1031 Corporation Exchange Professionals Celebrates 20 Years

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.

Failed 1031 Exchange Gains When QI is Bankrupt or in Receivership

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.

One of the Most Powerful Tax Deferral Strategies Remaining

"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.

Buy Real Estate With Your IRA Or 401(k)

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.

1031 Corporation is Going Green!

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.

IRS Considering Relief for Taxpayers Caught Up With Bankrupt QIs

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.

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

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?

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

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.

IRS Gives OK to Non-Safe-Harbor Reverse Exchange

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.

Like Kind vehicles under Section 1031

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.

IRS Says Okay for EAT to hold Partnership Interest

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

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!

Alternative Minimum Tax (AMT) Patch in 2009 Recovery Act

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

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?

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

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.

AMT Filers May Finally Get Some Needed Relief

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

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.

IRS Guidance and 1031 exchanges

Many times in this blog, we refer to different Internal Revenue Service publications that provide guidance on issues involving real estate and 1031 exchanges. The IRS provides a number of publications and written correspondence that provide guidance. These documents are essentially a translation of tax laws that Congress enacts. we often refer to these when consulting clients on 1031 exchanges. I've listed the top 5IRS publications we use - starting at the highest and moving down according to their "rank".

Regulation
Regulations are the highest form of guidance to new legislation. They are are issued by the IRS and Treasury to also address issues that arise with respect to existing Internal Revenue Code sections. Regulations interpret and give directions on complying with the law.

Revenue Ruling
A Revenue Ruling generally states an IRS position. It is an official interpretation of the Regulation Code or statute. It is, basically, how the IRS applies the law.

Revenue Procedure
A Revenue Procedure is an official statement affecting the duties or rights of taxpayers under the Code, statute, and/or regulations. A Revenue Procedure might provide return filing or other instructions concerning an IRS position. It may also provide a "safe harbor" umbrella with which a taxpayer can structure and complete a transaction.

Private Letter Ruling
A Private Letter Ruling, or PLR, is a statement written to a specific taxpayer that interprets/applies tax law to that taxpayer's specific set of facts. It is issued to establish the tax consequences of a particular transaction before the transaction is completed or before the filing of a taxpayer's return. To receive a PLR, a taxpayer must request a written response from the IRS. It is binding to that taxpayer's circumstances only if the taxpayer is fully and accurately describing the proposed transaction in the request and carries it out as described. It should be noted that while a PLR may provide guidance, it can not be relied on as precedent by other taxpayers or IRS personnel.

Technical Advice Memorandum
A Technical Advice Memorandum, or TAM, is guidance furnished by the Office of Chief Counsel in response to technical or procedural questions that develop during a proceeding. A request for a TAM generally comes from an exam of a taxpayer's return or a taxpayer's claim for a refund or credit. TAMs are issued on closed transactions and interpret the application of tax laws, treaties, regulations, Revenue Rulings or other precedents. The advice is deemed a final position of the IRS, but only with respect to the specific issue in the specific case in which the advice is issued.

There are, of course, many other additional publications and pronouncements that provide taxpayer guidance. Robert F. Reilly, CPA, CFA - in a two part article for the AICPA's Practicing CPA, detailed a number of these various publications. Part I covers publications presenting official IRS positions, IRS instructional publications, and announcements, notices, and news releases. While Part II covers advance rulings and determinations as well as new types of IRS pronouncements.

When seeking tax and litigation guidance, tax professionals (CPAs and attorneys) first consider statutory authority. When that is insufficient, they look to these official publications of the IRS as well as judicial precedent (Tax Court rulings)regarding the specific matter.

With respect to 1031 exchanges, your Qualified Intermediary should be monitoring various tax law updates and publications to have the most current weapons to provide you in your arsenal. 1031 Corporation Exchange Professionals has a full time CPA on staff and retains expert tax and real estate attorneys that constantly monitor and update like-kind exchange strategy. While we do not provide tax or legal advice, we can consult with you and your tax professionals and provide guidance as to the proper IRS publications and court case precedent in reviewing your individual exchange facts and circumstances. Further, this consultation is provided as a part of our services and no fee is paid unless an exchange is initiated.