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

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

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

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

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

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

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

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%?)

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?

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

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

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

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

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

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

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

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

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

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

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

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

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

"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

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

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

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!