Acquiring a Leasehold Interest as Replacement Property

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

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

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.