1031 exchanges - gorenberg

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Workshop presentation on 1031 Exc

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  • 1. Section 1031 Exchanges in the 21st Century Regulatory Changes and Case Law ImpactPresented by:Citibank Financial Intermediaries GroupDavid M. Gorenberg, EsquireCertified Exchange SpecialistPresented:
  • 2. Please Turn Cell Phones and Pagers to Silent or Off.Thank you.2 Section 1031 Exchanges in the 21st Century
  • 3. Important Disclosures This presentation does not constitute legal or tax advice. Citibank and its employees do not provide tax or legal advice and are not responsible for advising customers on the laws or regulations pertaining to any 1031 exchange transaction. Citibank and its employees will not make any representations regarding the tax consequences of any 1031 exchange transaction. It is the customers responsibility to seek tax and legal advisors in connection with any 1031 exchange transaction. IRS Circular 230 Disclosure: To the extent that this material or any attachment concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Citibank, N.A., Member FDIC. Citibank and Arc Design is a registered trademark of Citigroup Inc.3 Section 1031 Exchanges in the 21st Century
  • 4. Agenda 1031 Exchanges Case Law and Regulatory Update The Good What is Like-Kind Property Real Property Personal Property Regulatory Review The Bad QI Fraud QI Bankruptcy The Ugly Choosing a QI Ethical Considerations4 Section 1031 Exchanges in the 21st Century
  • 5. The Good5
  • 6. Overview of the Statute and Regulations6 Section 1031 Exchanges in the 21st Century
  • 7. Why Exchange? - smaller property7 Section 1031 Exchanges in the 21st Century
  • 8. Why Exchange? - larger property8 Section 1031 Exchanges in the 21st Century
  • 9. Taxation 101 Generally, all income is taxable, unless specifically exempted by law. Even illegal income, such as stolen or embezzled funds, must be reported on Line 21 of Form 1040. Source: Department of Treasury, Internal Revenue Service, Publication 525.9 Section 1031 Exchanges in the 21st Century
  • 10. IRC Section 1031 No gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like kind which is to be held for productive use in a trade or business or for investment. 1031 provides for deferral of taxes, not complete elimination.10 Section 1031 Exchanges in the 21st Century
  • 11. Like-kind Property Foreign real property is not like-kind to U.S. real property.11 Section 1031 Exchanges in the 21st Century
  • 12. Business or Investment Use There are five tax classes of property: 1) property used in taxpayers trade or business; 2) property held primarily for sale to customers; 3) property which is used as your principal residence; 4) property held for investment; and 5) property used as a vacation home Section 1031 applies to the first and fourth categories (and perhaps the fifth)12 Section 1031 Exchanges in the 21st Century
  • 13. Less than Fee Interests in Real Property that Qualify forExchanges Leases with at least 30 years remaining, including renewal options Vendees interest in a land sale contract; not the vendors interest Undivided interest in one property for an undivided or 100% interest in another property Remainder interest in real property Timber rights, riparian rights, mineral rights As determined by state law13 Section 1031 Exchanges in the 21st Century
  • 14. Common Less-Than-Fee Exchanges Timber Rights Mineral Rights Oil Rights Riparian Rights Tenants in Common Transferrable Development Rights Others14 Section 1031 Exchanges in the 21st Century
  • 15. Like Kind Personal Property Under the regulations, personal depreciable property used in business or held for investment is exchanged with like-kind property if exchanged either for property of a like kind or like class Properties are of like class if they are in the same: General Asset Class Rev. Proc. 87-56, or Product Class SIC Manual (4 digits) Personal property is like kind if identical15 Section 1031 Exchanges in the 21st Century
  • 16. Common Personal Property Exchanges Aircraft Artwork Collectibles Equipment Fleet Vehicles Intellectual Property Licenses, Franchises, Patents, Trademarks Livestock Others16 Section 1031 Exchanges in the 21st Century
  • 17. Common Personal Property Exchanges - Franchises Often Sold With Real Estate Franchises may be exchanged for other franchises Nature of the franchise must also be like-kind Lexus is not like-kind to Ramada Lexus is like-kind to Ford17 Section 1031 Exchanges in the 21st Century
  • 18. Common Multi-Asset Exchanges - Personal Property Often Sold With Real Estate Personal Property for Personal Property Real Property for Real Property18 Section 1031 Exchanges in the 21st Century
  • 19. 1031 in a Nutshell To obtain complete deferral of capital gains taxes, the taxpayer should: Purchase replacement property that is equal or greater in value to the relinquished property Have equal or greater equity in the replacement property Have equal or greater debt on the replacement property Receive nothing except like-kind property Avoid constructive receipt of exchange proceeds Use a qualified intermediary19 Section 1031 Exchanges in the 21st Century
  • 20. Time Restrictions 1984 Congress amends Section 1031 - 45 day identification period - 180 day exchange period runs concurrent - Or due date of tax return, whichever is earlier - Calendar days, not business days - No extensions Identification Period Exchange Period Day 0 Day 45 Day 180 Section 1031 Exchanges in the 21st Century20
  • 21. Identification Requirements Signed, and in writing Delivered QI or seller of replacement property Unambiguously described Legal description Street address Distinguishable name (e.g., Mayfair Apartment Building) May be revoked or amended, with same formality as above21 Section 1031 Exchanges in the 21st Century
  • 22. Identification Rules 3 Property Rule up to 3 properties, without regard to FMV; or 200% Rule any number of properties, so long as aggregate FMV does not exceed 200% of FMV of relinquished properties; but 95% Exception if first two rules violated, must acquire 95% of FMV of all identified properties22 Section 1031 Exchanges in the 21st Century
  • 23. Regulations: 1.1031- safe harbors 1.1031(k)-1(g) (2) Security or Guarantee Arrangements Determination of whether the taxpayer is in actual or constructive receipt of the exchange funds is made without regard to existence of mortgage, standby letter of credit, third party guar

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