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.

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

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

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

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

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

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

Subdivided land treated as capital gain

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

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

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

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

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

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

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

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

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

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

Is your Qualified Intermediary an FEA member?

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

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

· Legislative and regulatory updates regarding the 1031 industry

· Educational conferences

· Enhanced professional credibility

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

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

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

IRS Considering Relief for Taxpayers Caught Up With Bankrupt QIs

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

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

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

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

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

We’ll have to wait and see.

Money Crooks Beware

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

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

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

1031 exchange Real Estate radio show

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

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

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

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

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

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

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

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