the investment property and allow the real estate portfolio to grow tax deferred. When the parents pass on, the children then have an ownership in the investment property outside the estate.

If there is not time to do this advance planning, the heirs are subject to an estate tax. This tax had been getting less concerning for many taxpayers due to the Bush tax cuts in 2001 that increased the exemption amount and reduced the tax rate. The tax was set to expire in 2010. It was expected that Congress would re-visit the estate tax before the end of 2009 and put some structure in place. They did not. Because of a limited time circumstance confusion reigns in the current estate tax landscape.

Both the estate tax and the generation-skipping transfer tax (on assets given to grandchildren) were repealed at the end of 2009. If Congress and the President do nothing, both taxes are scheduled to return in 2011 at the unfavorable rates that applied in 2001. The amount that is exempt from each of these taxes will then be $1 million and the tax on the rest will be 55%. Most tax writers do not want this to happen and talks on the estate tax are already underway.

Congress is talking about reinstating the estate tax retroactively to January 1st, 2010 and reviving the "date of death" value for inherited assets. Given the size of some estates, like the one of billionaire Dan Duncan, some are likely to challenge the retroactive imposition of the estate tax and there is a long shot that a proposal gaining ground may give estate a choice in 2010. However, there are past court cases that suggest restoring the tax this way is perfectly legal and could be upheld. Of course, the sooner Congress acts, the fewer number of large estates likely to bring such cases and the less chance these heirs will have to call the tax unconstitutional.

Members of the House of Representatives generally support a proposed $3.5 million exemption and a 45% rate on estates. There is growing support in the Senate for a $5.0 million exemption and a 35% top tax rate. We'll see, in the coming weeks and months, how this plays out and we'll certainly do our best to keep you posted of any news.

By conferring with your tax professional, and utilizing the tools of estate planning and 1031 exchanges together, one can minimize the effects of capital gains taxes on investment property. If you have are considering selling your investment property and want to defer capital gains tax using the tools of a 1031 exchange, please contact the professionals at 1031 Corporation. We have years of experience and work with accounting professionals to structure an exchange to minimize the tax impact on your investment assets. Give us a call today at 888-367-1031.

1031 Regulatory Reform Legislation

2010-05-07T10:52:00.011-06:00

Recently the topic of financial regulatory reform has been a hot item in the news. I recently became aware that there is a paper circulating in Washington with a proposed national regulatory bill concerning the Qualified Intermediary industry. The author of this proposal has been running moving around the Capital attempting to put provisions in place that, had they been in place, reportedly would have "prevented the loss of over $770 million of exchangers' funds that has occurred at the hands of QIs which currently operate in an environment that is subject to little or no regulation and oversight at the state level."

Seven states, thus far, have adopted 1031 legislation in an attempt to protect consumers. Those provisions, if adopted by all states, or at the national level, would have, perhaps, prevented or reduced many losses from unscrupulous Qualified Intermediaries. It should be said that, like many laws, people that are crooks will break the law.

One of the provisions that the author of this latest proposal is suggesting, though, is detrimental to the public. It would not allow a bank-owned Qualified Intermediary from depositing the exchange client proceeds into the parent bank. The proposal says that the "depository bank, escrow holder, or trustee holding exchange funds must unrelated to, and independent of, the QI". The pitch is that the bank which owns or controls the QI could then "place its financial interests above those of the exchanger".

This proposal would have the effect of eliminating banks (and their exchange facilitator affiliates) from the exchange facilitator business. This requirement would also negatively impact title insurance company-affiliated exchange facilitators who may wish to use a related escrow or trust company to provide qualified escrow or qualified trust services to provide greater protection to taxpayers.

Despite the fact that banks are already regulated by a state or federal financial regulator (and are subject to more oversight and controls than non-bank exchange facilitators), this proposal seeks to eliminate some of the safest and financially strongest exchange facilitators from the industry. Given that not a single loss has occurred as a result of bank failure, and there has never been any loss of exchange funds that were held in a bank-related QI, there is no history that would warrant this provision.

The national trade association of Qualified Intermediaries, the FEA, has been a strong supporter of federal regulation of its industry to require prudent funds management standards and other protections for its clients. In 2007, the FEA petitioned the FTC for regulatory oversight and submitted to it a comprehensive draft regulation. The FTC denied the petition, saying that the burdens of regulation outweighed the need, and that there was no evidence of pervasive fraud throughout the industry.

The FEA has since been actively involved in passing state legislation to regulate exchange facilitators. The FEA is supportive of legislation or regulations which provide protections for all taxpayers utilizing exchange facilitators and which do not competitively disadvantage any legitimate business model. It is my personal opinion that working with the FEA, and not against its efforts, would best serve the consumer and the industry as a whole.

For the record, 1031 Corporation is owned by FirstBank. We also individually segregate accounts. Please visit our website for a free exchange manual or contact us at 888-367-1031.

1031 Corporation Exchange Professionals Celebrates 20 Years

2010-04-27T06:37:00.004-06:00

On April 27, 1990, company founder Larry Jensen CPA, formed 1031 Corporation Exchange Professionals to assist a taxpayer with an exchange of real estate under the provisions of Code Section 1031. There were few or no Qualified Intermediaries in Colorado at the time and it was difficult for taxpayers to implement a qualifying exchange under IRC §1031. Mr. Jensen felt that 1031 Corporation could be helpful as a facilitator.

In 1991, the IRS issued the “Safe Harbor” Regulations establishing a greater market for this type of service. 1031 Corporation was already established and began to market exchange services locally. Many of the clients, Corporation worked with in the early years were unacquainted with a “1031 Exchange.” 1031 Corporation quickly became a leader in introducing tax professionals, Realtors, title companies and attorneys to the simplified tax-deferred exchange procedures on the sale and purchase of real and personal property investments.

Over the years, because of its commitment to provide friendly, professional service, 1031 Corporation grew from its humble beginnings. With increased knowledge from tax and real estate professionals, repeat and referred client business and a growing real estate market, 1031 Corporation developed into one of the nation’s leading exchange intermediaries. In the 20 years of business, 1031 Corporation has facilitated thousands of exchange transactions ranging from the simple real property exchange to the complex, multiple asset exchange.

In 2006, recognizing that clients deserve assured safety of their exchange funds and competent professional services, 1031 Corporation became a subsidiary of FirstBank. With it’s extensive reputation of friendly customer service, safety and security, FirstBank and 1031 Corporation were a natural fit. As Colorado’s largest locally-owned bank - with over $10 billion in assets and 130 branches in Colorado, Arizona and California – FirstBank continues to expand 1031 Corporation’s exchange services nationwide.

Since 1991, 1031 Corporation and its staff of Certified Exchange Specialists have assisted clients with leading-edge services and consultation that continues today. As we celebrate our 20th anniversary, 1031 Corporation Exchange Professionals wishes to thanks all of our clients, and business partners for the confidence they have placed in our services over the years. We pledge to continue serving our clients at the highest level of competence and expectations.

Please give us a call at 888-367-1031 or visit our website if we can be of any assistance.

Texas Attorney charged in 1031 QI theft

2010-04-15T10:03:00.006-06:00

In yet another case of an individual getting desperate, a Texas attorney in McAllen has been charged with the theft of $300,000. McAllen police believe Rogelio Ibañez, 44, stole the money from a real estate investment firm that had hired him to hold the funds as part of a 1031 exchange.

In June, the investment firm filed a complaint with the state bar association that resulted in revocation of Ibañez's attorney license. However, they only filed criminal charges last month.

Unfortunately, we've seen this too many times before. One thing that appears consistent, as well, is that investors that begin questioning where their funds are held tend to hold off filing criminal charges - presumably hoping that they can "work with" the QI to get their funds returned. In too many cases, most the money is gone and holding off filing criminal charges only further damages their chances.

As we've indicated before, for most states, it's an "investor beware" situation. Nine states now have taken action to require Qualified Intermediaries to meet certain minimum standards but the laws can only go so far. So how does one protect themselves?

As we've blogged about numerous times, transparency - and this really goes for any "investment" - is paramount. Do you know where your QI is holding your funds? Is your QI willing to give you access to view the deposit of funds? Does your QI provide the option of setting up a Qualified Escrow between the bank, the QI and you?

Of equal importance is the segregation of held funds. Does your Qualified Intermediary hold the funds in a separate bank account - and by that we mean not only separate from their operating accounts but separate from other clients' funds? To many will say they segregate between their operations and their trust funds when, in reality, they pool investor funds into a combined investment account. Beware, the "subaccounting" systems some QI's does not protect you when there are problems.

We also believe having the backing of a financially sound parent company - whether this be a bank, title company or financially sound owners is also something you can check out. Is your Qualified Intermediary willing to share the financial statements of their ownership? Is your QI regulated by bank regulators or state examiners? Are these financials audited?

All good questions to ask. Unfortunately, too many investors looking to do a 1031 exchange don't ask these questions or blindly trust the person with whom they are entrusting their substantial sale proceeds. You should be asking the same questions you would anytime you "invest" with a company.

To speak to us about any of these questions, or to open up your exchange with Certified Exchange Specialists 1031 Corporation, a subsidiary of FirstBank, please contact us at 888-367-1031.

1031 Exchange Converted to Primary Residence Court Ruling

2010-04-09T12:24:00.008-06:00

Last week a U.S. Tax Court ruled (T.C. Memo 2010-64) that replacement property acquired in a 1031 exchange did not meet the "held for" investment requirement after the taxpayer moved into the property two months after acquiring it.

In the fall of 2002, a couple placed an offer on a single family home in Georgia contingent upon the sale of their primary residence in California. A few months later the couple sold their home and moved in with some in-laws living in Georgia. In the spring of 2003, the couple sold some rental property in California and used a 1031 exchange through a Qualified Intermediary to complete the purchase of the Georgia single family home. The couple placed a "for rent" advertisement in a neighborhood newspaper for a few months, began work to finish the basement and, two months after acquisition, moved out of their in-laws house and moved into the Georgia home.

In the Tax Court's ruling against the taxpayers, they noted the short time frame between the acquisition and their conversion to a primary residence. They also noted the fact that they had made the purchase of the Georgia property contingent upon the sale of their California primary residence (and not the rental property). They dismissed, as irrelevant or non-persuasive, the facts presented by the couple that the Georgia purchase was not extravagent in relation to California property values or the fact that they moved in with in-laws. In its ruling the Court found that the taxpayers had contemplated the use of the Georgia property as a personal residence before the exchange. The couple was held liable for the tax payment deficience in 2003 and 2004 as well as accuracy-related penalties under section.

While conversion of an investment property to a primary residence or vacation home is permissible, this ruling points out that the held-for-investment intent should be clearly evidenced from the start. If you are considering the possibility that an investment property may some day become your primary residence or vacation home, substantial documentation of your investment efforts should be evident. While Section 1031 of the Code does not clearly define the amount of time required to hold something for investment purposes , previous cases and rulings have shown a year (or even better, two years) should usually pass between the acquisition, use as an investment property and conversion to a personal use.

If you are contemplating a 1031 exchange and are considering the future personal use of investment property, you should consult with your tax or legal professional. We also hope you will give 1031 Corporation a call at 888-367-1031 if we can be of any assistance with your 1031 exchange.

Health Care Reform Adds New Real Estate Investment Tax

2010-03-25T17:13:00.001-06:00

With the House of Representatives´ narrow passage of health care reform over the weekend came additional tax increases for the small investor in real estate. A new 3.9 percent Medicare Payroll Tax will be imposed on income from rents, capital gains, interest, dividends, annuities and royalties for individuals who earn more than $200,000 annually and joint filers reporting more than $250,000. Just like the Alternative Minimum Tax, which Congress has to adjust each year to protect millions of households, this new tax is not indexed for inflation, so as incomes rise over time, more taxpayers will incur the tax.

While the bill increased taxes on one form of real estate investment, it did not include the proposal to increase the tax on carried interest as a revenue offset. However, as Congress seeks additional revenue to help pay for additional programs, many believe there may be additional taxes at both the state and national level to help pay the impact the health care reform measures will have on the deficit.

Failed 1031 Exchange Gains When QI is Bankrupt or in Receivership

2010-03-08T16:45:00.010-07:00

After several 1031 intermediary failures, the IRS has finally granted tax relief for taxpayers who were unable to complete their exchange because their Qualified Intermediary (QI) entered into bankruptcy or receivership.

Revenue Procedure 2010-14 provides guidance on how to report income from the sale of property when a 1031 exchange fails due to a QI bankruptcy. In order to qualify under this procedure, the QI has to be subject to a bankruptcy proceeding under the United States Code or in receivership under federal or state law.

Ordinarily, a sale of property is reported and taxes are paid in the year of sale. If sale proceeds are to be received in installments, the sale can be reported under the “installment sale rules” of Code Section 453. This code section allows the gain to be reported and taxed ratably as contract price payments are received.

In a 1031 Exchange, taxpayers may begin an exchange in one tax year and complete the exchange in a subsequent year. When the exchange "fails", they may not receive their proceeds (known as "boot") until the year subsequent to the relinquished property sale. The tax on the boot received can be deferred to this subsequent year under the installment sale rules (Reg. §1.1031(k)-1(j)(2)).

Revenue Procedure 2010-14 recognizes taxpayers who have entered into an exchange that has failed due to QI bankruptcy or receivership. Taxpayers that have been caught up in a QI bankrutpcy may not posess any of the receiver-disbursed funds until a subsequent year. Taxpayers may receive little or no proceeds from the bankruptcy or receivership until after the proceeding is closed.

Revenue Procedure 2010-14 permits taxpayers to report gain on the sale in a procedure similar to the installment sale rules of IRC §453 and Reg. §1.1031(k)-1(j)(2). Tax on the cash received is deferred until cash is actually received. Taxable gain on the cash received is calculated in a manner similar to the installment sale rules. If the taxpayer received less than the property was sold for, the calculation of the gain is reduced accordingly.

Revenue Procedure 2010-14 is a little more complicated than this explanation. Taxpayers should consult their tax professionals for a complete explanation. With this new recognized procedure for reporting, the IRS has provided clearer guidance to those who have, unfortunately, been caught in a failed 1031 Exchange due to QI bankruptcy or receivership.

INSIST on a Segregated 1031 Exchange Account

2010-02-26T11:57:00.000-07:00

There is a very good article on Summit 1031 Exchange in the Bend Bulletin Friday, February 14th edition. We've previously spoken about firms that held themselves out as Qualified Intermediaries who didn't disclose or have misrepresented where investor client money was held. We've also spoken about industry-led legislation - both at the state and national level - trying to curtail the irresponsible practice of "investing" escrowed funds in anything but completely safe, liquid accounts. Intermediaries that hold investment funds in anything outside of cash equivalent, segregated bank accounts, in any prudent investor's opinion, are simply playing games with your money.

1031 Corporation has always held each exchange client's funds in a segregated bank account at our FDIC-insured parent company, FirstBank. FirstBank is participating in the FDIC’s Transaction Account Guarantee Program. Under that program, through June 30, 2010, all noninterest-bearing transaction accounts are fully guaranteed by the FDIC for the entire amount in the account. While most banks can only insure up to $250,000 of your money through the FDIC, FirstBank's 25 separate charters also make it possible for your interest-bearing 1031 proceeds to be insured up to $6.25 M.

Many Qualified Intermediaries will talk about the amount of 1031 Corporation fidelity bonding they have (1031 Corporation has $25 M). However, most don't discuss that bonding typically involves theft of an employee or officer and covers the FIRM, not the client. While this gives added financial capacity for a company to recover any lossed money, a firm that exceeds this loss or is unwilling, or unable, to honor their contractual obligation to the client has to be sued. In the cases of convict Ed Okun's 1031 Tax Group and LandAmerica Exchange Co, losses far exceeded the bonding - forcing the company into bankruptcy. It is then up to a bankruptcy court to allocate the recovery of funds. As we saw in the LandAmerica case, significantly greater weight in that allocation came from the clients that had insisted on segregated accounts. Of course, had LandAmerica held all accounts in segregated bank accounts, rather than the Auction Rate Securities (ARS) market, those losses probably wouldn't have occured in the first place.

Like any other company you do business with, you should check out and be comfortable dealing with that company. Whether it's a bank you deposit your money in, an insurance provider you buy coverage from, or a retailer you buy goods at, you should always be confident that you are making the best decision before you do business with them. Reputation, financial capacity to honor claims and their ability to perform to your satisfaction are of utmost importance. In completing a 1031 exchange, I, personally, wouldn't have my QI hold my proceeds in anything but a liquid bank account. You should insist on the same!

Arizona introduces 1031 exchange legislation

2010-02-17T06:49:00.006-07:00

The State of Arizona, following the lead of many other western states, has introduced a bill to regulate Qualified Intermediaries doing business in its state. Senator Thayer Verschoor has introduced Senate Bill 1333 that establishes regulations for exchange facilitators (defined as a person that facilitates an exchange of like-kind property). The bill includes provisions to protect consumers while balancing regulation against common sense allowing ethical Qualified Intermediaries to do business in Arizona.

Similar to laws in California and other, mostly western, states, Exchange facilitators will be required to maintain bonds in an amount of at least $1 million executed by an insurer, deposit at least $1 million in an interest-bearing or money market account (this is higher than other states that have typically required $250,000), or deposit all exchange funds in a qualified escrow account or qualified trust. It also requires QIs to maintain an errors and omissions insurance policy of at least $250,000.

The bill also requires Exchange Facilitators to hold all exchange funds in a manner that provides liquidity and preserves principal and to invest exchange funds in investments that meet the prudent investor standards. The prudent investor rule doesn't specify what instruments Intermediaries must hold funds. Rather, it uses a common sense approach to which investments should be chosen based on their suitability for each escrow account's client. In the case of Qualified Intermediaries entrusted with holding money on a short-term basis, 1031 Corporation has always followed the practice of limiting the funds placed in its trust to individually-segregated, liquid bank accounts.

We applaud Senator Verschoor and Senator Chuck Gray who have lead this sensible approach to legislation. Investors with property in Arizona can be confident that standards of 1031 exchange business practice exist and ethical Qualified Intermediaries in the state can continue to do business without difficult and unpractical regulation.

The Budget, Capital Gains and Politics

2010-02-12T08:17:00.001-07:00

A couple weeks back, the Obama Administration submitted its fiscal year 2011 budget outlining the government's plans for tax change. But reports indicate that the timetable for tax hikes may delayed. Some Democratic Congress members are worried that going along with the Obama Administration's increases might cause their re-election bids to fail. So how might this affect capital gains tax in 2010 and beyond?

For joint filers making more than $250,000 (some report this number around $231,000)and single filers making more than $200,000 (including the amount of the gain, keep in mind), Obama has proposed increasing the tax rate to 20% for long-term capital gains (and qualified dividends). The current rate of 15% would be extended for those making less than these amounts.

Nine years later, most have embraced and accepted the policy to tax capital gains and qualified dividend at the same special rate. However, because of this generally accepted principle, there is the possibility that long term capital gains rates may go higher than Obama's 20% proposal. The justification lies in the qualified dividend half of the "same treatment" proposal. If dividends were treated as ordinary income, rates could go as high as 36%. Congress may decide, under the recently enacted Pay-Go rules, that deficit issues and budget scoring require a higher rate. Some have indicated a "blended" same treatement rate of 25% or 28% is a very real possibility.

There is also the potential that November elections will concern enough Congress members to simply extend the Bush tax cuts for another year. Avoiding any action this year would mean the Bush capital gains tax cut would expire at the end of 2010. Many argue (or perhaps justify their lack of action - depending on your political perspective) that now is not the time to raise capital gain tax rates. With the economy in a fragile state of perceived tepid recovery, they should wait to take any action that would raise taxes.

So how do the proposed increases impact your decision to sell investment property? Some time back, we posted a blog about how this tax change may impact your decision to defer the gain through a 1031 exchange. Most would think that paying 15% now sounds a whole lot better than paying 20%, or worse, 25% or 28% some time down the road. But even with tax rates increasing, in many cases, it still may make sense to defer the gain (versus paying 15% tax that is gone today). The answer depends on the marginal increase in taxes, the amount of time you aniticipate holding the asset and your expected cash-on-cash expected rate of return over that period. If you earn a rate of return, and anticipate holding the replacement asset for a length of time, the answer may surprise you. The time value of holding on to that tax money can be powerful!

Discussing your individual situation with your tax advisor is recommended. Of course, you can and/or your tax professional can always contact 1031 Corporation Exchange Professionals for free consultation of your like-kind exchange questions. Even the call is free 888-367-1031.

One of the Most Powerful Tax Deferral Strategies Remaining

2010-02-09T17:35:00.006-07:00

"The taxpayer: That's someone who works for the federal government but doesn't have to take the civil service examination."

- Ronald Reagan
As many prepare their 2009 tax return hoping to get a refund, we once again want to remind you how a 1031 Exchange is still one of the most powerful tax deferral strategies remaining available to taxpayers. Taxpayers should never have to pay income taxes on the sale of property if they intend to reinvest the proceeds in similar or like-kind property.

The advantage of a 1031 Exchange is the ability of a taxpayer to sell income, investment or business property and replace with like-kind replacement property without having to pay federal income taxes on the transaction. A sale of property and subsequent purchase of a replacement property doesn't work, there must be an Exchange. Section 1031 of the Internal Revenue Code is the basis for tax-deferred exchanges. The IRS issued "safe harbor" Regulations in 1991 which established approved procedures for exchanges under Code Section 1031.

The 1991 "safe harbor" Regulations established procedures which include the use of an Intermediary, direct deeding, the use of qualified escrow accounts for temporary holding of "exchange funds" and other procedures which now have the official blessing of the IRS. Exchanges most often employ the services of an Intermediary with direct deeding.

Anyone involved with advising or counseling real estate investors should know about tax-deferred exchanges, including Realtors, lawyers, accountants, financial planners, tax advisors, escrow and closing agents, and lenders. To learn more about one of the most powerful tax deferral strategies remaining today, please visit our website or call us at 888-367-1031.

Recent Quote in Property Swap Regulation Article

2010-01-21T12:03:00.006-07:00

Last Friday, an article titled "After Investors Lose Millions, Property Swaps Face Regulation" was released by Investor's Business Daily. Joe Gose, a freelance reporter, contacted some Qualified Intermediaries for comments on the Wall Street Reform and Consumer Protection Act that was approved by the House in December.

As I had previously commented here on the CFPA bill, he contacted me for comments. A previous blog entry I wrote stated some concerns about giving this new "super agency" sweeping and ill-defined powers that mandated who - and what - financial products can be offered to consumers. When Mr. Gose called and left a voice message, it seemed apparent he was intent on a certain "angle". His questioning were clearly fixed on writing an article that painted most of the industry against regulation. Nothing could be further from the truth.

This blog is filled with entries that indicate that I believe some regulation is necessary. I was fortunate to be part of a five FEA member committee that worked to ensure responsible legislation in Colorado. Many other FEA members have worked tirelessly to ensure proper 1031 legislation was passed in Nevada, California, Idaho, Washington, Oregon and Maine. As other states like Arizona consider legislation, the FEA is working with these states. The FEA has also worked diligently with federal officials to determine ways to properly regulate the industry on a national level.

My quoted comment to Mr. Gose was simply that I had concerns about the amendment added late in the game by Representative Michael Michaud (D-Maine). The amendment is brief, it is vague and it essentially places all the power to determine any future national 1031 regulation in the hands of a newly-formed CFPA Director. The bill contains no provision for public input or industry feedback in determining any planned regulation.

I was dissapointed to be incorrectly quoted as President of 1031 Corp and to read that our firm was "hardly clamoring for federal oversight". First, had the writer done some proper research, he would have found that our name is 1031 Corporation. Another Pennsylvania FEA member firm, Joe, is called 1031 Corp. It's also interesting that he picked our firm - one that is owned by a financially-sound bank, holds investor client funds in a segregated bank account, maintains a $25 M fidelity bond and is audited and regulated already by the FDIC, external and internal auditors - as somehow against consumer protection.

So, what's the reason/motivation for the incorrect quotes, Joe?

Colorado Conservation Easement Fees Decrease

2010-01-14T16:27:00.002-07:00

Last week, the Colorado Division of Real Estate announced a decrease in the fees for certification of a conservation easement. The new cost of a conservation easement appraisal decreased from by $80 and a certification for land trusts and local governments came down by $1,000.

Because of previous overvalued land, which resulted in unwarranted distribution of tax credits, Colorado law now mandates that all land trusts holding easements be certified and all appraisals where a credit is requested be reviewed by the state's Division of Real Estate. The division reduced the fees from last year's amounts to ensure that smaller land trusts can afford to participate and to encourage donations.

Under conservation easements, landowners agree not to develop property that is agricultural or contains scenic vistas or wildlife habitat in exchange for receiving a state tax credit. The easement restricts the landowner to land uses that are compatible with long-term conservation and environmental values. The Colorado program is run exclusively through certification fees assessed on land trusts and the easement appraisal submissions.

The Colorado Real Estate Division reports that, as a direct result of the new law, credits claimed were cut in half - thus saving the state over $50 million.

The sale of a conservation easement is "like kind" to real estate and could qualify for eligibility as a 1031 exchange. Proceeds from the sale of a conservation easement could then be exchanged into additional land or any other investment property held for productive use. If you are contemplating a conservation easement sale, please contact 1031 Corporation for further information on how to defer taxes on that sale.

1031 & self-directed IRA class offerings in Phoenix

2010-01-08T15:50:00.005-07:00

1031 Corporation will once again team up with Entrust Arizona for our three hour class Tax Deferred Real Estate Investing (AZ course #C0149) next Thursday January 14th and Friday, January 15th in Phoenix. I, along with Timarie McClendon of Entrust, will provide three hours of instruction on how you might benefit with tax savings on your real estate investments.

Both classes are offered from 10 AM to 1 PM and a free lunch (courtesy of Magnus Title) will be provided. The class on Thursday will be at Realty Executives' 36th and Campbell office. There is a $15 fee for attendees that are not Realty Executives agents. HomeSmart is hosting a class on Friday, January 15th that is also open to real estate professionals and investors. There is no fee for that class.

This is an educational seminar and not a marketing pitch. We benefit by getting our name out and you benefit from getting educated on 1031 exchanges and self-directed IRAs. The class is accredited by the Arizona Department of Real Estate for three (3) hours Legal Issues Continuing Education for Arizona licensed real estate professionals.

If you or someone you know is interested in learning about ways to invest in real estate on a tax-deferred basis, please encourage them to join us. It's credit toward your license renewal, a good education and a free lunch. Can't beat that deal!

Please contact Shari Griffin at 480.329.1335 or by emailing her at shari.griffin@magnustitle.com if you would like to attend. We look forward to seeing you there!

Year-end Tax Planning with Section 1031

2009-12-23T10:53:00.000-07:00

If you are selling property before the end of the calendar year, you have a potential opportunity to plan for taxes in 2010 by utilizing Internal Revenue Code section 1031 as a tool. Whether a 1031 exchange is ultimately completed or not, there may be an opportunity to choose whether the tax will be paid in 2009 or 2010. This is because, under exchange rules, your right to receive the proceeds from the sale of the property are held by a third party Qualified Intermediary. If you are unable to identify or close on a sale, and subsequently, the exchange fails, your first right to the proceeds doesn't occur until 2010. How is that? It has to do with the time of year we have entered.

Under 1031 exchange rules, a person exchanging property may receive the sale proceeds (a) after the expiration of the 45 day identification period (if the taxpayer did not identify any replacement property); or, (b) the date upon which the taxpayer acquires all replacement property identified by the taxpayer in the exchange, or (c) at the end of the 180 day exchange period. So if you sell a property on December 15th, your 45 day period would not occur until January 29th.

Section 1031 says that if your exchange fails in a different tax year than the year you sold it, the IRS's installment sale rules kick in. So, the taxes that would be due in 2009 could be deferred until 2010. I say COULD be because the installment sale rules also allow you to elect out of them.

If the Obama administration and Congress decide to raise capital gains rates before the Bush tax cut is set to expire at the end of 2010, a taxpayer whose exchange failed could elect out of the installment reporting rules. This also might help if you determine, before filing your tax return, that it would be better to go ahead and recognize the gain in 2009. This stategy, setting up an exchange now, would allow you to plan and recognize the gain in the year of greater tax benefit for you.

Of course, you should have a legitimate intent to complete an exchange and not simply look at this as a tax deferral strategy. However, if you are selling real estate and MIGHT reinvest the proceeds in replacement property, it could certainly make sense to setting up an exchange - just in case. If you are considering this option, you should also consult with your tax accountant or attorney regarding your specific tax situation. For more information on this option, visit our 1031 exchange professionals website or give us a call at 888-367-1031.

Swap and Drop Exchange Upheld by Oregon

2009-12-21T08:10:00.001-07:00

As we've previously indicated, there are situations where a partnership may split up or liquidate but one or more partners may want to defer capital gains through the benefits of a 1031 exchange. Perhaps the partners have different goals or they simply no longer want to stay in business together. Partners often want to go in different directions with their share of the proceeds. Some may want to reinvest in real estate and can defer their taxable gain through use of a 1031 Drop and Swap.

The opposite can also happen where an investor exchanges a property and wants to enter into partnership with other investors. This is known as a "Swap and Drop". This investment would take the form of a tenancy-in-common interest in the property. It has been previously thought by many tax professionals that this undivided fractional real estate interest should be maintained for a sufficient period of time in order to satisfy the 1031 "held for investment purposes" requirement.

However, a recent court case in Oregon puts some doubt into whether this is really necessary. In the case of the Oregon Department of Revenue v. Marks taxpayers had acquired a tenancy-in-common interest as replacement property for their exchange. They then immediately contributed the replacement property to a partnership (a "swap and drop"). The Oregon Department of Revenue (affectionately referred to hereafter as ODOR) challenged the exchange based on the partnership "drop". The original court ruled that the taxpayers had indeed met the guidelines of a 1031 exchange and it was permissible to exchange and then immediately contribute the property to a partnership. ODOR appealed that decision but the Tax Court upheld the original ruling.

Within the appeal ruling the Tax Court referenced the 9th Circuit court case of Magneson v. Commissioner. In that case, the 9th Circuit held that the transfer did not impair investment intent and that the transfer to the partnership changed the form of ownwership but not the substance of real property ownership. The Tax Court determined that the taxpayers' continuity of interest and lack of cashing out override the ODOR's concerns about the short holding period of the replacement property.

This is significant in that Magneson preceded adoption of a subsection of IRC 1031 ((a)(2)(D))that excludes partnership interests from property that can be exchanged. It appears from the reference that the court continues to affirm the view that the partnership is an aggregate of its partners (in contrast with a corporate entity status being seaparate from its shareholders.

It should also be highlighted that the Oregon court case only applies to Oregon STATE tax and not to Federal tax. The assertive Franchise Tax Board in the state of California is reportedly pursuing a case contesting the "Swap and Drop" tax strategy. It appears that case involves similar arguments that the immediate transfer demostrates the taxpayer lacked investment intent at the time of acquisition.

Neither the statute, the Revenue Code, the IRS, nor the courts have provided complete certainty in this area. The 2008 Partnership Tax Form 1065 was revised to include questions regarding "Drop and Swaps" and "Swap and Drops". This change was made to "enable the IRS to focus compliance resources on returns and issues that warrant examination. What, if any, resources is unclear. But it does appears that the IRS has some interest in continuing to fight court cases involving "Drop and Swaps" and "Swap and Drops". If you are contemplating such an exchange, you should consult with your tax professional(s) and speak to your 1031 exchange professional early in the sale process to attempt to understand and mitigate your financial risk. Of course, if you have any questions about 1031 exchanges, you can give us a call free of charge at 888-367-1031.

1031 Regulation Part of CFPA Bill

2009-12-17T13:02:00.008-07:00

Representative Michael Michaud (D-ME2) successfully added an amendment to the the "Wall Street Reform and Consumer Protection Act of 2009". HR 4173 would establish the Consumer Financial Protection Agency as the primary regulatory body over 1031 Exchange Qualified Intermediaries.

The CFPA bill was quickly introduced on December 8th and passed the House late last Friday by a vote of 223 to 202. It now moves to the Senate. If passed there and signed into law, the bill would usher in, what CNN describes as, “the most sweeping set of changes to the banking regulatory system since the New Deal.”

Michaud's amendment requires that the Director of the CFPA conduct a review of Federal laws and regulations relating to the protection of individuals that utilize exchange facilitators , submit to Congress recommendations on the steps necessary to ensure appropriate protection of such persons and establish and carry out a program, utilizing the authority of the CFPA, to protect individuals that utilize exchange facilitators.

Calls for reform, in light of the previously covered Okun 1031 Tax Group and LandAmerica Exchange fraud and failure, have come from consumers as well as many within the QI industry. A few states, including Colorado, have established their right to regulate 1031 exchanges within their borders. However, the federal bill and the Michaud amendment makes no mention of what protections should be established. Instead it puts the power to decide solely in the hands of the CFPA Director.

Some in the QI industry, that appear to have pushed for the bill amendment without industry association support, have suggested regulatory requirements that Qualified Intermediaries have specific prohibitions against illiquid investment vehicles and require the exchange facilitator to hold funds in a segregated bank account. They have also called for audits of Qualified Intermediaries.

While not in disagreement with these sound financial business principles, the wild card in any government intervention into the financial markets is what the CFPA Director decides to recommend. Many within the financial industry are concerned the legislation creates sweeping new powers for the federal government and may have unintended consequences that reduce access to credit and financial services while increasing the costs. One thing seems logical...such a "superagency" regulator, would further increase costs of running the federal government and increase costs to those within the financial industry - costs that will undoubtedly get passed on to consumers.

First Signs of Life for CMBS Reincarnation

2009-12-14T07:48:00.005-07:00

Two successive commercial mortgage bond offerings have many hopeful that the CMBS market may be showing signs of recovery while others question just how quickly this initial sign of life may jump start a dead market.

In late November, a real estate investment trust (REIT), Developers Diversified Realty Corp., broke the market with the assistance of the Federal Reserve's Term Asset-backed Securities Loan Facility (TALF). The $400 million deal was met with strong investor demand as evidenced by the significant subscription activity and the resulting Treasury price premium reduction. The offering was the first true CMBS transaction to reach the market since June 2008.

As further evidence that the CMBS market may be showing early signs of life, Bank of America followed by pricing a $460 million offering for Flagler Development (backed by Fortress Investment). That issue was secured by office buildings and industrial investment property in Florida and was brought to market without any TALF support. A third offering, a $500 million retail investment property deal for Inland Western Retail Real Estate Trust Inc., is scheduled to come to market from JP Morgan. It, too, is said to be free of any TALF backing.

Goldman Sachs, Bank of America and JP Morgan have all publicly announced that their door is now, or will shortly be, open for new securitization activity. Reports indicate that Deutsche Bank and Royal Bank of Scotland are also firing up their conduit lending programs. So far, the deals announced have been limited to single-borrower transactions that were reportedly "conservatively underwritten and well-structured". Many industry experts have commented that they believe this niche may spark a welcome revival to thawing the lifeless private-label CMBS market.

Most would agree that this is a welcome sign. The deals brought to the market thus far seem to have transparency, low leverage and, thus, have been positively acknowledged. Only time will tell whether these initial CMBS offerings will return the market to pre-2008 levels of credit availability for commercial real estate. Of course, the wild card may turn out to be how open Congress will allow the markets to be.

But, if investors continue to respond positively to these low-leverage deals, it should prove to be something of a positive catalyst for the commercial real estate sector and may stem the tsunami of billions of maturing securitization dollars that are scheduled to mature in the next couple years. Just how distressed the commercial market gets remains to be seen. Much of that will depend on the state of the economy and the substantive, yet sensible, reincarnation of the capital markets.

Section 1245 Property Issues in 1031 Exchange

2009-12-09T12:50:00.014-07:00

Many taxpayers don’t immediately recognize that the sale of Section 1245 property is subject to depreciation recapture at ordinary income tax rates. This can be a startling discover when their tax bill is calculated. Section 1245 property is subject to tax at ordinary rates to the extent of any gain on the sale and to the extent depreciation is recognized on the property since acquisition.

Section 1245 Property is generally depreciable personal property whether tangible (such as machinery, equipment, furniture and fixtures) or intangible (such as patents, copyrights, and subscription lists). However, real property can sometimes include Section 1245 Property subject to the same depreciation recapture rules. Some examples of real property which is also Section 1245 Property include –

• Cost segregated real property that includes components which are depreciated as personal property.
• Oil and gas storage tanks, grain storage bins, silos.
• Certain commercial real estate acquired between 1981 and 1986 which was depreciated using an accelerated method.

Section 1245 property that is a part of the sale of real estate, attributable to the realized gain and depreciation taken on Section 1245 property, will be taxed at ordinary income tax rates instead of the preferred capital gains tax rates (subject to previously non-recaptured section 1231 losses).

In a 1031 exchange of real estate, realized gains are deferred if qualifying replacement property is acquired and if there is no taxable “boot” received. However, if the real estate exchanged contained any Section 1245 Property, there will be a Section 1245 depreciation recapture unless the replacement real estate also includes Section 1245 Property of equal or greater value. Any “trade-down” in the Section 1245 Property will result in Section 1245 depreciation recapture taxed at ordinary income tax rates.

Taxpayers with Section 1245 property embedded in their real property should consult with their qualified legal and tax professionals on the potential recapture occurring when contemplating either a sale or exchange. If you’ve questions on the 1031 exchange of Section 1245 property, 1031 Corporation would be happy to consult with you and your tax professional. Give us a call at 888-367-1031.

Guaranteed Returns, Commingled Funds & Related Company Transactions

2009-11-30T16:21:00.005-07:00

In 2002, an Internal Revenue Service ruling (Procedure 2002-22) set forth guidelines for purposes of determining where undivided fractional ownership interests in real estate could be treated as ownership of real estate. Under the ruling, if "essential elements" of the TIC arrangement are followed, TICs qualify for 1031 exchange deferral of taxes. The structure of a TIC can be beneficial to many investors tired of active daily real estate management. There are many solid TIC sponsors in the market today. However, this is the story of one that wasn't.

By 2005, TICs were a hot commodity. At one time, Boise, ID-based DBSI, which operated under names such as Spectrus Real Estate and For 1031 LLC, was riding near the top of the heap. The 29 year old company became one of the nation's biggest sponsors of Tenant In Common (TIC) ownership interests in commercial properties across the United States. By providing smaller investors with access to the institutional properties markets and, in some cases, a guarantee of investment returns (from 6.5% to 12% returns annually -- whether or not the property performed well), DBSI became one of the most well-known TIC sponsors in a rapidly growing industry. Guaranteed returns, regardless of performance....really?

But as the commercial market began slowing in 2007 and 2008, DBSI began reporting problems. By September 2008, the house of cards quickly began to crumble. In a letter to investors, DBSI indicated it was "temporarily" reducing or eliminating payments. Within six weeks, DBSI had declared Chapter 11 bankruptcy. With the bankruptcy, day-to-day management of its properties broke down.

In October 2008, bankruptcy court-appointed examiner Joshua R. Hochberg, former chief of the Justice Department's fraud section, began investigating claims of fraud. He was directed to investigate allegations that DBSI defrauded investors out of $500 million. DBSI founder and president Douglas Swenson was alleged to have taken somewhere in the neighborhood of $160 million ( (Swenson's counsel denies he did anything wrong).

Hochberg’s (preliminary report, released in June, indicates a tangled web of closely related companies primarily controlled by Swenson. Transactions within the company - including transfers among DBSI related companies, Swenson, and four other minority owners - were more numerous that previously believed. Instead of investing the money as promised, Hochberg declared that the company was "an elaborate shell game." Hotchberg's report seems to indicate that as the market cratered, and new cash infusions dramatically slowed, DBSI and its affiliates used new investor proceeds to continue their daily operations and pay off existing debts. His report also claims that Swenson, DBSI and several other executives exerted control over dozens of DBSI affiliates and essentially ran them as a unified business with commingled funds (where have we also heard this other major problem before?).

Hotchberg continues to investigate the demise of DBSI. A more complete, final report should be out soon. What will the report conclude? Based on the the initial report indicating commingled funds, closely-related transactions and guarantees of returns - three major flags in previous schemes - I'd say it, unfortunately doesn't look good for investors.

LandAmerica and Okun

2009-11-20T12:22:00.004-07:00

The Federation of Exchange Accommodators released their November newsletter recently updating member firms about the legal proceedings in the Ed Okun and LandAmerica Exchange cases.

The Okun case sentencings have now been completed for the wrongs committed in the failure of 1031 Tax Group. The last of three former employees, the chief legal officer of Okun's organization, was sentenced to three years in prison. Along with the 100 year prison term Okun was sentenced to earlier, the chief operating officer was sentenced to 10 years and to five years.

In the LandAmerica case, it appears there is a possible settlement pending on the bankruptcy proceedings. Customers who set money with LandAmerica but did not specify exactly how it was to be held will get $0.25 on the dollar from the former Qualified Intermediary arm of LandAm Title. Customers who put funds in segregated accounts will get will get $0.70 on each dollar they set aside, and customers who specified their funds be put in escrow will get $0.97 on each dollar they put with LandAmerica. In this case the court took a very stringent view of tracing and heavily weighed the argument that the funds were not co-mingled. Seggregated accounts is something we've always strongly advocated (and always followed in our practice).

With the approaching holiday, we at 1031 Corporation want to wish you all a Happy Thanksgiving. We know this year hasn't been an easy one for many of us but we certainly realize there is still much for which to be thankful. We hope your travels will be safe and that you'll enjoy time invested (I always hated the idea that we SPEND time) with family and friends.

Arizona 1031 Fraud Conviction

2009-11-02T09:09:00.010-07:00

Late Friday, a Phoenix television station reported news that a Litchfield Park married couple that had claimed to be a Qualified Intermediary was convicted of fraud. The couple did business under the name 1031 Exchange Consultants, LLC (as well as Etna Land Trust; Executive Realty Group; and Tax Management Consultants, LLC).

Owner of 1031 Exchange Consultants, Gordon Deibler, acted as a Qualified Intermediary (QI) through the companies and accepted the proceeds from property sales for clients. Instead of securely holding the funds and then using the proceeds to purchase replacement property for his clients, he diverted the money for personal use.

The couple was also involved in a mortgage loan scheme with their handyman where they inflated the property value and falsified credit and income information for a loan application.

According to news reports, Mr. Deibler pleaded guilty to one count of directing a criminal syndicate and one count of fraudulent schemes and artifices. He faces a prison term of somewhere between three and twelve years and was ordered to pay restitution to the victims in the amount of $1.6 million.

Once again we have a story hitting the news of another fraudulent individual acting as a Qualified Intermediary. While regulation may slow some of these schemers down, criminals will still find ways to break any laws written. This couple is a perfect example of that. I don't think it would have mattered what laws were written. They clearly had no conscience about stealing money from individuals that placed their trust in them.

We've written of the need to fully investigate the Qualified Intermediary you use. Much like you would want to know the bank you place your money, the investment advisor you use, the accountant or attorney you retain, you should review the qualifications, experience and safety of your Qualified Intermediary. 1031 Corporation is a subsidiary of FirstBank. While a bank-owned QI is not the only choice, investment requirements of banks are highly regulated. Further, a typical bank-owned Qualified Intermediary will segregate funds, have a high amount of bonding and financial backing as well as have dual control procedures in place to ensure checks and balances are maintained.

You have a choice when selecting a Qualified Intermediary. You should use that choice to make sure you are comfortable knowing who is assisting you in your 1031 exchange needs. Give us a call at 888-367-1031 if we can assist you with questions or setting up your 1031 exchange today.

1031 Corporation Parent Reports Strong 3rd Quarter

2009-10-27T15:43:00.001-06:00

As reported yesterday in the Northern Colorado Business Report, - FirstBank Holding Company - the Lakewood-based holding company for the largest locally-owned banking organization in Colorado - reported increases in all its key financial measures for the nine months ending Sept. 30, 2009. Net income grew was up 15 percent to $109.88 million compared to the same period in 2008. The company's earnings increased by 17 percent from the comparable period a year ago.

Total assets were $9.84 billion and total deposits increased to $8.95 billion, up 6 percent and 13 percent respectively. Total loans grew 9 percent to $4.22 billion, and return on average shareholder equity was 22.1%.

"FirstBank has performed exceptionally well in 2009, and our third-quarter financial results show that we've been able to sustain the momentum we created during the first half of 2009," said John A. Ikard, president and CEO of FirstBank Holding Co. "Concentrating on our core business has allowed us to better serve our customers and deliver value to our shareholders."

Ikard noted that FirstBank does not originate, hold or purchase any subprime mortgage loans or securities, a fact that has helped the company avoid costly credit losses.

FirstBank also expanded its geographic footprint during the third quarter of 2009 by opening a new branch location in Surprise, Ariz. It operates 121 locations in Colorado, eight in Arizona and five in California, serving more than 600,000 customers.

1031 Corporation, a subsidiary of FirstBank offers nationwide Qualified Intermediary services and strategy consultation for tax-deferred, like-kind exchanges.

All-Cash TIC Advantage for 1031 investments

2009-10-16T09:44:00.005-06:00

Some time back, I saw an interesting article by Robert Johnson - president of St. Paul-based AEI Capital Corporation - discussing the advantages of an all-cash tenant-in-common investment. I asked, and received, his permission to re-publish some of the important issues he describes in the article. The full article appeared in the January 2009 National Real Estate Investor. The article contains solid information for 1031 investors that lack debt in their relinquished property and are looking for suitable replacement property investments.

Access to affordable capital has rapidly become a difference maker in the tenant-in-common industry. TIC sponsors that able to use an all-cash acquisition and offering strategy are getting a leg up on their leverage-dependent competition. Moreover, a lack of acceptable financing is forcing some leveraged TIC sponsors to delay bringing. or to pull altogther, deals to the market.

Sales volume in the Tenant-In-Common industry has been reduced due to a decline in U.S. real estate sales and the corresponding decrease in demand for 1031 exchange properties which enable investors to defer capital gains taxes. Despite the drop in sales volume, the TIC property ownership structure remains sound for suitable 1031 exchange buyers.

Benefits of an all-cash TIC transaction include no foreclosure risk, no interest rate refinance risk, and less risk of capital calls. Added benefits include avoiding the bank application process, easier resale, and flexible 1031 exchange closing schedules.

All-cash TIC properties usually generate a slightly lower rate of return. On the other hand, the front-end fees associated with all-cash transactions will normally be less than those of TICs using debt. Ultimately, the all-cash model provides an added layer of protection that is attractive in a market where investors are increasingly averse to risk.

Although TIC offerings requiring leverage are still offered, they are considerably more difficult to organize in today's relatively illiquid market. As financing has become more expensive, and difficult to obtain, the advantages of an all-cash strategy become more meaningful for 1031 investors.

As Mr. Johnson points out, all-cash TIC offerings tend to focus on properties priced under $10 million and may not be suitable for all 1031 exchange investors looking to reduce risk (larger, institutional-grade properties are typically perceived by investment professionals to contain less overall risk). TIC offerings should be reviewed with full due diligence and a complete understanding of the investment risks. If you are considering an investment in a tenant-in-common property, you should discuss the offering details with your legal and tax professionals. For futher details on the ideas expressed here, contact Robert Johnson at 800-328-3519 or at aei1031@aeifunds.com.

Reality of Lending

2009-09-30T06:31:00.000-06:00

Our economy is struggling. We all know that. But understanding why, what happened, and how the banking industry and the government is responding can be complicated and timely. The Colorado Bankers Association recently released information about the "lack of lending” in order to encourage the appropriate coverage of the issues surrounding this frustrating topic.

They have released a brochure titled, The Reality of Lending that details what they believe to be reasons for the current "credit crunch". Below is some of the highlights of the facts they are hoping are addressed.

Banking takes appropriate responsibility for its prudent loan standards. We also think customers and the public deserve to understand other factors that significantly impact the ability to get credit in this environment.

The lack of lending (heavily criticized by the public, media, and public officials) reflects low loan demand and is attributable to borrower creditworthiness issues, lender financial constraints, and regulators’ tougher standards, and is exacerbated by the greatly diminished role of nonbank lenders recently. For business borrowers who are key to an economic recovery and already have financial strain this means banks are their primary source of credit and banks are unable to make many of the loans for the reasons stated. This is especially difficult for loans secured by real estate.

Changing regulatory standards in capital requirements, loan concentrations, and loan downgrades often result from subjective judgments and national benchmarks. They disallow recovery of real estate values over time, and often prompt shrinkage of the bank which reduces lending and greatly impacts customers.

Bank lending plays a critical role in our economic recovery. Borrowers and lenders are addressing financial constraints and are working through issues. Bank regulation and examination are essential to a sound banking system. CBA recognizes this essential role but also believes regulators are impairing bank lending and thus the recovery by overly aggressive actions in capital standards, concentration standards, and loan downgrades. CBA is providing essential information to bankers, public officials, the public, and major customer groups.

The site titled Financial Information for Consumers has additional information on this and other topics such as Home Mortgages, Identity Theft, Credit Awareness and Loans.

Related party basis shifting case upheld

2009-09-24T09:50:00.000-06:00

A Ninth Circuit Court of Appeals decision to affirm a previous Tax Court ruling further highlights the need for extra scrutiny in 1031 exchanges involving related parties. The 2005 Tax Court decision, involving exchanges of condominium and apartment properties (Teruya Brothers), disallowed the tax deferred swap because it occurred between related parties and the main reason for the exchanges was to reduce the overall tax bills of the buyer and seller.

In the case, the entity (Teruya Bros, Ltd) that owned the apartment building and condominium complex had a built in, large capital gain. Upon the sale, a $13 million capital gain would have resulted to this entity triggering a massive tax bill. Rather than sell, the entity transferred the real estate to an unrelated Qualified Intermediary (QI) which sold the properties and bought replacement land from a subsidiary (Times) in which the entity had a controlling interest.

The issue that causes this related party exchange to be disallowed essentially relates to the overall tax paid. The subsidiary did not exchange into additional replacement property. Rather, it chose to treat the sales as taxable events and accounted for a capital gain of roughly $3.5 M on the property sale to the related entity. However, the subsidiary that sold the property had significant net operating losses from previous operations. These NOLs were used to offset the $3.5 million gain - resulting in no taxes paid on the sales.

Effectively, what the related party exchange attempted was a "cash out". The subsidiary now had the cash from the sales. The two related entities combined had decreased their investment in real property by approximately $13.4 million while increasing their cash position by the same amount. By disallowing the related parties to cash out of a significant investment in real property under the appearance of a 1031 like kind exchange, the Appeals Court upheld the previous Tax Court decision that "these transactions were undoubtedly structured in contravention...that nonrecognition treatment only apply to transactions "where a taxpayer can be viewed as merely continuing his investment.""

It is clear that tax deferred exchanges between related parties are subject to additional scrutiny. Accounting professionals, tax and real estate attorneys and taxpayers should be familiar with, and aware of the potential pitfalls, in exchanging property between related parties. The use of a Qualified Intermediary familiar with the rules and legal precedence in dealing with this advanced topic can be of assistance in handling a related party exchange appropriately.

Qualified Escrow Agreements for Intermediaries

2009-09-14T07:31:00.002-06:00

A number of states have instituted regulation for the Qualified Intermediary industry. Nevada, Idaho, California, Colorado, Washington, Maine and Oregon have all passed legislation. A number of other states are looking at adding some law(s) to protect taxpayers in the face of 1031 exchange facilitator fraud and losses.

Existing state law in California, Colorado and Washington as well as upcoming 1031 laws in Maine (went into effect Sept 12, 2009) and Oregon (effective January 1, 2010) require Qualified Intermediaries to:

a) Maintain fidelity bond (typically not less than $1 M), or;

b) Post deposits of cash or letters of credit equal to the amount of the fidelity bond required, or;

c) Hold all client funds in Qualified Escrow or Qualified Trust accounts which require the signatures of both the QI & taxpayer to authorize any disbursements.

As a result of the aforementioned industry losses - and the subsequent insurance claims - many Qualified Intermediaries have recently been unable to obtain option a) - a fidelity bond. If you are looking at doing an exchange, you should ask your exchange provider to provide a copy of the Fidelity Bond Evidence of Insurance to ensure your Intemediary is complying with the fidelity bond requirement. Make sure, if you are acting as a Qualified Intermediary, you are in compliance with these laws!

If your 1031 exchange provider does not have bonding, they must either post cash or a letter of credit with the state or use a Qualified Escrow account. Qualified Escrow accounts are held at a third party escrow agency and provide the greatest level of protection against fraud or missing funds. The escrow agent will only invest the proceeds according to the Agreement. They will also require signatures of both the Qualified Intermediary and the taxpayer client before any movement of those funds takes place.

If you are considering completing a 1031 exchange (or are a Qualified Intermediary without bonding) and in need of establishing a Qualified Escrow, FirstBank Escrow Services and their escrow officers can provide a Qualified Escrow Agreement that is specific to the 1031 exchange. Along with protecting the integrity of your exchange, FirstBank’s team of escrow specialists can work with you to establish an escrow contract that simplifies your risk mitigation requirements and meets your transaction needs. Client escrow accounts are individually segregated and held securely in FDIC-insured deposit accounts. FirstBank Escrow Services provides rapid review and turnaround of the agreement to ensure your transaction closes quickly.

If you or your Qualified Intermediary have need for a Qualified Escrow, please contact one of FirstBank's escrow officers for additional information at 800-964-3444.

Negative Equity Mortgages and Reverse Exchanges

2009-09-09T12:25:00.001-06:00

A recent WSJ report indicates that more than 32% of all mortgaged properties in the United States were in negative or near equity position as of June 30,2009. An additional 2.5 million mortgaged properties were approaching negative equity.

The five states with the largest negative equity share accounted for nearly half the nation's remaining states. Nevada, Arizona and and Florida had the largest number of negative equity mortgages. California and Michigan were the other top-ranked states for negative equity loans.

Negative equity - also known as "underwater" or "upside down" - means the borrower owes more on a mortgage than the home is worth. Near negative equity is when mortgages are within 5 percent of being in a negative equity position. Negative equity can occur because of a decline in value, an increase in mortgage debt or a combination of both.

While negative equity continues to be the dominant driver of the mortgage market because it leads to foreclosures, the good news is it actually declined slightly this quarter. Other recent news indicates home price declines are moderating or flattening - possibly indicating we are at the low point in the cycle. Of course, continued bad news in unemployment figures, a worsening commercial real estate market and cold weather seasonality could lead to further declines.

We've noticed a a couple of interesting trends in this negative equity market. It appears a growing number of our long-term, real estate investor clients feel it is the right time to get back in the real estate market and make additional purchases. The trouble they are now finding is that many of the lender-owned properties are receiving multiple offers or it is taking some time to get closed. The other interesting observation is that it still seems somewhat difficult to obtain financing. We've had a number of exchanges that weren't completed because lenders were unwilling or unable to lend on replacement property.

If you are considering buying, and find that perfect property, it may not be wise to wait until your sale occurs. This is where a reverse exchange may make sense. By having your replacement property already lined up and financed, your exchange will not fail because you were continually getting outbid in what appears to be a fabulous opportunity or because of an inability to obtain timely financing. For more information on the benefits of a reverse exchange and how 1031 Corporation, as a bank-owned QI, is uniquely positioned to assist with your reverse exchange, please give us a call at 888-367-1031.

Buy Real Estate With Your IRA Or 401(k)

2009-08-24T11:43:00.006-06:00

Since it's my birthday (not telling what number!), I thought I'd take the day off from blogging and publish an informative piece from one of our business partners. Entrust Arizona specializes in record keeping services for individuals and small business owners who wish to include non-traditional assets within their tax-deferred and tax-free portfolios. The following was provided by Timarie McClendon, director of business development with Entrust Arizona.

It’s a common misconception that the only investments allowed in an IRA or 401(k) is stocks, bonds, and mutual funds. The truth is that broader investment options, including real estate, have been available to the public since 1975. The key is to house your IRA or 401(k) at a company that will allow you to invest in real estate. All real estate investing with your IRA or 401(k) is legal - from single family residences to multi family, raw land, developed land, commercial property and even international real estate.

Self-directed retirement plans have quickly become the talk of the real estate community. Not only are real estate professionals self-directing their own IRA’s into property and projects, they are also using their knowledge about these plans to generate more business.

Don’t be confused by the marketing term “self-directed.” All brokerage firms will offer you their version of self directed. This means you can self directed your money into any of the stocks, bonds or mutual funds they offer. But…..that is where your investment choices end. Finding a truly self-directed administrative firm is not difficult. Some refer to this specific type of IRA as a “Real Estate IRA.” While this is not technically the legal description of a real estate investment within an IRA you can see how this might be the perfect description for the investor who is new to this option.

Understand these real estate investments are just that...investments. The real estate investment must be one that is an “arms-length” transaction. This means that the IRA account holder, as well as certain family members and business associates (disqualified persons), cannot live in a property, rent office space in a property, provide a service, or be involved in transactions in which the IRA buys or sells the property. The critical issue for many is making sure the property remains strictly an investment by avoiding self-dealing or prohibited transactions with family members or business associates. And an investor needs to be aware that all expenses, fees, etc. will have to be paid out of the IRA.

Retirement accounts can partner together in an investment. Utilize the investment power of multiple retirement accounts from people you trust and with whom you may already be doing business. Your IRA or 401(k) can even get a mortgage! You can partner your IRA with a 1031 exchange. You may also partner multiple IRA or 401(k) accounts or even partner personal monies!

You may hear false objections from uninformed advisors such as “that’s illegal”, “it’s too complicated” or “I’ve never heard of that.” Simply put, an IRA is a Trust. It’s that simple. If you understand a Trust, you understand an IRA. To simplify things even further, the IRS code is not written to specifically address what you CAN invest in. It is written to address what you CANNOT invest in. The IRS only prohibits two types of investment transactions - collectibles and life insurance.

You can use your retirement account to invest in real estate and harvest the same tax benefits of the IRA you may currently have invested in the stock market. Self-directed IRA administrative companies function just like your brokerage firms except that they specialize in alternative assets as opposed to securities.

For more information about self-directed IRAs and tax-deferred real estate investing, please take a look at Entrust Arizona's website or give them a call at (480) 306-8404.

Maine Adds 1031 Exchange Intermediary Regulation

2009-08-12T11:58:00.007-06:00

The state of Maine recently added it's name to a growing number of states instituting 1031 exchange Qualified Intermediary (QI) regulation. Maine Public Law, Regulation of Exchange Facilitators, was enacted by the Maine Legislature in April and will go into effect on Sept 12, 2009.

The new law utilized much of the language we've seen from a number of western states that have been early in adopting new 1031 regulation. Like other states, the Maine law prohibits commingling of exchange funds with operating funds of the QI, but does not require the segregation of each client exchange account (which we strongly support). The new law prohibits any loans to the QI or affiliated person or entity, and requires that exchange funds be invested in a manner that will ensure liquidity and preservation of the principal. Similar to the recently passed QI bills out west, the Maine law also requires ten day notice of any change in control of the QI.

It does require a lower fidelity bonding and errors and ommissions (E &O) insurance coverage that we've seen in other states. The fidelity bonding threshold is $250,000. The Maine act allows the QI, in lieu of bonding, cash deposits or irrevocable letter of credit in that amount or the use of a qualified trust or escrow account. E&O coverage of $100,000 is required (or in lieu thereof cash deposits or irrevocable letter of credit in that amount).

The Maine law does differ in that it requires annual licensure of any person acting as QI for relinquished property in the state. We've written previously about other state licensure provisions being passed. While licensure may allow the state to keep track of those that are acting as QIs in the state, it does little to protect a consumer against fraud until it is too late.

As we've seen in other failed QI cases, having minimal fidelity bonding and E & O insurance doesn't provide as much security to the client as one would think. Bonding and/or insurance protects the firm, not clients of the QI firm. In addition, each act of fraud is not necessarily considered a "per occurance" event so the bonding may fall considerably short of protecting exchange clients.

While each state has, thus far, adopted segregation of client funds from operating funds, we've yet to see a state adopt segregation of each individual client escrow account. This is a recurring issue in the bankruptcies and subsequent legal procedings that have occured in the 1031 Tax Group and the LandAmerica Exchange cases. Clients of failed QIs that do not segregate - and distinctly identify the segregation of funds in their exchange agreement - will, unfortunately, learn that their interest is pooled together in a bankruptcy case as just another unsecured creditor. Since the funds are commonly "pooled" for greater investment returns, individual client funds are not protected as clearly being 'in trust for' a specific client.

Only segregated accounts and an exchange agreement that clearly makes use of segregation language can ultimately provide protection for clients of Qualified Intermediaries that sell. Of course, due diligence should be performed to make sure you know the financial condition of the QI you chose. Publically available financial statements, forthcoming answers to questions of segregation and investment policy/practices and a solid exchange agreement should all be provided.

If you've interest in discussing provisions of this new state law, or any other pending or passed exchange facilitator regulation, the Federation of Exchange Accommodators is working hard to balance the interests of clients and industry member firms to maximize protection of clients while minimizing the regulatory burden/costs and would be happy to answer many of the questions. We at 1031 Corporation would be happy to answer any questions you might have in selecting a Qualified Intermediary or information specific on how we protect our client funds. Give us a call today at 888-367-1031.

1031 Corporation is Going Green!

2009-08-04T11:59:00.000-06:00

Going green is easy with a 1031 exchange. Green as in the Three R's - Reducing, Reusing and Recycling your capital gain tax dollars! The 1031 Exchange option is the perfect “green” way to hold onto your money and reinvest it into another like kind investment. Taxpayers should never have to pay income taxes on the sale of property if they intend to reinvest the proceeds in similar or like-kind property.

Through an IRS tax-deferred exchange, you are able to reduce your tax liability. A 1031 exchange provides the ability to defer the capital gains tax with the purchase of like-kind replacement property that would have been due and payable. For a real estate exchange, like-kind replacement property means any improved or unimproved real estate held for income, investment or business use.

Your Qualified Intermediary must hold and forward net proceeds from the sale of your property to the purchase of the replacement property. If you receive cash or have a trade down in value you may have "Boot". Boot is the money received or the debt reduction received by the taxpayer in an exchange. The rule of thumb for avoiding "boot" is to always replace with property of equal or greater value than the relinquished property.

The tax basis of the old property becomes the new tax basis in the replacement property. If you “bought equal,” the basis in the new property is the same as it was on the old property. In a 1031 exchange, the basis rolls forward from the old property to the new property. If your replacement is a trade up in value you will be able to increase your basis by the amount of the trade up. This trade up allows you to increase the amount available to be depreciated.

Just remember the three R's for going green are Reduce, Reuse, Recycle. 1031 Corporation is ready to assist you in Reducing your tax liability, Reusing your proceeds from the sale of your relinquished property on the purchase of your replacement property and Recycling your ability to depreciate by purchasing up in value on the replacement. Are you ready to go green? Give us a call today at 888-367-1031.

FirstBank, 1031 Corporation's Parent, Net Income Up 7%

2009-07-27T08:49:00.004-06:00

FirstBank Holding Company, parent of 1031 Corporation, announced first half 2009 earnings grew amid strong loan and customer deposit growth. The bank earned $72.3 million for the first six months of the year. This figure is up 7 percent from the same six-month period in 2008. The company’s earnings per share were up 9 percent from a year ago $556.61.

“FirstBank performed exceptionally well through the first half of 2009, due to our focus on quality loan acquisition, consistent deposit growth and our continued ability to attract new customers,” said President and CEO John Ikard.

Total assets were $9.55 billion on June 30, up 3 percent, and total deposits increased by eleven percent to $8.71 billion. Total loans grew to $4.1 billion - an increase of 14 percent. Return on average shareholder equity was 22.6% annualized for the first six months of 2009.

FirstBank is the largest locally-owned bank in Colorado. The bank operates 121 locations in Colorado, seven in Arizona and five in California and is the parent company of 1031 Corporation Exchange Professionals. It does not originate, hold or purchase subprime mortgage loans or securities, which has helped the company avoid the type of credit losses that have hurt other financial institutions in the past couple of years.

1031 Corporation, a subsidiary of FirstBank, holds each client's exchange funds in a segregated money market account at one of the 25 bank charters. For net exchange proceeds in excess of $250,000, 1031 Corporation can deposit client funds in separate accounts at any of the 25 bank charters FirstBank maintains. This allows 1031 Corporation to provide FDIC insurance of up to $6.25 M per client. For more information on setting up your next exchange, please call us at 888-367-1031.

Subdivided land treated as capital gain

2009-07-22T07:51:00.006-06:00

Last month, the tax court ruled on a case (TC Memo. 2009-142) involving the issue of a parcel of land that was subdivided and sold over a period of time. At stake was the issue of whether the taxpayers were required to pay ordinary income on the investment property versus being treated to a more preferential capital gains treatment. It has implications for those considering a 1031 exchange that face a similar issue.

The case involved a couple that had purchased a 14 acre parcel to build their primary residence. Prior to building, the couple decided they would prefer to have neighbors rather than being so remote. They made the decision to subdivide the former agricultural property into ten parcels.

Over the next four years, the couple went thru the re-zoning process, created a homeowners association and sold seven of the lots. When the couple reported the income as capital gain, the IRS claimed that, with the sale of multiple lots, their status had changed from investor to dealer and that all profit constituted ordinary income due.

Eseentially, because a) their advertising was nothing much more than a simple wooden sign, b) they sold the lots primarily to acquaintances and c) they were not considered real estate developers (having ownership in a non-development, successful business), the tax court held that the gain qualified for capital gains treatment.

The case provides insight with respect to 1031 exchanges as well. It, theoretically, follows that if the taxpayer had chosen to exchange into another qualifying real estate investment - rather than simply sell the lots and pay the capital gains tax - they could have deferred the gain under section 1031.

We are occasionally asked what qualifies as "held for" investment and what type of exchange does not qualify due to the taxpayer being viewed as a dealer (i.e. - developer) versus an investor.

The court laid out nine factors that determined the property status:

1. The taxpayer's purpose and reason for property acquisition.
2. The purpose for subsequently holding the property.
3. The taxpayer's everyday business.
4. The frequency and substantially of sales.
5. The extent of improvements.
6. The extensive use of advertising.
7. The existence of a business office for property sales.
8. The degree of supervision over sales agents.
9. The time habitually devoted to sales.

It would appear that a taxpayer that can meet the above factors, and considering a like kind exchange, could reasonably justify they are not a developer/dealer and qualify for deferred treatment under section 1031. While each case is different (and as we caution - the specific circumstances should be reviewed with a tax professional before proceeding), the case does provide some important insight into what might be possible.

Have a similar issue involving a 1031 exchange? Give 1031 Corporation a call at 888-367-1031. The phone call and conversation are free.

Is your Qualified Intermediary an FEA member?

2009-07-13T08:37:00.002-06:00

Do you really know the structure and background of the company with whom you are placing your 1031 exchange proceeds? In the tough economy, that all of us are facing, is your Qualified Intermediary (QI) looking out for your best interests?

1031 Corporation has been active in the QI business for 19 years. We are a member of the Federation of Exchange Accommodators (FEA). FEA is the only national trade association that represents like kind exchange professionals. Established in 1989, the FEA was organized to promote the discussion of ideas and innovations in the industry, to establish and promote ethical standards of conduct, to offer education to its members, and to work toward the development of uniformity of practice and terminology within the exchange profession. Professionals that are members of this association enjoy membership benefits that include:

· Legislative and regulatory updates regarding the 1031 industry

· Educational conferences

· Enhanced professional credibility

· Only FEA Members are eligible to earn the distinguished Certified Exchange Specialist® designation

· Access to fidelity bonding and errors and omissions (E&O) insurance

As exchange professionals, 1031 Corporation offers the advantage of being a FEA member to our clients. Currently there are only 208 Company and Individual members in the FEA association. Is your Qualified Intermediary one of them?

IRS Considering Relief for Taxpayers Caught Up With Bankrupt QIs

2009-07-08T09:16:00.002-06:00

Large and small 1031 Exchange Qualified Intermediaries (QIs) have gone into bankruptcy in the last couple of years for a variety of reasons, including frozen liquidity in the financial markets and questionable diversion of exchange funds to fund loans to related companies. This has caused taxpayers to not only lose their 1031 exchange funds but to also have income tax liabilities for incomplete replacements under §1031 for the sale of their real estate.

Congressmen and Senators have been receiving complaints from their constituents for some kind of tax relief in these circumstances and the IRS has been receiving appeals to do something about this. As a result, the Internal Revenue Service is notifying Congressmen and Senators that it is working on some kind of relief for taxpayers who have been unable to timely complete a like-kind exchange because the used a Qualified Intermediary that went bankrupt.

Up to now, the position of the IRS has been that a sale of property is taxable if the 1031 Exchange fails due to a bankrupt QI with no taxpayer relief.

The IRS has also said that if a taxpayer sustains a loss of exchange funds due to a bankrupt QI that is not compensated for by insurance or otherwise, he can deduct the loss from gross income under Code Section 165(a), but only in the year the loss was sustained. Sometimes the loss is sustained in the year following the tax year of sale of the relinquished property and is not available for offset of the taxable gain on the sale of the relinquished property.

As a result of all the controversy over bankrupt QIs, the Internal Revenue Service is now saying that it is contemplating some type of relief for affected taxpayers. The IRS has been promising action on this issue since the fall of 2007 when the real estate market started heading south in many areas.

We’ll have to wait and see.

Money Crooks Beware

2009-06-29T16:54:00.006-06:00

Yesterday in New York, a judge sentenced Bernie Madoff to the maximum penalty of 150 years in prison for his fraud and ponzi scheme that bilked investors out of some $65 Billion. The court heard testimony from nine investors - some of whom have lost their entire life savings from the case. While the size of this case is so incredible and may not be repeated, it is, unfortunately, probably not the last time this sort of thing will happen. It certainly isn't the first and reminded me of issues in our own industry.

Earlier I'd written about the case of Ed Okun. While a scheme like Madoff's gets all the press because of the size and severity of the case, Mr Okun was no less guilty of frauding investors - some, again, out of their lifelong savings. In a scheme designed to defraud clients out of millions of dollars through false pretenses, Okun started buying 1031 exchange companies and, over the course of two years, began raiding the client accounts. He used the money to buy more 1031 Qualified Intermediary companies to keep the ponzi scheme running as well as fund his lavish personal lifestyle. Mr Okun will be sentenced in August and faces up to 400 years in prison.

While the money is gone, at least the courts are finding the heart and determination to sentence these "white collar" criminals to the remainder of their lives in prison. It does nothing to bring back the life savings of the former clients from whom they stole but at least the crooks are paying for what they've done. Maybe, just maybe, it will stop a few future would-be criminals from making the same mistake. Perhaps too, it will bring further highlight to the fact that you need to know who you are dealing with and do your due diligence before allowing them access to your money.

1031 exchange Real Estate radio show

2009-06-22T15:18:00.006-06:00

This Wednesday, June 24th from noon to 1 PM Pacific time, 1031 Corporation will be on the air live at KFNN 1510 in Phoenix. Carol Croft and I are guests on a show hosted by Entrust Arizona's JP Dahdah and Timarie McClendon.

We plan on discussing how 1031 exchanges provide a way to defer capital gains taxes and preserve more of your principal in your real estate investments. We will also be discussing some recent trends in the industry and provide some information on the legislative landscape as it relates to Qualified Intermediaries.

You can listen to the show live here or, if you've missed this post or are not available at that time, Entrust Arizona provides a link to past shows they've hosted.

We hope you'll take the time to listen and, perhaps, increase your financial literacy as it relates to this important tax strategy!

Also, if you have a real estate license in Arizona, we are offering, along with Entrust Arizona, Four Hour Continuing Education course on Thursday, June 25th from 11 AM to 3 PM. We even provide lunch! The class is in Entrust's state-of-the-art facility at 20860 N Tatum Blvd, Ste 240 in Phoenix.

The first 2 hours is our class offering, Everything You Wanted to Know About 1031 Exchanges. In addition to providing the basic rules of IRC Section 1031, this class provides a basic understanding of the Reverse and Improvement exchange process. We also discuss the role of the Qualified Intermediary and investor motivations for a 1031 exchange. This class also highlights strategies involving the section 121 Primary Residence rules used in combination with a 1031 exchange.

The second 2 hours will be Entrust's class, Show Me The Money! How to Buy Real Estate with Your IRA/401k. Did you know you could invest in real estate with your IRA? Do your clients? You can even get a mortgage with your IRA or partner together with other retirement accounts or individuals. Your choices are endless. This workshop teaches real estate agents & brokers how to tap into the trillions of dollars available within retirement plans. The class teaches attendees the important elements of Self-Directed IRAs so they can add this hot topic to their current marketing plan. You will walk away with a clear understanding of how you can position yourself in a true advisory role with your clients.

For more information about 1031 Corporation, please call us at 888-367-1031. For more information about Entrust Arizona, please call (480) 306-8404.

Deceased Sister’s Trust is not Related Party to Siblings

2009-05-21T07:43:00.002-06:00

Related parties are defined by IRC Section 267(b) or 707(b) of the IRS code. Special rules apply to related parties who are involved in a 1031 exchange.

Related parties include ancestors, descendents, siblings and spouses. Related parties do not include the spouse or children of a sibling. A taxpayer doing an exchange with a spouse or child of a sibling is not subject to the related party restrictions and requirements.

In a recent Private Letter Ruling ( PLR 2009192007), a trust for a deceased sibling’s spouse and children was held to not be a “related party” to the surviving siblings for the purposes of Section 1031. This allowed a portion of the inherited farm ownership to be sold while also allowing the other two siblings to retain their ownership and continuing their taxable gain deference.

In this case, the Taxpayer and two siblings co-owned equal shares of farmland as tenants in common. Ownership was held in trusts for each of them (Trusts A, B and C). Child C died and beneficial ownership of assets in trust passed to Child C’s surviving spouse and children. Trust C now wanted to sell its share of the farmland.

The tenancy in common interest of each trust was converted to fee simple interests in the same property through subdivision. This was technically an exchange between the three trusts. After the exchange of the undivided interests for whole parcels, the husband of the deceased sister, via Trust C, quickly sold its parcel to an outside, third party. The other two siblings retained their respective parcels. If the deceased sibling's trust was a 'related party' under section 1031, the exchange of the interests for the whole parcels could have been found to be a taxable event to the other two siblings due to nonn-compliance of the two year-rule reference above.

Although her trust sold within two years of the swap in ownership, the IRS said the sale did not trigger tax on the exchange by the other two trusts. The ruling held that the exchange and subsequent sale was not a transaction to which section 1031 applies because the sibling taxpayers are not related to the Trust within the meaning of section 1031.

This ruling provides some insight into who is NOT considered a Related Party within the context of 1031 exchanges. However, rules on related parties should be reviewed with your tax professional before relying on any Private Letter Ruling for definition. You may also give us a call at 888-367-1031 if you have any questions regarding 1031 exchanges between related parties.

Renting Real Estate to a Related Corporation May Cause PAL Rule Tax Problems

2009-05-19T08:10:00.005-06:00

The passive activity loss (PAL) rules were enacted as part of the Tax Reform Act of 1986. They were intended to prevent taxpayers from using losses and credits from tax shelters to offset income from such sources as wages, interest and dividends. Congress felt that taxpayers who were simply investors in a business activity (and not actively participating) should use deductible tax benefits only against income from such passive activities.

Rental real estate activities are passive activities subject to the passive activity rules. Losses from rental activities, after including expenses such as interest and depreciation, are not deductible unless a taxpayer has passive activity income from other sources. There is an exception. Taxpayers are generally allowed to take a net deduction of $25,000 from ordinary income if they actively participate in the rental activity. This special rule is phased out for high-income taxpayers.

Taxpayers with passive activity losses have a natural desire to create sources of passive activity income which can be used for deduction of losses from other passive activities. Taxpayers who are doing business as a corporation frequently own the real property which the corporation uses and receive rents from the corporation for the property use. This lease income to their corporation is reported on their individual income tax return as rent income. Taxpayers would normally expect that this income is passive activity income because rental activities are defined as passive activities.

However, the IRS does not like the possibility that a taxpayer could create artificial passive income by renting property to a controlled corporation and use this income to offset losses from other passive activity investments. The sole owner/taxpayer of an S Corporation could also compensate himself through the artificial use of rent and diminish W-2 compensation (which is subject to payroll taxes). To stop this perceived abuse possibility, the IRS recently issued new regulations classifying net rental income from a corporation owned by the taxpayer as active income (and not passive activity income). Therefore, rents from a corporation owned by the taxpayer could not be used to offset losses from other passive activity investments.

But what happens if the rents from the taxpayer-owned corporation result in a rental loss after rental-related expenses? The IRS has said the activity IS a passive activity and losses can only be deducted against other passive activity income. If there is no passive activity income from other sources, the loss cannot be used to shelter ordinary income.

In a recent Tax Court Case ( Senra, TC Memo. 2009-79) the taxpayer argued that a rental loss should be deductible against wages the taxpayer reported from the same corporate activity. The taxpayer argued that the rental activity was related to the business activity of the corporation and, when combined, the two activities formed one economic unit. They argued that it should be treated as a single activity for purposes of measuring gain and loss for netting purposes.

The Tax Court disagreed and said that the passive activity loss rules cannot be escaped under the "one economic unit" argument. The taxpayers were stuck with a rental loss which could not be used to offset wage income from the same corporation. This court case is something to consider when dealing with a related party transaction between a controlling taxpayer and a corporation having rental income.

When dealing with related parties, the water can get murky. 1031 Corporation has information on exchanging properties between related parties and can help you understand the issues that may be present. See our website for information on structuring issues when parties related to each other are buying and selling and making efforts to defer capital gains taxes. Of course, you can always give us a call at 888-367-1031. While we can't advise you on passive activity loss rules, we can provide related party exchange-related consultation...and both the information and phone call are free!

How do you report a 1031 Like-Kind Exchange to the IRS?

2009-05-14T08:46:00.000-06:00

We often are asked for assistance from taxpayers and accountants on how to report a like-kind exchange. While we are unable to give tax advice, we do have obvious experience with this somewhat complicated and difficult form to complete. So, we can provide some assistance with YOUR completion of the form.

You must report an exchange to the IRS on Form 8824 and file it with your tax return for the year in which the exchange occurred. For example, if you sold property on November 5, 2008 as part of a 1031 exchange, and you purchased the new property on February 7, 2009, you would need to file Form 8824 with your 2008 tax return. This is a two page form that you submit with your federal tax return to report the details of your 1031 exchange.

Form 8824 asks for:

·Descriptions of the properties exchanged

·Dates that replacement properties were identified and transferred

·Any relationship between the parties to the exchange

·Value of the like-kind and other property received

·Gain or loss on sale of other (non-like-kind) property relinquished

·Cash received or paid; liabilities relieved or assumed

·Adjusted basis of like-kind property relinquished; realized gain

When you complete an exchange with 1031 Corporation you will receive a summary of your 1031 Exchange. Included with this summary is a worksheet to assist you in completing the Form 8824. Our worksheet and the 8824 form are also provided on our website under Accounting Topics.

Of course, we'll also walk you through all the steps of the exchange and make you aware of any obstacles and work with you to hurdle them. Plus, our clients receive pre- and post-consultation at no additional cost. That comes in handy when you are trying to fill out that Form 8824.

Give us a call today at 888-367-1031 with your 1031 exchange needs!

1031 Drop and Swap Distributions Receiving New IRS Attention

2009-05-11T11:45:00.001-06:00

Partnerships which are selling property often have one or more partners who want to structure a 1031 exchange for their share of the property owned by the partnership (or LLC). Sometimes all of the partners will wish to go separate ways and either sell for cash or do their own 1031 exchange. Sometimes one or two partners of a multi-partner firm will wish to leave the partnership arrangement.

A sale of a partnership interest does not qualify for a 1031 exchange. So, individual partners who want to structure a 1031 exchange for the sale of their interest in the partnership real estate need to position themselves appropriately. They can do so by receiving a deed to their share of the real estate from the partnership. This is done by the partnership conveying a tenancy-in-common interest in the real estate to the individual partner in redemption of his interest in the partnership. This leaves the real estate co-owned by the partnership and the individual member of the partnership who received the deed. Each of the co-owners proceeds to close on the sale of the real estate to the buyer and the individual member proceeds to do a 1031 exchange for the sale of his interest. Of course, the partnership and its remaining members are also positioned to do their own 1031 exchange if they wish to do so. This procedure is known in the industry as a “Drop & Swap.”

The Drop & Swap commonly takes place at the same closing table at which the property is conveyed to the buyer with back-to-back closings. The individual member partner who received a tenancy-in-common deed from the partnership has, technically, only owned his piece of the for sale real estate a few minutes. The first question that comes up is whether a few minutes of ownership is adequate for qualification of the sale for a 1031 exchange. The requirements for a 1031 exchange include the condition that the property being sold has to have been held by the taxpayer for investment or business purposes. This is commonly known as the “held-for requirement.” The Code and Regulations provide no guidance on how long a taxpayer has to have “held” the property for the required purposes.

In the past, the IRS has challenged taxpayers who have done a Drop & Swap with only momentary ownership prior to a sale. However, the courts have been favorable to the taxpayer holding that a distribution of property to a taxpayer is merely continuing the investment in a different form. In recent years, the IRS has not been aggressive in challenging Drop & Swaps.

However, commencing with 2008, Partnership Income Tax Returns include two new questions in Schedule B –

13. Check this box, if during the current or prior tax year, the partnership distributed any property received in a like-kind exchange or contributed such property to another entity (including a disregarded entity).

14. At any time during the taxpayer year, did the partnership distribute to any partner a tenancy-in-common or other undivided interest in partnership property?Based on these new questions - which clearly include Drop & Swaps, it appears that the IRS wants to know how frequently this is being done and is giving it their attention. Will the IRS select partnership returns for audit based on the answers to these questions? We don’t know. At a recent industry conference, an IRS agent indicated it was Treasury and not the IRS that had added these questions. Further, the IRS has offered no explanation for these new questions. Whatever the case, it appears some study is being done on the subject.

Taxpayers involved in a Drop & Swap will have to accept some risk of challenge by the IRS based on these new questions on the Partnership Income Tax Return. Taxpayers should always consult with their tax and law professionals if they are contemplating a Drop & Swap for consultation on this issue as well as other business and tax issues affecting the partnership and its members.

For more answers to your questions regarding partnership interests and 1031 exchanges, please visit our website or give us a call at 888-367-1031.

Strong Ethical Foundations Important in 1031

2009-04-30T08:52:00.003-06:00

Michele Falivene recently wrote an article for the banking industry about ethics. In it she states, “I have found there is a great deal of finger pointing going on these days as we grapple with the causes and impacts of the recession. Employees, businesses, government officials and consumers want to know who to blame and how to hold someone accountable for their losses. But it’s that lack of accountability and a very public absence of personal responsibility that has left many people without the answers they’re looking for.”

While we can’t rewrite the past for those 1031 exchange companies who engaged in questionable investment practices and pooled exchange funds, we can certainly revisit the principles that a Qualified Intermediary (QI) should offer - uncompromised integrity and a sound, ethical foundation.

A well-built, ethical foundation should be a vital part of the exchange company that you choose. A principled QI will explain their company’s commitment to best practices and make ethical considerations a primary decision-making factor. Detailed questions should be asked of the 1031 intermediary that you are considering using. Immediate answers for those questions should be forthcoming. You should be left having no lingering doubts.

1031 Corporation has built it’s foundation on these standards. As Henry Kravis said, “If you build that foundation - the moral and the ethical foundation as well as the business foundation and the experience foundation - the building won’t crumble.” In light of recent failures or “crumbling” in the 1031 exchange industry, 1031 Corporation is still standing strong. You can count on 1031 Corporation to provide our clients uncompromised integrity from a sound ethical foundation. For your 1031 exchange needs, please give us a call today at 888-367-1031.

Hold Open Title Policy Can Benefit your 1031 Exchange

2009-04-22T10:04:00.006-06:00

What is a Hold Open?
A Hold Open is a title insurance term used for real estate transactions where the title company that insures the initial sale agrees to insure another sale of the same property within 24 months of the original sale. They are used in reverse 1031 exchanges to avoid the cost of two separate policies. Investors might also use them in a "flip" transaction.

There are three parties involved in a completed Hold Open transaction: the original seller, the middle buyer (the person requesting the Hold Open or, in the case of a reverse exchange, your Exchange Accommodation Titleholder or EAT), and the final purchaser (the exchanging client. Hold Opens are often associated with reverse 1031 exchanges and fixer-upper properties, but this is not a requirement for a buyer to request a Hold Open. Investment properties can be held open from one sale to the next and Hold Opens are also available for short-term owners who simply know they will be selling the property within two years.

Benefits of a Hold Open
A Hold Open ultimately saves money for the buyer in a 1031 exchange. Since the buyer knows that the purchased property will be resold within two years, the title company can hold the file open for the resale at a fraction of the cost the buyer would have paid — even with a discounted reissue rate — in title insurance premiums.

The process works like this: The original seller pays the applicable title insurance premium for the initial sale to insure the middle buyer. The middle buyer then pays only a small percentage (depending on the underwriter) of the full basic premium charge in order for the title company to keep the file open, and no title insurance policy is issued at this time. In the case of a reverse exchange, the client pays all closing costs associated with the initial purchase so they ultimately save title cost on the subsequent exchange.

When the middle buyer (EAT) sells the property (back to the exchanging client), they pay the difference in premiums between their purchase price and the selling price on the second half of the Hold Open. A title policy is issued only to the final purchaser.

For example, a Denver residential property purchased for $250,000 would have a full premium of $1,265. The buyer (via the EAT) would pay an additional Hold Open fee of $126 to keep the file open. Upon the sale of the relinquished property in the exchange, the EAT sells the house back to the taxpayer for the same price. While this second sale would normally trigger the need for new title insurance (costing another $771 at the standard 50% reissue rate), the up-front, 10% payment of the Hold Open policy would result in no additional title insurance premium.

In the case of a fix and flip, hopefully, the property was sold for more. Let's say it was subsequently cleaned up and sold for $300,000. In this case, the seller would pay the difference in premiums, which would be $92. His total title charge would be $218 ($126 for the Hold Open and $92 for the increased coverage over the original $250,000 purchase), saving $553 over the $771 he would have paid if he had simply used a standard 50% reissue rate.

Conditions for a Hold Open
A property is eligible for Hold Open status only if the following conditions are met:

• A commitment to insure the final purchaser is issued after recording the initial conveyance to the middle buyer. This is in lieu of a policy of title insurance to the middle buyer, or EAT. Any adverse matters that are recorded or become known to the title company must be satisfied before the policy is issued.

• There must be a single resale transaction of the exact property as reflected on both the original commitment to the middle buyer (EAT) and the final policy to the final purchaser (the exchanging party). For example, the purchase of a duplex must be sold as a duplex, not sold as two separate units in the final conveyance.

• The middle buyer (the exchanging party's EAT) must sign an affidavit acknowledging that he is aware the property must be sold within two years or the Hold Open charge will be forfeited and the policy issued to the middle buyer.

• Both transactions must be insured through the same title company. The final purchase for the transaction initially held at one title company cannot be insured by another title company.

Property Value Increases
The Hold Open charge is based upon full value of the real estate or interest at time of the initial conveyance, with an additional charge of 10–25% (depending on the underwriter) of the basic premium based on the full value of the real estate or interest.

Upon closing of the resale within two years, the owner’s title policy will be issued to the final purchaser without additional cost. If there is an increase in the liability between the initial conveyance and the ultimate sale, a charge will be made based on the difference between the two liabilities calculated at the applicable schedule of rates.

Additional stipulations
The Hold Open is available only one time per transaction. If the resale to the final purchase is not recorded within 24 months of the date of the original sale, the policy of title insurance will be issued insuring the purchaser in the initial
sale in the amount originally committed. The Hold Open charge will be forfeited.

A potential drawback of the Hold Open procedure is that the middle buyer is not insured for any warranties of title that may be given in the deed to the final purchaser, since no owner’s policy is issued to the middle buyer.

Kyle Snyder of Land Title Guarantee Company has graciously provided much of the above information. If you have questions about Hold Open title policies, give Kyle a call at 303-393-4945. For your reverse exchange needs, please contact us at 888-367-1031.

FirstBank at the Colorado Rockies Season Opener

2009-04-17T15:20:00.006-06:00

1031 Corporation is a wholly-owned subsidiary of FirstBank. While we try to highlight the safety and soundness of our parent company, the bank recently made an aerial effort to highlight its long-standing belief that fiscal responsibility starts with the way a company you do business with spends its money. This banner flew over LoDo Denver above Coors Field on the Colorado Rockies 2009 opening day last Friday.

In case you can't read the banner, it says: "This is the closest thing we have to a private jet"....with the FirstBank logo.

Oh, by the way, 1031 Corporation does aircraft exchanges...in case you are considering exchanging a single prop, like the one in the photo, for that private jet.

Have a great weekend!

Requirements of a 1031 Exchange

2009-04-16T09:35:00.007-06:00

A tax-free real estate exchange is an important financial tool for investors looking to sell a property and reinvest in other real estate. The advantage of a 1031 exchange is that they allow taxpayers to sell income, investment or business property and replace it with like-kind property without having to pay Federal income tax on the transaction. The tax is deferred allowing the investor to reinvest the full proceeds of a sale into new investment(s).

First, the property being exchanged must qualify. Qualifying property is any real or personal property held for investment purposes or used in a taxpayer's trade or business. Any property used exclusively for personal use cannot be exchanged. Also, property acquired with the intent to immediately resell does not qualify.

Second, the replacement property must be like-kind to the relinquished property. In the case of personal property, what is like-kind can be a bit more challenging. The replacement property generally needs to be in the same asset class as the relinquished property. In real property, replacing like-kind property is easier to meet. A single family house can be exchanged for a condominium (or cooperative) unit. Raw land can be swapped for an office building or a farm can be exchanged for commercial or industrial property. A relinquished property in the United States must be replaced with property in the United States. Foreign property is like-kind to foreign property.

Next, a couple of deadlines must be met. The replacement property must be identified within 45 days from the date of sale and must be purchased within 180 days of the sale. The exchange will end if identification is not made within 45 days or if property is not purchased within 180 days.

Finally, the most important requirement of a successful 1031 exchange is that the taxpayer cannot receive (or control) any of the net sales proceeds from the relinquished property. All such proceeds must be held in escrow by a neutral party and must go directly into the purchase of the replacement property. Generally, a Qualified Intermediary is involved in the transaction.

If you have questions about additional requirements of your 1031 exchange, please see our Exchange Manual or give us a call at 888-367-1031.

1031 Exchange Classes and Continuing Education

2009-04-13T10:23:00.015-06:00

1031 Corporation Exchange Professionals provides continuing education classes for Realtors, CPAs and Attorneys. We work with broker offices, title companies and real estate, accounting and legal trade associations to provide Continuing Education credit for 1031 exchange classes in Colorado (and very soon, Arizona and California). In conjunction with a couple self-directed IRA providers, we also provide a broader, tax deferred real estate investing class.

While many states now have a prescribed minimum requirements list that includes ethics and other "core" classes, a class involving 1031 exchange options, rules and procedures is a great way to add an interesting twist to your class offerings. It allows participants to hear something about a topic with which they may not be as familiar. It attracts agents, business associates or investor clients that might not normally attend a class offering and gives something of value to the agency or firm sponsors the course.

Carol Croft, Larry Jensen and I combine to offer our expertise and real life experiences to provide valuable insights into new strategies to defer capital gains. Carol has over fourteen years experience and she is a Certified Exchange Specialist. She's performed thousands of exchanges on behalf of our clients and has a number of real life examples that provide practical knowledge about how one goes about completing an exchange. Larry, as a Certified Public Accountant, is extremely knowledgeable about the technical and legal basis for many exchange strategies and concepts. While he is a former accounting firm partner and has more than 30 years accounting experience, he provides much more than a dry scholarly approach. Pretty interesting stories too...oh....me? I am just a former banker of seventeen years that really likes mixing real estate, financial concepts and saving money on taxes! All three of us love thinking "outside the box" and coming up with possible solutions to the most complex of 1031 exchange scenearios.

Our most popular class, a course titled Everything Your Ever Wanted to Know About 1031 Exchanges (I know, pretty lofty title, LOL) provides the basics of a like kind exchange in a format that allows interaction - all while informing in a very easy to follow, two hour format. We typically even work with a sponsor that partners by providing the facility or perhaps lunch. No better way to bring in a crowd than with free food! In these economic times, inexpensive, one-on-one marketing opportunities are effective. They provide the ability to converse face-to-face with those individuals that are actively positioning themselves to benefit during the next recovery cycle.

If you have questions about 1031 exchange classes or partnering with 1031 Corporation Exchange Professionals on education opportunities, please call us toll free at 1-888-367-1031.

Things a Lender's Counsel Thinks about in a Real Estate Transaction - Part 2

2009-04-10T07:28:00.004-06:00

Last Friday, we covered the first six of the top things a Lender’s counsel thinks about regarding a commercial loan transaction. This weeks conclusion of that article provides the final items. This list is courtesy of Michael Fogel of the Florida law firm of Fogel and Pekale LLP.

7. Show me where the dead bodies are buried

Except for a condominium, it is almost the rule that some form of environmental questionnaire, analysis, study, or report will be required by the lender. If you think buyers don’t like surprises, then you’ll not be surprised to learn that lenders dislike them even more. You should know that there are very few exceptions to the lender’s requirement that this pre-closing condition meet the lender counsel’s satisfaction. Quite simply, the lender will not fund the loan without it. While an environmental questionnaire is relatively quick to prepare, an environmental study (i.e., a Phase 1 Report) frequently is not. If any further analysis is required, that WILL take time. Therefore the best advice is, when the contract is fully executed and if the lender requires an environmental analysis, don’t delay. Order it today!

8. How’d they do that?

Ah...the appraisal. One of life’s great mysteries. Some how, some way, the property is given a value by those all-knowing, all-powerful prognosticators of worth: the appraisers. This may be one of the toughest jobs in the real estate industry. It takes experience and study and is critical to the loan process. Which means that the appraiser (like the surveyor) must meet the lender’s qualifications and the bank will (or will not) make its loan based upon the value the approved appraiser gives the subject property. The lender’s counsel will have this item as a high priority item on its Closing Checklist as the loan itself will not be done without the appraisal meeting the lender’s criteria.

9. The Kitchen Sink

Each commercial real estate transaction is unique and there are times when there are other important facts, terms, or conditions that are critical to disclose to the lender and its counsel very early in the process. The list is endless - virtually a kitchen sink of scenarios. For example, franchises and gas stations have very specific agreements that affect the use of the subject property and, therefore, are subject to the Lender’s review and approval. Other commercial properties may have tenants of all different sizes and leases of varied terms. There may be cross-access easements, deed or other use restrictions, property owner associations, zoning or code violation matters, like kind exchange documents. All of these are important to lender’s counsel and must be addressed in the initial pre-closing phases of the transaction. A delay in getting lender’s counsel information on any of these items may result in a delay of the closing, or perhaps closing will not happen at all, frustrating the buyer’s and the broker’s objectives and creating unwanted consequences.

10. I’ve got you covered

If you have lived in Florida for 5 minutes you know that property insurance is a very hot topic now and likely will be for some time to come. It one of the essential ingredients in “baking the closing cake”. It is extremely unlikely that buyer’s lender will close without the buyer obtaining insurance coverage acceptable to the lender. It is, therefore, important to have the buyer determine what the lender’s insurance requirements are as soon as possible then diligently pursue satisfying them. Insurance will most certainly be a pre-closing item on the lender counsel’s closing checklist. Get evidence of insurance coverage - paid in advance by the buyer - to the lender’s counsel. As we have all seen, the insurance market changes like the weather. Do not wait until the last minute on this matter.

10 (again). Show me the Money (Again)

While all of the pre-closing conditions are getting satisfied, keep your eye on
one of the last requirements - the buyer’s closing funds. Generally, the buyer shall be required to come to the closing with funds sufficient to close the transaction. Funds are usually in the form of a bank or cashier’s check, an attorney’s trust account check or are sent by wire transfer. It is not uncommon for buyers/borrowers to lose track of this requirement. They then have to scramble to come up with sufficient closing funds, thereby causing a myriad of issues on the eve or day of the closing!

While this article is written from the perspective of a lender’s counsel, you may notice that several of the top items are very important, even critical, to the buyer and its counsel. Accordingly, make sure that these items are delivered to such parties concurrently with the delivery thereof to lender and its counsel. If the broker can provide this information thoroughly and quickly, it can and most often does make the pre-closing part of the transaction proceed more quickly and efficiently. And getting the closing to occur, as we all know, is the main objective.

We'd like to thank Mr Fogel for granting us permission to use his insights. Please contact Mitchell at (561) 393-9707 with any questions or comments.

What a Lender’s Counsel Thinks About in a Real Estate Transaction – Part I

2009-04-03T07:51:00.001-06:00

In today’s competitive environment, having information and knowledge may often mean having a tremendous advantage over the competition, the difference in closing a transaction quickly, or even closing it at all. If the idea is to be as prepared as one can, thus making the closing as good an experience as possible for the broker and the buyer (a.k.a. borrower), then one sure way is to know what to expect from the Lender and its counsel. With that in mind, Mitchell C. Fogel , of the Boca Raton, Florida law firm of Fogel & Pekale, LLP, offers these nuggets of information to help you close your deal and/or earn your fees.

1. Whose on first, What’s on Second, and I Dunno’s on Third

It may seem obvious, but the loan will NOT fund - and the deal will NOT close - without establishing in detail and delivering to the lender and its counsel critical, current and complete information about the borrower, the seller and, when applicable, the guarantor(s). That means the names of all the parties and, where entities are involved, the formation and governing documents of the applicable entities. As simple as this seems, it is often one of the biggest areas of breakdown in getting the loan ready to close. One of the parties (usually the buyer, but often the guarantors) may form a new entity; may assign the contract to a previously unknown entity (such as a Exchange Accommodation Titleholder in a reverse 1031 exchange); may change the owners, principals or managers of a critical entity; or may modify the governing documents of a vital entity. To avoid delays in closing, always make sure that the most current information and documents - and all amendments or modifications - are timely delivered to the lender and its counsel.

2. Life begins at Contract-ception.

In every deal I have been a part of as counsel for buyer, seller or lender, there has been a written contract executed by the necessary parties to the deal. Lender’s counsel must have a complete and legible copy of the contract (including any and all exhibits thereto, amendments thereof, and other related documentation), and will use the contract in preparing the lender’s closing checklist, a document that provides what materials, conditions, and data that must be delivered, satisfied and/or prepared prior to closing. Also, any changes to the contract - a 1031 exchange addendum, for example - must also be received by such counsel or the closing may be delayed.

3. Show me the Money

If the contract calls for a deposit, or a number of deposits, make sure each has been delivered to the applicable escrow agent and ensure evidence of each deposit is given to the lender and its counsel.

4. Now, show me the Survey

In most real estate transactions, unless the subject property is a condominium unit, it is in the best interests of the buyer to have a current survey of the subject property prepared, and it should show and label all applicable title matters. With the survey, the buyer and lender can make an informed decision about the property, its condition and matters that affect title to it. Lender’s counsel will need to have sufficient time to review the survey and related matters that affect the subject property, PLUS the survey must be certified correctly (usually to the lender, the title insurance company, the buyer, and the closing agent).

5. He said, She said

Effective communication among the essential parties is critical to having a smooth closing. Therefore, the lender’s counsel must receive, early in the process, the names and contact information of all parties and their representatives (i.e., lawyers) in the transaction. Often the broker can be a tremendous asset in this area.

6. What’s mine is mine and what’s your is mine

In a real estate deal - and the loan that funds it, the Buyer’s “status of title” is what is most important to the Lender and its counsel. The Lender decides to make its loan, and determines what the loan terms will be, based upon a number of factors. One of the most significant factors is the priority of its lien on the Lender’s primary collateral. Reviewing title matters can be quite complex, requiring Lender’s counsel to read and analyze many documents, some of which may be very old and hard to read. It is not uncommon to include the services of a surveyor or other professional in determining the applicability of some title documents. Title review can be challenging and can take quite a bit of time. So, do not delay having a title search performed (and where applicable, a title insurance commitment issued) and having it delivered to Lender’s counsel as soon as possible. Lender’s counsel will not advise its client to close a loan unless it is certain that Lender’s lien will be in the position Lender requires as to the Loan.

We will post the second half of "What a Lender's Counsel Thinks About in a Real Estate Transaction" next week. In the mean time, if you have any questions or comments about the contents of this article, please contact Mr Fogel, toll free, at866-829-7472 or in the Palm Beach area at 561-393-9111. If you have questions regarding an upcoming real estate closing and the possibilities of deferring capital gains tax on the sale, please contact us at 888-367-1031.

IRS Gives OK to Non-Safe-Harbor Reverse Exchange

2009-04-01T16:29:00.001-06:00

In January, the IRS issued a Private Letter Ruling (PLR 200901004) approving a reverse improvement exchange under §1031 that did not comply with Revenue Procedure 2000-37 (the “safe harbor” exchange guidelines issued by the IRS).

There were two unusual features to this exchange –

It is a “non-safe-harbor” reverse exchange, and
The replacement property is an improvement built on property (easements) owned by the taxpayer.

These are issues for which no specific guidance or approval had been previously issued by the IRS. Usually, like-kind replacement real estate has been thought to require ownership of real property as distinguished from an improvement constructed on land already owned by the taxpayer.

As described in the PLR, the taxpayer proposed to exchange “Old Facility” for “New Facility.” Old Facility was to be sold to an unrelated third party. Taxpayer was to hire a contractor (Accommodator) to build New Facility on easements already owned by Taxpayer or acquired by Taxpayer prior to the exchange. The contractor would initially own and finance the construction of the New Facility independently of the Taxpayer. Following completion of New Facility, the contractor would transfer ownership of New Facility to Taxpayer (presumably using the exchange cash to service debts of the contractor).

This is the substance of the proposed exchange described by the PLR. However, there are more complicated relationships in the transaction which can be summarized as follows –

The contractor was a domestic subsidiary of a foreign corporation which also owned the Taxpayer. However, the contractor is not a related party to Taxpayer because the parent is a foreign corporation which is excluded from the definition of a related party.
The contractor had no equity in the project other than funds from its parent foreign corporation.

Unlike the DeCleene Case, the ruling does not examine whether the contractor acting as Accommodator possessed the benefits and burdens of ownership, whether it was acting as Taxpayer’s agent or whether the exchange is a step transaction resulting in the Taxpayer acquiring improvements on its own property. The ruling does imply that an exchange can be structured using an accommodator for property in which the taxpayer has a substantial ownership interest or over which it otherwise exercises control.

As with all PLRs, this opinion was issued as a private letter ruling to the taxpayer requesting a ruling, and therefore it cannot be cited as precedent. The Internal Revenue Service has the right to change its position on this matter without notice. If you have questions about structuring your improvement or reverse exchange, please give us a call at 888-367-1031.

Luna-TIC Fringe

2009-03-30T11:05:00.000-06:00

Michael Franklin, author of this entry, is an Executive Vice President of Los Angeles-based FORT Properties Inc. He has graciously allowed us to borrow his thoughts about the recent economic crisis as it relates to the Tenant in Common (TIC) industry.

The past year has undoubtedly been the most challenging in recent memory for those involved in commercial real estate. Tenant-in-common (TIC) sponsors have felt the pressures and, in some high profile cases, have succumbed to the rapid changes in our economy. As in all areas of the commercial real estate sector, however, there are TIC sponsors that are reacting proactively to the challenges and there are those that won't survive the downturn. What are the major issues facing TIC sponsors in 2009? and who will live to see another deal?

A Business Model Issue, Not an Industry Issue

The past year was a few high profile TIC sponsors fail completely or take to the sidelines. While it may be expedient to view this as an indictment of the entire industry, those familiar with these firms recognize the reality - the stresses on this sector have magnified the fault lines of companies whose business models work only in the best of times.

Transparency and 'skin in the game' provide the incentive for sponsors to act with integrity. Each TIC investment must stand on its own merits. Those who invest in the asset inherently invest more comprehensive due diligence and are more realistic about the property's prospects - after all, this sponsor is willing to own the asset.

Refinancing - The Elephant in the Room

The majority of TIC investments were financed through Commercial Mortgage-Backed Securities (CMBS) vehicles. With an estimated $40 billion in CMBS loans for the TIC industry alone coming due in the next three years, the choices available may be difficult. Lenders have shown a skeptical willingness to extend existing term and the ability to extend the term may cost dearly.

Borrowers can also turn to more traditional sources of lending to refinance a property though they face the same challenges as all commercial real estate borrowers in addition to the burden of educating traditional lending sources about TICs. One challenge inherent in the TIC structure continues to prove difficult for all lenders - creating a comfort level in dealing with the multiple owners of a TIC asset.

Commercial real estate transactions have been paralyzed by the unwillingness (or inability) to lend. Supply cannot be manufactured without debt and fears within the market have made debt difficult to obtain. TICs are particularly susceptible to this environment as investors hoping to utilize a 1031 exchange find it increasingly difficult to find a buyer who can obtain financing.

There is Good News

While the evolution of the industry will result in far fewer TIC sponsors, those that remain will have done so because their business model is investor focused and realistic. These same sponsors will certainly have a history of strategic acquisitions and exceptional asset management or they would have been unable to obtain financing during these turbulent times.

TIC investments remain an outstanding strategy for certain investors. Well capitalized, strong sponsors will ensure that this option remains viable and attractive long after the economic crisis has passed.

For more information on thoughts addressed in this article contact Michael Franklin at 213-572-0222. If you have questions about 1031 exchanges and Tenant-in-Common Interests, please visit our website or give us a call at 888-367-1031.

New 1031 Exchange Regulation in Colorado

2009-03-26T07:28:00.001-06:00

Colorado House Bill 09-1254, sponsored by State Representative Joel Judd and State Senator Ted Harvey, has been unanimously passed by the 67th General Assembly of the State of Colorado. This legislation is designed to create consumer protections relating to Section 1031 Like-Kind Exchanges facilitated by Qualified Intermediaries (QI) and Exchange Accommodation Titleholders, otherwise known as Exchange Facilitators.

For the past two years a group of QIs committed to responsible business practice has served as a resource team for legislators promoting this bill. The team, comprised of members of the Federation of Exchange Accommodators (FEA), included committee leader Brent Abrahm of Accruit, Mary Lou Schwab of Bankers Escrow; Paul Holloway of Land Title Exchange Corporation; David Wright of 1031 Corporation Exchange Professionals - a subsidiary of 1stBank; Scott Saunders of Asset Preservation; Suzanne Goldstein Baker of Investment Property Exchange Services, Inc. (IPX1031); and Max Hansen of American Equity Exchange, Inc. Abrahm, Baker, and Hansen also serve on the FEA’s Board of Directors.

Abrahm, CEO of Denver-based Accruit, LLC, explains that “the like-kind exchange (LKE) was added to the Internal Revenue Code in 1921 to promote business reinvestment in our economy. It is important, especially during difficult economic times like the present, that this ultimate stimulus tool be governed in the best interests of the consumers and businesses that utilize it. We applaud Representative Judd and Senator Harvey for supporting legislation that protects the integrity of the services provided by QIs doing business in Colorado. It’s been an honor to be a resource for this landmark legislation, which will ensure appropriate business standards for all QIs in the state.”

The FEA, which represents Qualified Intermediaries nationwide, requires that its members follow a strict code of ethics consistent with the legislation presented by Representative Judd. Billions of dollars in like-kind exchanges for real estate and other business assets are transacted each year, and House Bill 09-1254 will ensure that all Colorado Exchange Facilitators follow secure banking procedures that provide sufficient liquidity of funds to meet their obligations to their clients.

“The FEA Code of Ethics very specifically provides every member organization a set of standards and business processes to safely handle assets and business funds,” says Hugh Pollard, President of the FEA. “With proper due diligence, no client should have reason to fear doing an LKE. Each client should ask detailed and specific questions about how their money will be invested and they should make sure that their QI provides proper financial assurances.”

For more information on the new Colorado regulation and the protections it provides or for more about section 1031 operating principles, please give us a call at 888-367-1031.

Like Kind vehicles under Section 1031

2009-03-24T11:40:00.013-06:00

A new private letter ruling (PLR 200912004) says that vehicles that share characteristics of both cars and light general purpose trucks - including SUVs, minivans, cargo vans and crossovers - are of "like kind" for section 1031 purposes.

The IRS observes that in the past few decades motor vehicles have evolved in a manner which blurs the distinction between cars and light-duty trucks.

The “safe harbor” for determining which vehicles are like-kind to each other has been by reference to the General Asset Classes found in Reg. §1.1031(a)-2(b)(2) or the Product Classes found in Sectors 31, 32 and 33 of the North American Industry Classification System (NAICS). Vehicles which are found in the same Asset Class or Product Class have been deemed to be like-kind.

PLR 200912004 observes that personal property exchanges can be like-kind for a 1031 Exchange even if they are not in the same Asset or Product Class and that no inference is to be drawn from the fact that properties are not in the same Asset or Product Class.

As noted above, the Asset and Product Classes are “safe harbors” and not the exclusive way to determine if personal property is like-kind.

Accordingly, cars, light general purpose trucks and vehicles that share characteristics of both cars and light general purpose trucks (13,000 lbs) (e.g., crossovers, sport utility vehicles, minivans, cargo vans and similar vehicles) are like-kind for 1031 Exchange purposes even though they are in different Asset or Product Classes.

Caveat: This opinion was issued as a private letter ruling, and therefore it cannot be cited as precedent, and the Service has the right to change its position on this matter without notice.

For more information on depreciable tangible personal property and like-kind exchanges, please visit our 1031 exchange website, www.1031cpas.com, or give 1031 Corporation a call at 888-367-1031.

Intangibles Can Qualify as Like Kind Property for Section 1031 Exchanges

2009-03-19T19:00:00.006-06:00

A new Chief Counsel Advice (CCA 200911006) declares that intangibles such as trademarks, tradenames, mastheads, etc., that can be valued separately and apart from goodwill qualify as like-kind property for a Section 1031 exchange.

This is a policy change from past thinking of the IRS as expressed in PLR 200602034 - issued as a Technical Advice Memorandum - which said that such intangibles could not be of like kind to similar intangibles of any other business because they were closely related to, and part of, the goodwill of the business being sold. Goodwill of a business being sold is not considered to be like kind to the goodwill of any other business being purchased.. The CCA also reverses IRS’s position in FAA 20074401F, which stated that newspaper mastheads and customer-based intangibles were too closely related to goodwill to ever be like-kind.

The CCA declares that the IRS should not follow the position set forth in PLR 200602034. The IRS says that except in rare and unusual situations, intangibles such as trademarks, tradenames, mastheads, etc. can be valued separately from the goodwill of a business and thus are eligible for an exchange for like-kind intangible property.

If you have questions about intangibles and whether they may qualify for a section 1031 exchange, please give us a no obligation, toll free call at 888-367-1031.

IRS Says Okay for EAT to hold Partnership Interest

2009-03-17T14:35:00.009-06:00

Under the rules of §1031, a taxpayer is required to receive real estate as replacement property for an exchange of real estate. In a recent Private Letter Ruling (PLR 200909008), the taxpayer was using the services of an Exchange Accommodation Titleholder (EAT) to take and hold title to a replacement property until his relinquished property could be sold (reverse exchange). The taxpayer's desired replacement property was real estate owned by a partnership in which the taxpayer was a 50% owner and Partner B was the other 50% owner. The only asset of the partnership was qualifying real estate. Taxpayer desired to become the 100% owner of the real estate. Ordinarily, the taxpayer would have to become the purchaser of real estate to complete a tax-deferred exchange of real estate.

In the case of this Private Letter Ruling, the EAT took ownership of the 50% interest in the partnership owned by Partner B (versus taking title to 50% of the real estate owned by the partnership). At this point, the partnership was comprised of the taxpayer and the EAT as 50/50 owners. When the taxpayer’s relinquished property was sold, the EAT transferred the 50% partnership interest to the taxpayer as replacement property for the taxpayer’s exchange. In effect, the taxpayer had acquired the 50% interest in the real estate owned by Partner B by becoming the 100% owner of the partnership.

While Section 1031(a)(c)(D) precludes the exchange of real estate for a partnership interest, under Revenue Ruling 99-6, the acquisition by a partner of all the remaining interests in a partnership is treated as the acquisition of a pro rata share of the assets of the partnership (in this case, real estate). The partnership is deemed to have made a liquidating distribution of the real estate to the taxpayer and the partnership “disappears.”

For more information on 1031 exchange and partnership issues, please visit our website or give us a call at 888-367-1031.

Real Estate Agents Exempt from Passive Loss Rules

2009-03-13T13:30:00.002-06:00

A recent Tax Court Summary Opinion reversed the IRS's position that a real estate agent wasn't a real estate professional under tax law. This made the real estate agent/taxpayer eligible to claim real estate rental losses as non-passive and deductible.

So what's the big difference between non-passive and passive activity losses? Significant to many. Passive activity losses are limited in the amount you can take to offset other non-passive income sources. Non-passive activities are not limited.

In general, any rental activity is a "passive" activity - regardless of the taxpayer's participation. Internal Revenue Code section 469 rules don't apply to a "qualifying real estate professional". Just because you call yourself a real estate professional doesn't mean you are automatically entitled to treat the activity as non-passive. You must also meet the general material participation standard. Specifically, more than one-half your time AND more than 750 hours of services during the tax year must involve real estate that you materially participate. This same rule is applied to landlords, developers and brokers.

The IRS took the approach that a real estate agent was not a licensed real estate broker and could, therefore, not engage in the real property trade or business as defined under section 469. The tax court disagreed holding that a taxpayer doesn't have to hold a real estate license to be treated as engaged in a real estate brokerage trade or business. As long as the material participation standard is met, the court opined, a taxpayer can claim losses incurred on rental real estate as non-passive.

Of course, questions regarding passive activity losses and the participation rules that apply should be reviewed by your tax professional. You certainly want to make sure you meet the qualifications before treating them as non-passive and deducting them against other non-passive sources of income. In addition, I do want to note that a Summary Opinion uses a different standard of evidence, is a less formal proceeding and may not be appealed....meaning...it's specific to this case and you, technically, are not allowed to cite the case or rely on it as precedence. But if you are a real estate agent, and not licensed as a broker, you now at least have one Summary Opinion that supports your case!

New Homebuyer Tax Credit – The American Recovery

2009-03-10T11:54:00.001-06:00

In an effort to stabilize home values, the First-Time Homebuyer Tax Credit enacted in 2008 has been modified and extended by the American Recovery and Reinvestment Act of 2009. In a nutshell, here are the new rules for home purchases in 2009 –

• The credit is for 10% of the purchase price limited to $8,000 (up from $7,500 under the 2008 law).

• The new home must be purchased in 2009 before December 1, 2009 to qualify. A taxpayer can elect to take the credit on a 2008 income tax return even though the residence was purchased in 2009.

• Repayment is no longer required if the taxpayer lives in the home for 36 months. The credit is recaptured and must be repaid if the home is sold or discontinued as a primary residence during the 36 months following purchase. The repayment is due on the tax return for the year the home was sold or use was discontinued.

• The credit is phased out for taxpayers with adjusted gross income between $75,000 and $95,000 ($150,000 - $170,000 for joint filers).

A taxpayer is considered a first-time homebuyer if the taxpayer (or spouse) had no ownership in a principal residence during the three year period preceding the purchase of the home.

The National Association of Homebuilders has developed a website, Federal Housing Tax Credit, that further details the plan and answers many frequently asked questions.

Replacement Value for 1031 Exchange

2009-03-04T14:40:00.000-07:00

In order to defer 100% of the capital gains taxes in an exchange, a taxpayer should replace with like kind property of equal or greater value than the relinquished property. But that doesn't mean you taking cash or reducing debt will invalidate your 1031 exchange. It simply means you will be responsible for taxes on any cash taken or debt not replaced. This is known as "boot".

You may choose to take some cash out (cash boot) or to incur less debt on the replacement property (debt boot) than was attached to the relinquished property. Cash boot must be taken at the closing of the sale of the relinquished property or when the exchange is complete. The rules of boot can be complicated and even among accounting professionals, treatment of boot can differ. Consult with your tax professional about the allocation to depreciation recapture and capital gain income on the boot.

Care should be taken as to the amount of boot you hold from the exchange. Taxes will be assessed on the amount of the boot taken OR the total gain on the sale, whichever is less. The boot taken must be less than the total gain to result in an actual tax deferral.

It is wise to go over the numbers with your tax professional BEFORE deciding to receive boot in an exchange. If you or your accounting professional have questions about the Rules of Boot, you might find it helpful to review the information about it on our website or give us a call, toll free, at 888-367-1031.

Trust Your Exchange to a Certified Exchange Specialist®

2009-02-26T13:04:00.000-07:00

Why is it important to have a Certified Exchange Specialist® (CES®) manage your IRC Section 1031 exchange? Currently, due to lack of regulation, almost anyone is legally permitted to act as a Qualified Intermediary (QI) to facilitate a 1031 Exchange. The Federation of Exchange Accommodators (FEA) has addressed this issue by establishing a Certification and Continuing Education Program.

The Certification is available only to FEA members who meet specific criteria. CES® Designees are required to have three full time years of experience before sitting for the exam. This full time experience must include substantial time spent counseling taxpayers and their advisors (e.g., attorneys, accountants and real estate professionals). They must attend 20 hours of continuing education to maintain their designation. Designees are required to adhere to a strict Code of Ethics enforced by the FEA.

The purposes, as provided from the Federation of Exchange Accommodators), of the CES® certification program are to:

Establish nationally recognized standards of knowledge and experience for exchange specialists;

Assess the level of knowledge demonstrated by exchange specialists in a valid and reliable manner;

Encourage professional development in the exchange accommodation field;

Formally recognize individuals who meet the requirements set by FEA; and

Serve the public by encouraging quality Section 1031 exchange services.

Mary Foster, CES® and former President of FEA has stated, “The sign of a Certified Exchange Specialist® shows a commitment to knowledge and continued education that is difficult to achieve. As with other professions, the CES® is a must-have if consumers are looking for a QI who handles their business with the highest level of professionalism available.”

1031 Corporation has four Certified Exchange Specialists® on staff ready to meet your 1031 exchange needs. If you have questions about a 1031 exchange you are considering, call one of them today at 888-367-1031.

Federal Foreclosure Prevention Plan Summary

2009-02-19T10:05:00.003-07:00

Yesterday, President Obama announced a extensive foreclosure prevention plan. The plan is in addition to the $787 billion economic stimulus bill Obama signed on Tuesday, the Financial Stability Plan the Treasury department announced last week, the mortgage bankruptcy “cram-down” bill currently being discussed, and any other regulatory restructuring that is being contemplated by Congress and the Obama administration.

Homeowner Stability Initiative:
The plan calls for a $75 billion partnership between government and lenders to share the costs of modifying certain at-risk loans. Banks would reduce a borrower’s loan amount to 38% of their monthly income. The government would match additional reductions until the monthly payments equal 31% of monthly income.

Lenders participating would receive incentives for completing modification. Borrowers that are able to stay current would receive balance deductions within the first five years are included in the plan.

Partial Guarantee Program through FDIC:
The plan calls for $10 billion to be spent to provide up to 50% guarantee on loans that received an approved modification, depreciated in value and saw the borrower default. The goal is to discourage lenders from foreclosing quickly on loans that are at risk of depreciating further.

Government Sponsored Enterprise-based refinancing:
Currently Fannie and Freddie can’t refinance any loans that have less that 20% equity. The government will loosen the refinancing requirements of GSEs allowing them to refinance loans that they either hold or guarantee, as long as the balance does not exceed 105% of the current home value. The administration projects this will help three to four million borrowers. GSE's would receive an additional $100 billion over the September 2008 figure to complete this refinancing plan.

Increase in GSE portfolio:
Treasury also will permit Freddie and Fannie to increase the size of their portfolios by $50 billion from to $900 billion.

Only property used as a primary residence would be eligible for assistance. Obama’s proposal relies heavily on bank participation and some skepticism exists whether borrowers who are out of work and behind on payments can be saved. There is also skepticism as to why someone who is upside down on value with no equity and a past due mortgage would want to work out versus simply giving it back to the bank and walking away.

Additional specifics and technical details are expected to be announced on March 4th and it will be interesting to see whether this plan will work or if it is simply throwing good money after bad.

Alternative Minimum Tax (AMT) Patch in 2009 Recovery Act

2009-02-13T12:01:00.009-07:00

The Alternative Minimum Tax (AMT), which began back in 1969, is a parallel tax system that was created to make sure taxpayers in the highest tax brackets weren't able to skip through the tax system. But because of a lack of adjustment over the years, this tax now reaches far deeper than the 155 individuals it was targeted at back in 1969. It is estimated that if changes are not made, it will expose 30 million taxpaers in 2010. Instead of comprehensively dealing with this, it appears we are now stuck in a year-to-year patch that doesn't really address the overall issue of the AMT.

So, what is it? The Alternative Minimum Tax is a tentative minimum tax for the year over the regular tax for the year. In arriving at the tentative minimum tax, an individual begins with taxable income, modifies it with various adjustments and preferences, and then subtracts an exemption amount (which phases out at higher income levels). The result is alternative minimum taxable income (AMTI), which is subject to an AMT tax rate of 26% or 28%. The Alternative Minimum Tax (AMT) is the amount by which the tentative minimum tax exceeds the regular income tax.

In 2008, the AMT patch passed last year created an exemption of $46,200 for unmarried individuals; $69,950 for married couples filing jointly and surviving spouses; and $34,975 for marrieds filing separately. The Recovery Act of 2009 being considered no will "patch" AMT for another year (otherwise the AMT exemption amounts would decrease to much lower year 2000 levels). The Recovery Act makes no change in the AMT phaseout rules.

So for 2009, the AMT exemption amounts for individuals are: married individuals filing jointly and surviving spouses, $70,950, less 25% of alternative minimum taxable income (AMTI) exceeding $150,000 with zero exemption being reached when AMTI is $433,800; unmarried individuals, $46,700, less 25% of AMTI exceeding $112,500 (zero exemption when AMTI is $299,300); and married individuals filing separately, $35,475 less 25% of AMTI exceeding $75,000 (zero exemption when AMTI is $216,900).

Absent any permanent fix by Congress, the 2010 AMT exemption amounts for taxpayers will revert to the levels they were at for 2000. The one-year Recovery Act AMT “patch” has the effect of postponing, for yet another one year period, the exemption reductions that were scheduled to go into effect for 2009. Unless something substantial is done, 30,000,000 taxpayers and nearly every married couple making more than $75,000 will find themselves subject to the AMT in 2010. This sure is a far cry from the original intent of capturing 151 individuals who made over $200,000 in 1969 - the inflation-adjusted equivalent of $1,157,629 in 2008.

IRS Form 8824 worksheet

2009-02-12T11:33:00.000-07:00

If you've ever completed an exchange, you know how difficult it can be to complete the IRS 8824 Like Kind Exchange form. You may have searched high and low, tried unsuccessfully to use a couple worksheets and even read all the instructions in the IRS publication but still had difficulty figuring out the form and what goes where.

Well, we are here to help. Larry Jensen, 1031 Corporation's accounting professional with more than 25 years CPA partner experience and 18 years experience in the 1031 industry, has created an incredibly helpful 8824 worksheet that can assist you or your tax professional in preparing the Form 8824. You can find the form by clicking on that previous underlined link.

Of course if you have questions about the worksheet or a question about completing your like kind exchange reporting, feel free to give us a call at 888-367-1031. The phone call is free and the complimentary guidance he can provide might prove invaluable. Just remember to use 1031 Corporation Exchange Professionals next time....the instructions, worksheet and all your reporting requirements come neatly bound after your exchange is complete. Sure makes tax time a lot easier for you and your accounting professional!

Oh, one more thing....if you haven't already done so...tomorrow is not only Saturday, it's Valentine's Day....don't forget your honey. If you do forget, well...we can't help you out with that!

What does 1031 Corporation do for You?

2009-02-09T17:09:00.012-07:00

1031 Corporation facilitates 1031 exchanges by acting as a Qualified Intermediary. We work directly with real estate agents, attorneys, and tax professionals to provide consultation and guidance throughout the exchange process.

We prepare all documents that the IRS requires in completing an exchange. This includes the Exchange Agreement, Assignment of Contract and Notice of Assignment of Contract. Documents are prepared before the sale of the relinquished property and before the purchase of the replacement property. We provide a form to comply with the identification requirements that the IRS has defined and follow up to make sure the deadlines are met.

The exchange proceeds are banked in segregated accounts for the benefit of the exchange client at FirstBank. We have the ability to provide FDIC insurance up to $6.5 million by using separate accounts within the FirstBank charters. Our clients earn money market interest rates on the exchange proceeds.
Upon completion of the exchange, we provide our clients with a summary of the exchange. The summary includes copies of all documents and worksheets to assist with completing Form 8824. We have a CPA on staff to assist with any exchange related tax questions.

Choose 1031 Corporation. We have the knowledge and expertise to help clients defer capital gains tax and we provide exceptional customer service in the process!

1031 Receiver Recovering Lost Funds

2009-01-29T12:11:00.006-07:00

A couple of recent news reports from Las Vegas indicate that former clients of Southwest Exchange may receive a substantial portion of their 1031 exchange funds. Jeff German of the Las Vegas Sun reports that as much as $91.7 million of the $97.5 million previously thought lost has been recovered through settlements with insurance and banking partners of the firm.

This is a remarkable sum considering how it appeared almost two years ago. Reportedly, Southwest Exchange acquirer, Don McGhan, invested nearly half to purchase a breast implant manufacturer and spent millions more to support his lavish personal lifestyle.

Of course, the news is tempered. As much as 25% of the money could go to attorneys that assisted in obtaining the money. Also, those taxpayers did not receive any relief from the IRS on the capital gain tax that they were required to pay (since their exchange could not be completed within their original 180 day window). Still, the news is much more favorable than anticipated and much better than what the latest is on the 1031 Tax Group/Ed Okun scandal.

As we've highlighted before, the central theme to both these issues (as well as the recent Summit 1031 Exchange failure) is the borrowing of monies that were placed in trust for clients into closely held and irresponsible, or downright fraudulent, investments. Both McGhan and Okun were acquirers who found a way to loan themselves millions of client exchange funds. Summit was owned by a sponsor of Tenant In Common Interests that was loaning its client funds to the parent thereby allowing it to leverage real estate.

Recent provisions in California, and now pending in Colorado, will make this activity illegal. No longer will Qualified Intermediaries be allowed to "loan" funds to an affiliate. This is an important element in all these unfortunate scandals. By providing sensible legislation that protects the client and allows ethical Intermediary firms to do business cost effectively, California and Colorado are taking the lead in protecting consumers and business alike.

Development Rights are Like Kind to Fee Interest in Real Estate

2009-01-19T11:56:00.009-07:00

A newly released private letter ruling, PLR 200901020, reaffirms the IRS's view that development rights are a qualifying interest in real estate which can be like kind to a fee and other interests in real estate for purposes of an exchange under IRC Section 1031. PLR 200805012 previously affirmed the same. Accordingly, development rights can be exchanged for a fee interest in real estate and vice versa.

In order for development rights to be like kind to fee interest in real estate under IRC Section 1031, it is necessary for the state the rights are located in to view such rights as a real estate interest and for the rights to be in perpetuity (as distinguished from rights which are short-term or for a limited period of time). Perpetuity is important. Short-term rights may be an interest in real estate under state law but are not like kind to a fee interest in real estate under IRC Section1031. PLR 200901020 makes this clear.

A qualifying interest in real estate which can be like kind to a fee interest in real estate under IRC Section 1031 can include varying types of real estate interests. PLR 200901020 examines such other types of qualifying interests in real estate including –

• Leasehold interests of 30 years or more
• Easements
• Rights-of-ways
• Water rights
• Mineral rights
• Royalty rights
• Mineral leases

All of these types of real estate interests are considered like-kind to each other under IRC Section 1031 and may be exchanged for each other.

While the privage letter ruling can not be cited as precedent, and the IRS has the right to rule differently on subsequent occasions, it is a useful ruling for the purpose of demonstrating the IRS's view for similar situations. To receive a copy of the PLR, give us a call at 888-367-1031 or send us a message at 1031@1031cpas.com.

States Begin Regulating 1031 Exchanges

2009-01-08T15:35:00.000-07:00

In September, California signed a law that became effective on January 1, 2009 regarding companies facilitating 1031 exchanges. The new law holds Qualified Intermediaries (QI) to new requirements on property exchanges taking place in that state. California wasn't the first - Nevada and Idaho had previously approved legislation on the Qualified Intermediary industry. But, California passed legislation that has the intent to protect consumers while minimizing costly and burdensome regulation to 1031 exchange companies that was sure to be passed on to consumers.

The California 1031 law has become a model of consumer protection for other states, such as Colorado, Arizona and Washington, now considering similar legislation. Some of the requirements include requiring 1031 exchange facilitators to maintain bonding and insurance. They require Qualified Intermediary companies to notify clients of any change in the company's control (as in a sale or other controlling change in management). The California law also requires exchange companies to invest exchange client funds in a way that meets “prudent investor standards”. This last point is, perhaps, the most important measure included. No longer will exchange companies be able to loan funds to affiliates or owners to fund other "investments" (bank-owned Qualified Intermediaries are exempt when depositing funds in bank accounts with a parent bank).

This follows on the heels of a recent industry failures that have affected a significant number of 1031 exchange clients. A couple of high profile cases involve 1031 Tax Group and Southwest 1031 Exchange. LandAmerica Financial Corporation's recent bankruptcy filing (due to LandAmerica Exchange's lack of liquid investments) reiterated the point that additional guidance and regulation was necessary. Exchange intermediaries that are found to have not held the funds in a prudent manner - or otherwise fail to meet the "model law" requirements - could be subject to civil and criminal penalties. It also gives some recourse to injured exchange clients to file a claim against the required bonding, cash deposits, or letters of credit.

States that follow are using the California "model law" as a template for sound, practical legislation that doesn't create undue burden on exchange companies while, at the same time, providing protection to consumers. Each state, most likely, will have their own changes to the model. But the California 1031 law is a welcome trend for ethical, prudent exchange companies and the clients that employ them to facilitate their 1031 exchange tax strategy.

The Compounding Effect

2008-12-18T17:08:00.005-07:00

The following post is a portion of an article written by Ronald Raitz and appearing in the Sept/Oct edition of Commercial Investment Real Estate, The official magazine of the CCIM.

When Albert Einstein was asked, “What is the most powerful force in the universe?” His reply was, “Compound interest.” People in the financial services industry understand the effects of compounding: For example, whether an investor starts funding an individual retirement account at age 20 or 40 results in a dramatically different retirement balance at age 59½. The simplest of illustrations — the “double the penny” example — further highlights the sometimes surprising benefits of compounding: A penny doubled every day for a month is worth only two cents on day two, but on day 31 it is worth $64 million. Compounding plus time can indeed produce impressive investment growth.

Potentially the most powerful benefit of a 1031 exchange, the compounding effect also is the most overlooked. The key to getting the highest compounding result is keeping all of the money working for the investor — not only now but also into the future. In an exchange, the amount of tax that otherwise would be paid is reinvested. The projected future value of the compounded yield on the deferred tax becomes very substantial over time.

Many real estate investors also add leverage, which significantly amplifies the compounding effect. For example, in 1988, an investor who possessed strong management skills sold a $1 million property that had a $200,000 basis. Without utilizing an exchange, the gain on the sale would have been $800,000 with approximately $200,000 in taxes due. After paying the taxes, there would have been approximately $800,000 after-tax cash to reinvest.

But the investor exchanged the property and bought a $1 million income-producing replacement property that was 85 percent occupied. He put $200,000 down — exactly the same amount he otherwise would not have had without the exchange. Two years later, after making necessary management adjustments, he increased the property’s occupancy to 94 percent and sold it for $1.4 million. The $200,000 that he put down on the property (money that would have been used to pay the recognized gain in 1988) added to the $400,000 he just made equals $600,000.

The investor did another exchange and put the $600,000 in proceeds down on a $2 million income property that had been under-managed and was at 83 percent occupancy. Three years later, after achieving 92 percent occupancy in the property, the investor sold it for $2.6 million. With the $600,000 he had put down plus the $600,000 he made on the sale, after only five years the $200,000 tax that was deferred had grown to $1.2 million. Alternatively, without the exchange strategy the investor would have had no compounding benefit from his investments because the initial $200,000 would have been paid to cover the tax obligation.

Compounding combined with leverage can build wealth very quickly. Over a 12-year period, this investor did five exchanges and turned the money that he otherwise would not have had ($200,000) into $4.8 million.

Many investors have developed exchange strategies that have enabled them to go from a modest net worth to a very high net worth in a 10- to 20-year time frame. Clearly, these real-life examples are achieved more easily when real estate is in an up cycle, but this does not negate the potential benefits of employing a 1031 exchange strategy and holding real estate through the down cycles. Over time, the investors still come out far ahead of where they otherwise would have been if they had sold, paid the tax, and gone into an alternative investment.

Since there are no restrictions on the number of exchanges a taxpayer can complete, this strategy can be used during the taxpayer’s entire lifetime. Although some investors eventually sell property that is acquired via an exchange and pay the tax, it is very common to never cash out and carry investments into the taxpayer’s estate. At that point, the estate receives a stepped-up basis and the tax consequence disappears.

Section 721 Exchange into an UPREIT

2008-12-11T16:55:00.001-07:00

A REIT is a Real Estate Investment Trust whose stock is publically traded. An UPREIT is a real estate investment operating partnership in which the REIT is the general partner and real estate investors are limited partners. A Section 721 Exchange is the method by which real estate investors can transfer a real estate investment into an UPREIT tax-free (or tax-deferred). Internal Revenue Code Section 721 deals with contributions of real estate to an operating partnership in exchange for an interest in the partnership.

UPREITs use IRC §721 to acquire property from investors who want to exchange out of their real estate investment into an investment which is managed by professionals. Subsequently, at a point in time which is suitable for the investor, UPREIT partnership ownership units are exchanged for shares for publically traded stock in the REIT which are then sold on the securities market. The exchange of units of the UPREIT operating partnership for stock shares in the REIT is a taxable event. But this is done at the same time that the REIT stock shares are sold so at this time the investor is cashing out of all or part of his investment at capital gains rates. This arrangement provides professional management and liquidity to the real estate investor.

In order to contribute an investment property to an UPREIT, the property must meet the REIT's investment criteria which generally include a requirement for institutional-grade property. If the real estate investor's real estate is not institutional-grade, he can convert his real estate to institutional-grade real estate with a sale and exchange through IRC §1031 and replacement with an investment in a syndicated tenancy-in-common (TIC) investment. Then, the TIC investment can be contributed to the UPREIT in exchange for ownership units in the operating partnership of the UPREIT.

Insist your QI Hold Funds in a Segregated Exchange Account

2008-11-24T16:30:00.006-07:00

Qualified Intermediaries (“QIs”) use a variety of ways to bank and invest funds they hold in escrow or trust for their 1031 Exchange clients. QIs have a fiduciary responsibility to hold client funds in a safe and liquid manner. At the present time there is no industry standard for how funds should be held by QIs or how funds should be invested. The most common ways are as follows -

Segregated Accounts – Many QIs, like 1031 Corporation, open separate bank accounts for each 1031 file that they open. The accounts are usually money market accounts which are under FDIC protection and are opened in the name of the QI as escrow holder for the client and include the client’s federal identification number. The accounts usually bear interest which is reported on year end Form 1099 to the client.

Pooled Accounts – Many QIs pool all of their client 1031 funds into one bank account or investment. This is the common way large QIs manage money they hold for their clients. Many smaller QIs also use this method of holding 1031 funds.

Several recent scandals and failures in the 1031 Exchange industry have occurred with QIs using pooled accounts. In some instances, the pooled accounts were invested in other companies owned by the owner of the Qualified Intermediary company. In other instances, the pooled accounts were reinvested in securitized investments which have lost value in the current financial “melt down.”

Land America is apparently the latest casualty of the Pooled Account type of QI. They are reported to be holding $290 million of client exchange funds invested in securitized investments called Auction Rate Securities. The securities have become illiquid and Land America is attempting to meet client obligations from other operating accounts.

Our recommendation is to always insist that your QI hold your 1031 funds in a segregated account subject to FDIC protection.

Acquiring a Leasehold Interest as Replacement Property

2008-10-27T18:05:00.003-06:00

Section 1031 defines a leasehold interest with a term of 30 years or more as "like kind" to a fee interest in real estate. Renewal options under the lease are counted for purposes of determining if the lease has 30 years or more to run. Accordingly, a 30 year leasehold interest can be exchanged for a fee interest in real estate or vice versa, a fee interest in real estate can be exchanged for a 30 year leasehold interest.

Usually when a leasehold interest is sold or exchanged, the lease is an existing lease and there is significant value in the lease because of leasehold improvements which are present on the leasehold. When a leasehold interest is purchased as replacement property for an exchange, the value of the leasehold would normally be attributed to the value of the improvements which are on the leasehold. For income tax reporting, the taxpayer-lessee would continue paying rents after acquiring the leasehold including improvements. The purchase cost (or tax basis in an exchange) of the lease would be amortized over the period of the lease.

What if the lease is a newly created lease into which the taxpayer is entering? A taxpayer can transfer a fee interest for the receipt of a newly created 30 year lease. But in this case, it is important that the purchase price appear to be for the acquisition of a leasehold and related improvements and not merely as an advance payment of rent over the term of the lease. If the newly created lease was perceived to be an advance payment of rent 1031 exchange treatment has been denied under case law for the seller of the lease. But there have been exceptions under IRS Rulings.

If the IRS viewed the purchase of the lease to be an advance payment of rent to the lessor (and the rental agreements required rents of more than $250,000), the Internal Revenue Code would require that the lessor and lessee both treat the payment as rent income and rent expense over the period of the lease and this would not be viewed as a “purchase” by the lessor. Accordingly, the possible application of this provision is an issue that taxpayers entering into a purchase of a newly-created lease should be concerned about in drafting the terms of the purchase.

As one can see, it is important that the purchase appear to be in the nature of the purchase of real estate vs. an advance payment of rent. For more information on Leasehold Interests as Replacement Property, please visit our website or call 1031 Corporation Exchange Professionals at 888-367-1031.

Banking your 1031 exchange in uncertain markets

2008-10-21T15:44:00.006-06:00

There has been a great deal of turmoil in the financial markets and banking industry as several large and well known financial institutions have stumbled. With so much unease in the marketplace, and wondering who will be next in the news, I wanted to take a moment to talk about 1031 escrowed funds. During the exchange, the Qualified Intermediary you select has control of the funds. While they make accept your "input" into where the deposit is placed, it is ultimately up to them to determine where to place the money. It is important to know where the money is being banked. I wanted to spend a bit of time to discuss what is important and how 1031 Corporation - as a subsidiary of FirstBank deposits the funds.

Each account is segregated from all other exchange accounts. That means, the exchange we facilitate for you will have an account number that can be viewed 24/7 on FirstBank's website. You know exactly where the money is and when you awake to the sound of CNN talking about turmoil in the Asian stock exchange causing fears at 2 a.m., you can get online and view your account. Segregation is very important if there are issues with your Qualified Intermediary.

But what if there is an issue with the bank that your QI places the funds? It is worth checking to find out the stability, strength and customer service the bank provides - particularly in times of uncertainty. 1031 Corporation, as a subsidiary of FirstBank, deposits all client escrow accounts at FirstBank.

Here are some highlights of this respected institution.

Solid History FirstBank was founded in Lakewood, Colorado in 1963. It is employee owned with a long term focus. Over 100 officers and nearly 600 employees have more than 10 years of service with FirstBank.

Strong Financial Position FirstBank is viewed as "well capitalized" under regulatory guidelines. With assets totaling $9.2 billion and deposits of $7.8 billion, FirstBank continues to experience solid growth.

Record EarningsWhile others are reporting large losses, FistBank's net income was up to over $67 million thru the first half of 2008. This represents a 41% increase over the comparable period last year.

Unique FDIC Insurance Options While most banks can only insure up to $250,000 of your exchange funds, FirstBank's 26 separate bank charters make it possible to be insured for up to $6.5 million. No longer is there a need to "spread the risk" around by opening multiple accounts at various financial institutions.

No Subprime Involvement FirstBank does not originate, hold or purchase subprime mortgage loans or security. Continued focus on credit quality enables them to succeed in all ecomnomic cycles.

Open For Business With 126 branch location in three states (Colorado, Arizona and California) FirstBank serves more than 60,000 customers. Along with internet banking and 24 hour customer service, you can always speak to someone about your exchange account.

You should speak with your Qualified Intermediary and determine where your exchange funds are held. It is extremely important in these times of uncertainty!

Aircraft Exchanges

2008-10-14T11:44:00.001-06:00

If you have used an aircraft for trade or business purposes, a 1031 exchange of aircraft could save you thousands of dollars on the sale and replacement. Chances are you have depreciated the aircraft, perhaps even completely. The aircraft may be worth more today than when you purchased it. If you sell it without doing a 1031 Exchange, you may be taxed not only on any gain from the sale, but also on the depreciation recapture. Section 1031 of the Internal Revenue Code provides for the deferral of gain, provided certain requirements are met.

Things You Need to Know About 1031 Exchanges of Aircraft:

1. Both the old and new aircraft must be used for trade, business or investment. The old and new aircraft must both be used for trade, business or investment activities to qualify for a 1031 exchange. Personal use aircraft do not qualify.

2. The aircraft exchanged must be like kind. Aircraft are generally like kind to any other aircraft under the General Asset Classes or the Standard Industrial Classification (SIC) guidelines. In general, all aircraft and helicopters (except those used in commercial or contract carrying of passengers or freight) are treated as like kind. Commercial or charter aircraft and helicopters used for transporting passengers and cargo in scheduled air transportation, are similarly treated as like-kind to one another.

3. You have 45 days from the date of closing on the old aircraft to identify a list of aircraft from which you will purchase the new aircraft. From the date of closing, you have 180 days to close on one or more of the aircraft from your 45-day list.

4. You cannot have actual or constructive control of any of the proceeds received from the sale of the old aircraft. By law, all money is held by a Qualified Intermediary (also referred to as an Accommodator or Facilitator). You cannot have an associate or employee, your attorney, broker or CPA hold the proceeds, nor can you leave the proceeds in escrow until the new aircraft is purchased.

5. The titleholder on the old aircraft must be the same titleholder on the new aircraft. One aircraft can be exchanged for two or more replacement aircraft or vice versa.

6. The replacement aircraft must be equal or greater in value to the relinquished aircraft to avoid taxable boot, and all exchange cash must be reinvested in the replacement aircraft.

Aircraft owners can realize the benefits available through the 1031 Exchange process. A team of professional consultants is critical to ensure the necessary steps to complete your exchange properly are followed and comply with current Section 1031 tax law.

Selecting a knowledgeable and experienced Qualified Intermediary that is familiar with aircraft exchanges is of particular importance given the complexities of the exchange.

AMT Filers May Finally Get Some Needed Relief

2008-09-26T13:41:00.006-06:00

The IRS has announced that it will suspend the collection of back taxes from tax filers that have a large AMT liability due to the sale of Incentive Stock Options. Congress is FINALLY working to approve legislation that would help taxpayers who exercised ISOs during the "Dot com" boom and subsequent bust cycle of 2000 and 2001.

Let's take an example to show this point. As part of his incentive package, a mid-level manager of Yahoo receives an option to purchase 1,000 shares of the company at a strike price of $40 a share back in 1999. Quickly, the stock rises and goes over $100 a share by the beginning of 2000. The employee decides to purchase his options at $40. But - rather than immediately sell the stock - he decides to hold on to the 1,000 shares.

Since the stock options are an Incentive Stock Option, the employee has to recognize the unrealized gain on the difference between the option price and the market price at the time the shares were optioned. This means that this mid-level manager now has to pay tax on the $60,000 gain ($100,000 value versus his actual cost of $40,000) - even though he has not sold the stock. Why? The ISO purchase places him in the Alternative Minimum Tax category. Not only that, but Mr. Yahoo Manager isn't eligible for the 15% long-term capital gains rate. He now has to pay 26% of income (or 28% - depending on his income). To make matters worse, this poor fella hasn't even sold the stock yet. He decided to keep it. So, he has to find the cash from other savings to pay the tax. Sound like a disincentive to hold company stock as an investment?

Being a dedicated employee, he hangs on to his stock while watching it fall off its high in January 2000. He becomes anxious but knows the stock will come back. So, when his tax bill comes due on April of 2001 - and this Yahoo employee realizes his tax bill - he realizes he now has to sell the shares to pay the tax. But there's a problem. The stock has declined to $10 a share! This AMT tax filer has watched his stock get decimated and now doesn't even have enough net proceeds from the sale to pay his Alternative Minimum Tax!

Under the provisions of what Congress is attempting to pass, taxpayers that were caught in this unfortunate predicament will not get their AMT completely relieved. However, they will be able to speed up the use of the AMT credits that were generated as a result of these transactions. This, in effect, will provide a "relief" of sorts on subsequent tax bills. Thus, the IRS has decided to hold off on collecting these back taxes until the AMT credit can be recognized.

Shared Tax Burden? Spread The Wealth

2008-09-22T23:25:00.000-06:00

According to the most recent data from the IRS, the top 1% of filers are now bearing a record share of the income tax burden. In 2006, people with an adjusted gross income of more than $388,800 paid 39.9% of all federal income taxes while earning just 22% of the overall income. This is up from the 2005 data which showed the top "one-percenters" paying 39.4%.

The top 10% - which includes you if you earn more than $108,900 - pull in 47% of adjusted gross income but pay almost 71% of the total tax burden. The culprit? perhaps it is the Alternative Minimum Tax. In 2006, an estimated 3.8 million taxpayers were affected by the AMT and by 2007 that number is expected to grow to 23 million taxpayers.

It certainly doesn't appear that anyone has increased the number of tax breaks to the "wealthy". With record deficits and talk of increasing taxes, the only thing that appears to be increasing is their share of the overall tax burden.

On final interesting thing to note. The bottom 50% pay roughly 3% of the total income tax bill and the lowest income earners actually have a NEGATIVE income tax. Since their income is low enough to get the earned income credit, they qualify to get a refund on income AND payroll taxes.

The Rules of Boot in a 1031 Exchange

2008-09-15T10:03:00.001-06:00

"Boot" is a term that you won't find in the Internal Revenue Code. But, if you talk to your accounting professional, you might find it is something he or she uses when discussing the tax consequences of a Section 1031 tax-deferred exchange. I use this short comparison in some of the courses we teach to describe boot..."two cowboys meet out on the range and decide to trade horses. One horse is worth more than the other, so the cowboy with the lesser valued horse, throws in his six shooter "to boot" in the trading of horses.

In modern times, Boot is basically any money or the fair market value of any non-like kind or "other property" received in an exchange. When talking about money, in this context, it should be understood that this includes cash or any cash equivalents - including any debt or obligation the taxpayer assumed by the other party or liabilities to which the property exchanged by the taxpayer is subjected. "Other property" is property that is not like-kind, such as personal property received in an exchange of real property, property used for personal purposes, or "non-qualified property." "Other property" also includes such things as a promissory note received from a buyer (Seller Financing).

Any boot received is taxable (to the extent of exchange gain realized). This is fine when a selling taxpayer desires some cash - and is willing to pay some taxes. Otherwise, boot should be avoided to fully defer the gain in a 1031 Exchange. Boot can sometimes inadvertently appear at closing from a variety of factors. It is important for the exchanging party to understand what miscelaneous items can result in boot if taxable income is to be avoided.

The most common sources of boot include cash boot received during the exchange, debt reduction boot (from trading down in value) and sale proceeds being used to service costs at closing which are not closing expenses. We covered this recently in our article about Closing Costs and 1031 Exchange.

As a recap, the following are examples of some of the non-transaction costs which should be paid with cash brought to closing to avoid "boot":

rent prorata items

utility escrow charges

tenant security or damage deposits

loan acquisition costs

For complete information on the issue of boot, please look at the Rules of Boot section of our Exchange Manual found on the 1031 Corporation Exchange Professionals website.

Market Issues Threaten Investment Mortgage Options

2008-09-04T14:24:00.006-06:00

Headlines today are filled with larger banks and mortgage companies in residential real estate lending rushing to raise capital, set aside loan reserves and just simply try to stay in business. Possible government intervention, investor nervousness and changes at Freddie Mac and Fannie Mae in a tightening underwriting market are threatening to topple the mortgage providers and the organizations themselves. While the previous cause for the foreclosure market has been focused on higher loan-to-value loans and faulty or aggressive underwriting, traditional real estate investors are now beginning to feeling the pinch as well.

Earlier this year, Freddie Mac sent an advisory letter to mortgage lenders specifying new product standards. The advisory, now implemented, requires individual real estate investors that obtain loans sold to Freddie to finance no more than four investment properties (previously Freddie capped the number of properties at ten). With Freddie and Fannie responsible for nearly half of the twelve trillion dollar mortgage market in America, many other underwriters have followed suit on the four-property limitation.

You can understand what this drastic change has meant for investment financing options. With the new requirement, real estate investors who already have more than four properties are now unable to refinance their existing loans. This is a potentially big problem for the many investors that have used adjustable rate or fixed initial rate mortgages. As cash flow is squeezed, the change may lead to even greater foreclosure numbers. Those mortgage companies that are continuing to finance investors with greater than four investment mortgages are naturally increasing their costs for providing a mortgage. The rising costs are impacting investment portfolios and dampening tax incentive strategies across the country.

Previously, tax-savvy investors were able to take a mortgage against their primary residence and invest the money in investment property. Many times, these mortgages were larger than $417,000 – the current minimum jumbo mortgage loan amount. The idea was that the return on investment from the property would be higher than the after tax deduction cost of the mortgage interest. However, as investors are forced to pay higher rates on these mortgages, the strategy becomes less attractive.

While real estate investors are definitely more limited today than in the past, they are not completely out of options. It is possible to bypass the four-property rule by taking out a line of credit - rather than a mortgage - at a local bank. Many of these are prime-base products and can possibly be a lower cost option today. Another option is to work with a local or regional lender (1031 Corporation’s parent, FirstBank, is one such option) that holds investment and jumbo mortgages "on their books" as investments and locally underwrites each loan.

Overall, the industry outlook is that the mortgage market is probably going to get tighter. With a hard fought and tight presidential election looming as well as a struggling national economy and financial markets, investor sentiment is that it will take a while for the mortgage market to improve. For investors, that means establishing - or keeping in touch with - strong, trusted local lenders and advisers that are in touch with the rapidly changing mortgage markets.