1031 Exchanges:Yesterday, Today and Tomorrow

PRESENTED BYMargo McDonnell, CES®Certified Exchange Specialist®1031 CORP., President

Certified Exchange Specialist® Over 19 years in 1031 industry Involved in thousands of exchanges of

various size and complexity Serve on Board of Directors of FEA Spearheaded industry’s effort to launch

a 1031 certification and CE program Frequent presenter of 1031 courses

ABOUT ME

Margo McDonnellCertified Exchange Specialist®

Current 1031 trends Anticipated 1031 activity over next decade Misconceptions about capital gains and their

unexpected tax bills Quick overview of 1031 exchanges Using your 1031 knowledge to your advantage Selecting a Qualified Intermediary (QI) Q & A

TODAY’S OBJECTIVES

WHAT IS A 1031 EXCHANGE?

Section 1031 of Internal Revenue Code provides no gain or loss will be recognized on the exchange of property held for productive use in a trade or business or for investment.

Not for primary residences, flips or most vacation homes.

1031 EXCHANGE

1031 BENEFITS

Immediate Tax Avoidance Time Value of Deferral Avoid higher income tax

bracket and new 3.8% Medicare Tax

Preserve personal exemptions and stay out of Pease Tax

Greater Buying Power Increased ROI Less Management Consolidation

Fresh depreciation schedule

Create new cash flow Diversification of assets Relocation or expansion

of business Future conversion to

primary residence or vacation home

Possible elimination of gain Estate preservation with

stepped up basis

Tax Facts and RatesThe Power of a 1031 Exchange

FACTS Taxes are due on capital gain

Due on appreciation Short-term capital gains are taxed as ordinary income Maximum long-term capital gain tax rate for individuals

who held property more than 12 months

TAX FACTS AND RATES

CAPITAL GAINS* 20% for taxpayers with ordinary incomes exceeding

$400,000 ($450,000 for married taxpayers) 15% for incomes more than approx. $36,000 ($71,000

for married taxpayers) and less than $400,000 ($450,000 for married taxpayers)

0% for incomes less than approx. $36,000 ($71,000 for married taxpayers)

*Consult tax advisor to determine actual tax rates.

TAX FACTS AND RATES

NEW 3.8% UNEARNED INCOME MEDICARE CONTRIBUTION

New tax goes went into effect 1/1/2013; part of Affordable Care Act (Obama Care)

Applies to unearned income (rental income, capital gains, dividends, annuities)

Affects individuals with a gross annual income exceeding $200,000 and married couples exceeding $250,000

TAX FACTS AND RATES

DEPRECIATION MUST BE RECAPTURED Generally taxed at 25% regardless of tax bracket.

TAX FACTS AND RATES

Each state has different rules regarding exchanges. The Commonwealth of Pennsylvania generally does

NOT recognize a 1031 exchange. PA Gov. Corbett called for a PA version of section 1031 in 2013

budget address. Many states simply follow the Federal Code or have

adopted similar regulations Some states have special requirements such as the

replacement property must be located within the state Some states have no income tax

STATE INCOME TAX

ASSUMPTIONS Individual owned property for many years Annual Salary of $125,000 and $50,000 of add’l income

(interest, dividends, rental income) Paid $250,000 Made no capital improvements Depreciated down to $100,000 Selling for $500,000

1031 vs. SALE

ASSUMPTIONS Capital gains of $250,000 With $175,000 of income, falls into 20% capital gains tax

rate Subject to 3.8% Medicare Tax Subject to highest income tax bracket of 39.6% Deprecation recapture of $150,000 @ 25% Would likely face a phase out of Personal Exemptions and

be subject to the Pease Tax

1031 vs. SALE

1031 vs. SALE

Taxable Sale 1031 Exchange

Sale Price $500,000 $500,000Capital Gains $37,500* 03.8% Medicare Tax $9,500Depreciation Recapture $37,500 0Federal Tax Liability $84,500 0Net Proceeds $415,500 $500,000Buying Power (30% down) $1,385,000 $1,666,667

*Calculated at 15%. Actual amount could be higher.

Immediately avoids $84,500 federal tax liability Able to invest all proceeds Leverage extra $84,500 Acquire new property worth $281,667 MORE than

you could if you paid the tax Collect higher rents from Day 1 More depreciation available Enjoy greater appreciation long-term

1031 vs. SALE

1031 Trends and Projections

MULTIPLE REPLACEMENT PROPERTIES Investors are taking advantage of current CRE

market opportunities and historically low interest rates to leverage into several replacement properties

CURRENT TRENDS

COMMERCIAL PROPERTIES Commercial properties selling for over $2.5M are

being exchanged as a much faster rate than in many years

CURRENT TRENDS

SHORT EXCHANGE PERIODS Exchangers are lining up their replacement property

and are ready to acquire it immediately after conveying the old property to a buyer Average exchange is now completed within 43 days

(down from average of 93 days just two years ago)

CURRENT TRENDS

REVERSE EXCHANGES More and more investors are finding the ideal

replacement property before lining up a buyer Must be structured several weeks in advance

Preserves clients ability to defer gain when property eventually sells

QI thru an EAT acquires either the old or the new property and “parks” title for up to 180 days

CURRENT TRENDS

OIL & GAS ROYALTIES Investors are acquiring oil and gas royalties as

replacement property Current oil prices make this investment more attractive Provides good returns with no hands on

CURRENT TRENDS

NO MORTGAGES ON REPLACEMENT PROPERTY Higher than usual number of Exchangers choosing

to put in additional equity or trade down in property value rather than put a mortgage on the new property Trade downs are taxed on the amount of the trade down

CURRENT TRENDS

INCREASE IN PERSONAL PROPERTY 1031s Without the 100% bonus depreciation we had for 18

months, we are seeing a big increase in exchanges of other assets held for investment Companies are purchasing capital assets using 1031 New purchases to increase efficiency Examples: airplanes, equipment (cranes, lifts), printing

presses, railroad cars

CURRENT TRENDS

EXCHANGING PROPERTY WITH NO GAIN Investors are exchanging properties with little or no

gain, maybe even selling at a loss, to avoid costly depreciation recapture

CURRENT TRENDS

FEA member surveys estimated exchange activity dropped approximately 80% from 2005 to 2010

Activity is definitely picking up nationwide Using data from FEA member surveys, the Joint

Committee on Taxation (JCT) estimates 1031 deferrals of $2.5B in next 5 years and $18.2B in next 10 years Significant increase is expected as the real estate

market continues its rebound

1031 ACTIVITY: YESTERDAY , TODAY & TOMORROW

Beginning in September 2012, there has been quite a bit of noise regarding section 1031

1031 has been identified as one of the top tax expenditures and a potential target in the tax reform battle

JTC has rescores section 1031. Now $42 – 47B! Entire real estate industry, including FEA, working

together to preserve top real estate expenditures

1031 ACTIVITY: YESTERDAY , TODAY & TOMORROW

Unlocking the Power of ExchangesOverview of 1031 Exchanges

REAL PROPERTY (REAL ESTATE) EXCHANGES Refers to the nature or character of property

Specific type of property not essential

Very broad and liberal definition Must be used for business use or investment Located within 50 states, D.C. or selected territories Can buy or sell multiple properties

LIKE-KIND DEFINED

Examples of like-kind real estate Duplex, apartment building, rental house Office building, warehouse, shopping center Land Tenant-in-Common (TIC) interest Conservation easements, utility easements Leasehold interest of 30 years (including options) Cell tower easements Oil and Gas Royalties; Mineral Interests

LIKE-KIND EXAMPLES

Examples of non like-kind real estate Personal residence and most vacation homes Partnership interests Mortgages and notes Cash Non real estate assets Dealer property and inventory Stocks

LIKE-KIND EXAMPLES

PERSONAL PROPERTY EXCHANGESAny asset held for business use or investment can be exchanged.

Definition of like-kind is much more restrictive for personal property

Assets must be within the same asset classification code or the same kind of asset Examples of personal property assets: Equipment, aircraft,

franchise agreements, livestock, collectibles, antiques, distribution routes, furniture and fixtures, etc.

LIKE-KIND DEFINED

Holding period not defined in regulations One year is good rule of thumb

Taxpayer Relief Act of 1997 defined “long-term” investments as held longer than one year

Two year safe harbor in Rev. Proc. 2008-16

Intent of taxpayer is key Look at the picture you have painted

Personal use must be minimal (§280A)Consult tax and/or legal advisor to determine best strategy.

QUALIFIED USE

QI acts as “middleman” to facilitate an exchange Exchanger cannot have access to exchange

proceeds Time Periods:

Replacement Property* must be identified within 45-Day Identification Period

Replacement Property must be acquired within 180-Day Exchange Period

*Title must be held in the same name as relinquished property

ADDITIONAL REQUIREMENTS

Exchange must be set up (and 1031 docs signed) before title passed to buyer

To maximize deferral, replacement property must have equal or greater VALUE and EQUITY. Value takes closing costs into account. A trade down in property value or equity is taxed just on

the trade down.

ADDITIONAL REQUIREMENTS

Your QI is your partner throughout the exchange Choose company who is responsive, experienced and has

good knowledge of local real estate and title practices Make sure funds are held in segregated FDIC insured

exchange account Look for fidelity bond coverage Seek Certified Exchange Specialist® (CES®) Look for member of Federation of Exchange

Accommodators (FEA)

CHOOSING YOUR QI

1031 exchanges are a great wealth accumulation vehicle. Build real estate portfolio with pre-tax dollars Great way to accomplish long-term objectives Excellent estate planning tool Creates many opportunities to grow your business

The more you know, the more you will benefit. 1031 CORP. can help!

SUMMARY

QUESTIONS & ANSWERS

Margo McDonnell, CES®Certified Exchange Specialist®

1.800.828.1031 Mobile: 610.680.6896margo@1031CORP.com www.1031CORP.com

www.facebook.com/1031CORP

www.twitter.com/1031CORP

www.linkedin.com/in/MargoMcDonnellwww.facebook.com/MargoMcDonnell