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

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

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

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

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

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

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

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

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.