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Deferring Capital Gains Using § 1031 Tax-Deferred Exchanges and Other Strategies

Presented by: Sara A. SmithDirector – Exchange ServicesATG Trust Company

Christopher J. PrincisSenior Vice PresidentBrook-Hollow Financial, LLC

Deferring Capital Gains Using § 1031 Tax-Deferred Exchanges and Other StrategiesDecember 18, 2013


Wealth Management Tools

Using § 1031 Tax-Deferred “Starker” Exchanges and Structured Sales

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Agenda

What is a § 1031 exchange?

Key Concepts

Like-Kind Property

Holding Requirement

Same Taxpayer Requirement

Delayed Exchanges

45-Day Rule

180-Day Rule


Agenda

Constructive Receipt – Qualified Intermediary

Related Parties

Exchange Steps

Updates and New Rulings

Using Structured Sales as a Tool for Failed Exchanges

Summary and Questions

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What is a Tax-Deferred Exchange?

No Exchange:– Taxpayer sells investment property.

– Taxpayer pays tax on any gain.

– Remaining funds are used to buy new investment property.



With a Tax-Deferred Exchange:– Taxpayer transfers “like-kind” investment property.

– Tax on gain is deferred.

– More funds are available to acquire new “like-kind” investment property.

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A Tax Planning Tool for All Income Levels– Courts have said that there is nothing sinister in

arranging one’s affairs to keep taxes as low as possible.

– Everybody does so, rich or poor, and all do right, for nobody owes any public duty to pay more than the law demands.



Seven Key Concepts– Exchange, not Sale.

– What is like-kind property?

– Was the property held for a proper purpose?

– 45 days to properly identify Replacement Property.

– 180 days to complete the Exchange.

– Same Taxpayer

– Form over substance? i.e., no constructive/actual receipt – Qualified Intermediary

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Remember:– You do not have to be a tax expert to guide your client

through a tax-deferred exchange.

– Any sale of property that is not your client’s primary residence is a possible exchange.


Evolution of Tax-Deferred Exchanges

Simultaneous Two-Party Exchanges:– “A” has property “B” wants.

– “B” has property “A” wants.

– Properties are like-kind and of comparable value. How likely is this?

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Evolution of Tax-Deferred Exchanges

3-Party Exchanges:– “A” has property “B” wants.

– “B” has no property “A” wants.

– “C” has property “A” wants.

– “B” buys from “C”; transfers to “A.”

– “A” transfers to “B.”


Benefits of an Exchange

Asset value is maintained.

Full equity is reinvested.

Taxes are deferred.

Recapture gain is postponed.

Management burdens are reduced .

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Effect of Not Doing an Exchange

Payment of tax.

Less equity to reinvest.


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 either for productive use in a trade or business or for investment.

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Like-Kind Property

§ 1031 makes no distinction in qualities of real estate.– Farmland is like-kind to Willis Tower.

– A three-flat apartment building is like-kind to a single family home.


Like-Kind Property

All Real Estate in the United States is like-kind.

Interests in a Partnership are not like-kind, nor are stocks, bonds, or inventory.

Beneficial Interest in an Illinois land trust can be like-kind.

Leasehold Interests > 30 years are like-kind to a Fee Interest.

Perpetual Water Rights are like-kind to a Fee Interest. PLR 200404044

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Like-Kind Property

Foreign Real Estate– Not like-kind to U.S. real estate.

An apartment in New York City is not like-kind to an apartment in Paris, France.

– What is like-kind to U.S. real estate? Property in Puerto Rico is not like-kind to property in U.S., but

property in Virgin Islands is like-kind.


Like-Kind Property

Growing Timber or Crops– Exchange of all timber cut and removed from 60 acres

during two-year period for Fee Interest in three parcels of real estate.

– After two years, Taxpayer still has land, less timber, plus three parcels.

– Sale of timber for land was not like-kind. TAM9525002

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Like-Kind Property

Co-Op to Condo: Like-Kind PropertyLTR200137032

– Taxpayer owns stock in corporation and holds long-term lease (30+ years) for unit.

– Taxpayer wants to exchange Stock and Leasehold Interest for Fee Interest in the same underlying property.


Like-Kind Property

Co-Op to Condo: Like-Kind PropertyLTR200137032

– New York law is unclear whether co-op interest is realty or personalty.

– Taxpayer now owns directly what he previously owned indirectly (as shareholder). See also, PLR 200631012 – TIC Interest

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Like-Kind Property

TAM 200424001– Taxpayer was a Railroad.

– Taxpayer exchanged two types of assets: intact rail line segments, including affixed rails and ties; and

rails and ties that were not affixed to the rail line.


Like-Kind Property

TAM 200424001– State law determines nature of property:

Loose rails and ties were not of a like-kind to affixed rails and ties, even though the property is otherwise identical.

State law controls in determining whether the subject property is realty or personalty for federal income tax purposes.

Law of the state where the property is located controls, even if this would result in the identical property being treated as not of a like-kind merely because it was located in a different state.

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Holding Requirement

Was the Property Held for a Proper Purpose?– Productive use in a trade or business or for investment.

– Stock in trade and inventory are excluded.

– Taxpayer’s residence is excluded.

– Look to Taxpayer’s intended use at the time of the exchange.

– Mixed-use property can qualify.

– “Investment” does not always mean “income producing.”


Holding Requirement

How long must the Taxpayer hold the property?– IRS says two years.

– One year should be okay. Applies to both Relinquished and Replacement Property.

– Was property acquired just to exchange?

– Was property disposed of immediately after the exchange?

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Holding Requirement

Intent– What was the Taxpayer’s state of mind?

Why was property held:– Sale?

– Investment?

– Flip?


Holding Requirement

Intent– Factors to Consider; No IRS Safe Harbor

Why was the property acquired?

Why was it held?

Was there a pre-arranged plan to sell?

How many/frequent sales?

Taxpayer’s business/occupation?

What was the extent of efforts to sell property, e.g., listed with a broker?

Purpose of property at time of sale?

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Holding Requirement

Intent– Paullus v. Commissioner

T.C. Memo 1996-419 September 1996

Corporation owned golf course and vacant land.– Land zoned residential.

– Sales office with 100 “Buyers.”

– Corporation sold land to concentrate on golf course business.

IRS: Land held for sale.

Taxpayer: Sale of land was an ancillary business.

Corporation held property for four years with few sales.

Judge found this “troubling” but held for Taxpayer.


Holding Requirement

Intent– Baker v. Commissioner

Tax Ct. Dkt. No. 20372-95 April 1997

Developer:– Subdivided land into 48 lots.

– Built 14 homes; transferred remaining lots for $600,000 exchange credit.

– Reported lots as “work in progress” on tax returns and business records.

Holding: Lots were inventory, not property “held for Investment.”

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Title to Replacement Property

Same Taxpayer Requirement– General Rule:

The Taxpayer who receives Replacement Property must be the same Taxpayer who relinquished property.


Delayed Exchanges

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Delayed Exchanges

Starker v. United States 602 F.2d 1341 (9th Cir. 1979)

– Thurman James (T.J.) Starker, Professor of Forestry – Oregon State University Two-year exchange period;

6% growth factor;

Continuity of ownership?

Proper purpose?

Collateral estoppel;

Spurred IRS to create time limits.


Delayed Exchanges

Time Limit to Identify– Identification Rules

Prior to midnight on the 45th day after the Relinquished Property closing date, Taxpayer must unambiguously identify the Replacement Property:

– in writing, signed by the Taxpayer; and

– delivered to at least one party to the exchange who is not a disqualified person.

This deadline cannot be extended for any reason.

No identification may be made after 45 days, even if the desired transaction fails.

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Delayed Exchanges

Time Limit to Identify– Identification Rules

Start counting on the day after the closing date.

Each Taxpayer should sign the Identification.

Identification may be revoked during 45 days and replaced with other property.


Delayed Exchanges

Federal Disaster Area– This is the only exception.

“Affected Taxpayers”:– Individuals and businesses located in the disaster area;

– Those whose tax records are located in the disaster area;

– Relief workers, regardless of their state of residence or the location of their tax records. IR 2004-108

Notice 2005-3

Rev. Proc. 2007-56 gives guidance

www.irs.gov/uac/Tax-Relief-in-Disaster-Situations

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Identification Rules

Three Property Rule– This is the most commonly used identification rule.

– Taxpayer may identify up to three replacement properties without regard to market value.



200% Rule– Taxpayer may identify more than three properties as

Replacement Property if: at the end of the Identification Period, the Aggregate Fair

Market Value of the properties does not exceed 200% of the fair market value of the Relinquished Property.

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95% Rule– Taxpayer may identify more than three properties as

Replacement Property if: prior to the end of the exchange period, the Taxpayer acquires

identified Replacement Property with fair market value equal to at least 95% of the Aggregate Fair Market Value of all the Identified Replacement Properties.



Dobrich v. Commissioner T.C. Memo 1997-477 October 20, 1997

– Taxpayers are sophisticated real estate investors.

– Relinquished Property closed August 22, 1989.

– 45 days expired October 6, 1989.

– Exchange Period ended February 18, 1990.

– Exchange Agreement outlined time limits.

– Taxpayers timely identified 10 properties.

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– Offers were made and earnest money deposited, but none were acquired.

– January 1990 Taxpayers tried to identify five additional properties.

Qualified Intermediary advised Taxpayer of expired time limits.

Taxpayers backdated ID letters and contracts for two properties.




– IRS disallowed both exchanges.

– Taxpayers never expressed interest in Replacement Properties during 45 days.

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– Taxpayers claimed to have orally identified properties to each other.

– Regulations did not require written identification until June 10, 1991, but … identification between Exchangors would render identification

requirements meaningless.



Dobrich v. CommissionerT.C. Memo 1997-477 October 20, 1997aff’d T.C. Memo 1999-28804 August 25, 1999

– Installment treatment denied;

– Assessed tax of $2,222,612;

– Assessed penalties of $1,666,959;

– Guilty of filing false documents with IRS;

– Previously pled guilty to two criminal counts.

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Deadline for Completion

Closing on the Replacement Property mustTake Place by the earlier of :– the day that is 180 days after the closing on the

Relinquished Property; or

– the due date of the Taxpayer’s tax return for the tax year in which the Relinquished Property was transferred.

This deadline cannot be extended for anyreason except Federal Disaster Area exceptions issued by the IRS.



180 Days is not 6 Months.– If the Relinquished Property is transferred after October

17, the tax return will be due before the expiration of 180 days.

– Extending the filing date will give the Taxpayer the full benefit of the 180-day exchange period.

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Knight v. Commissioner T.C. Memo 1998-107 March 16, 1998

– Taxpayers identified three replacement properties.

– Seller of second property cancelled sale on Day 179.

– Third property acquired on Day 309.




– Taxpayers argued that “good faith effort” was sufficient, since the circumstances were beyond their control (IRS should be “citizen friendly”).

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– Analogized to § 1033 Involuntary conversion and two-year time limit.

– Tax law is contained in statutes, regulations, and judicial decisions, not in informal IRS publications.

– Internal Revenue Code controls, not equitable principles.



Receivership of QI Does Not Extend Exchange Period LTR200211016 December 10, 2001

– Taxpayer argued that the Exchange Deadline was suspended. Filing deadlines ... necessarily operate harshly and arbitrarily

with respect to those who fall just on the other side of them, but if the concept of a filing deadline is to have any content, the deadline must be enforced.

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Death of Taxpayer

Effect of Taxpayer’s Death During Exchange– Prior to Husband’s death:

Two Relinquished Properties transferred;

One Replacement Property identified.


Death of Taxpayer

Effect of Taxpayer’s Death During Exchange– After Husband’s death:

One Replacement Property identified;

Two Replacement Properties acquired;

IRS approved exchange.– Therefore, Husband’s share of proceeds is not income in respect

of a decedent. LTR 9829025 April 17, 1998

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Receipt of Proceeds

Constructive Receipt– Gain or Loss may be recognized, if:

Taxpayer actually or constructively receives money or other property before the Taxpayer actually receives like-kind property, even if the Taxpayer ultimately receives the like-kind property.


Safe Harbor

Use of Safe Harbor will result in determination that Taxpayer is not in actual or constructive receipt of money or other property.

More than one Safe Harbor may be used.

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Safe Harbor

Terms of each Safe Harbor must be satisfied independently.

Exchange may qualify without using Safe Harbor.


Safe Harbor

Secured Obligation– Obligation of the Taxpayer’s transferee to transfer the

Replacement Property to the Taxpayer may be secured by: mortgage;

letter of credit; or

third party guarantee.

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Safe Harbor

Secured Obligation– “A” has Property “B” wants;

“B” has no property “A” wants.

– “A” transfers to “B,” subject to mortgage.

– “B” buys from “C,” transfers to “A.”

– “A” releases mortgage.


Safe Harbor

Qualified Escrow or Trust– Obligation of the Taxpayer’s transferee to transfer the

Replacement Property to the Taxpayer may be secured by cash or cash equivalent, held in a qualified escrow.

– Taxpayer can perfect a Security Interest.

– Can be used with the Qualified Intermediary Safe Harbor, as protection against a dishonest QI.

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Safe Harbor

Qualified Intermediary– The Most Commonly Used Safe Harbor

Cannot be the Taxpayer or a disqualified person.

Under a written agreement with the Taxpayer, the QI acquires the Relinquished Property and transfers it to the Buyer.

QI holds the exchange proceeds to prevent actual or constructive receipt by the Taxpayer.

QI acquires the Replacement Property and transfers it to the Taxpayer.


Safe Harbor

Interest on Proceeds– Taxpayer can receive interest or other growth factor on

the proceeds.

– This is a taxable event.

– 1099 statement will be issued to the Taxpayer.

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Safe Harbor

Limits on Safe HarborsReg 1.1031(k)-1(g)(6)

– Safe harbors cease to apply at the time the Taxpayer has the immediate ability to receive, pledge, borrow, or otherwise obtain the benefits of money or other property before the exchange period ends.


Safe Harbor

Limits on Safe HarborsReg 1.1031(k)-1(g)(6)

– If there is money in the escrow and identified Replacement Property that has not been acquired, money cannot be disbursed to the Taxpayer until the exchange period expires.

– Can only disburse for a (g)(6) event or Taxpayer risks premature receipt of boot.

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Receipt of Proceeds

Constructive Receipt Voids Exchange Ab InitioFlorida Industries Investment Corporation and Subsidiaries v. Commissioner, T.C. Memo 1999-346 October 19, 1999

Florida Industries

Orlando Industrial(Exchangor)

Alpha Trust

Joint Venture


Receipt of Proceeds


– June 25, 1990


Alpha Trust

Joint Venture

Vacant Lots

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Receipt of Proceeds


– Exchange escrow opened: July 26, 1990

– 45th day: September 9, 1990

– 180th day: January 22, 1991

Bank(Escrowee)


Vacant Lots

Alpha Trust Cash


Receipt of Proceeds


– Escrow Disbursements July 27, 1990: First Replacement Property; excess funds to Exchangor,

not Escrowee.

November 20, 1990: Second Replacement Property (residence of Exchangor’s president).

November 26, 1990: $50,000 “draw” to Exchangor.

December 11, 1990: $50,000 “draw” to company owned by Exchangor’s president.

December 11, 1990: Third Replacement Property;

December 20, 1990: Fourth Replacement Property; excess funds to Exchangor, not Escrowee;

January 8, 1991: Balance of funds to Exchangor.

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Receipt of Proceeds


– The Court held:

Taxpayer’s control of proceeds made exchange void ab initio.

Residence did not meet “Purpose” test.

No valid identification for last three properties.

First exchange also failed, even though “Bad Acts” occurred after it was acquired.


Disqualified Persons

Taxpayer’s:– employee;

– attorney;

– accountant;

– realtor;

– investment banker;

– broker; or

– other agent,

if they performed services for the Taxpayer in the two years prior to the exchange.

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Relatives of the Taxpayer; or

Those having relationships described in §267(b) or § 707(b) (using 10% instead of 50%).



Exceptions to the Rule:– Persons who rendered services for the Taxpayer solely

with respect to § 1031 exchanges.

– Persons who provided routine financial, title insurance, escrow, or trust services for the Taxpayer.

– Now includes “bank affiliates” (T.D. 8982).

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Don’t settle for a Qualified IntermediaryWho is Merely Not Disqualified– The Federation of Exchange Accommodators (FEA)

Upholds standards in the exchange services field: Administrative and technical support;

Safety of exchange balances;

Regulation of exchange fees.


Related Parties

Any person bearing a relationship to the Taxpayer as described in IRC § 267(b) or § 707(g)(1);

Family members;

Common ownership among entities (i.e., same person owns 50% or more of each);

Grantor or fiduciary of a trust.

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Related Parties

What’s the Problem?– IRS fears that related party transactions will result in an

“abusive shift of basis.”

– Abuse occurs when high basis property is exchanged for low basis property.

– Reduces the recognition of gain on the subsequent sale of the low basis property.


Related Parties

Example of Abusive Basis Shift– “X” and “Y” are related parties.

– “X” wants to sell Blackacre to “Z” (unrelated).

– “X” will recognize a gain of $900,000 on sale.

“X” owns Blackacre.

FMV: $1,000,000Basis: $100,000

“Y” owns Whiteacre.

FMV: $1,000,000Basis: $800,000

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Related Parties

Example of Abusive Basis Shift– “X” and “Y” exchange properties.

– “Y” sells Blackacre to “Z.”

– “Y” will recognize a gain of $200,000 on sale.

“X” owns Blackacre.

FMV: $1,000,000Basis: $100,000

“Y” owns Whiteacre.

FMV: $1,000,000Basis: $800,000


Related Parties

Two-Year Holding Period– Intended to prevent abusive basis shifting.

– Non-recognition treatment is denied if either related party disposes of the property they received in the exchange.

– Both parties must recognize gain.

– Period begins on the date of the last transfer required to complete the exchange.

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Related Parties

Exceptions to Two-Year Holding Period– Involuntary conversion;

– Death of related party;

– Convincing the IRS that the avoidance of taxes is not a principal purpose of the transaction.


Related Parties

Do Related Parties Always Cause an Abusive Basis Shift?– A related party buying the Relinquished Property

creates a new tax basis: if the Replacement Property is acquired from an unrelated

party; and

if the related party never owned the Replacement Property there should be no abusive basis shift.

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Related Parties

The Real Related Party Rule– If related parties each hold like-kind property at the start

of the exchange; and

– when the exchange is over, one has like-kind property and the other does not;

– no matter what you did to get to that point, you probably did something wrong!


Related Parties

PLRs for Reference:– Related Seller:

201220012

201216007

201048025

200820025

– Related Buyer: 200709036

200712013

200728008

201027036

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Example of Deferred Exchange

Example of a Deferred Exchange Using the Qualified Intermediary Safe Harbor



Taxpayer enters into a contract for Relinquished Property.

Taxpayer BuyerContract

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Taxpayer assigns contract to Qualified Intermediary.

Taxpayer Assignment



Taxpayer must give notice of the Assignment to all parties to the Exchange.

TaxpayerNotice of

Assignment

Co-Owners

Buyers

QualifiedIntermediary

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Taxpayer gives notice of the Assignment to all parties to the Exchange. – Must have proof Notice was given.

TAM 200130001

Taxpayer could not prove Notice of Assignment was given.– Rules are specific and exact, and must be followed with precision

or the integrity of the transaction will be jeopardized.



Taxpayer transfers Relinquished Property directly to Buyer.

Taxpayer BuyerRelinquished

Property

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Buyer pays proceeds to Qualified Intermediary.


BuyerProceeds

of Sale



Taxpayer identifies the Replacement Property.– Within 45 days after the transfer of the Relinquished

Property Taxpayer must identify the property: Unambiguously in writing;

Signed by the Taxpayer;

Delivered to a party to the exchange who is not a disqualified person.

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Taxpayer enters into a contract for Replacement Property.

– NOTE: This may be done prior to identification.

Taxpayer SellerContract



Taxpayer assigns contract to Qualified Intermediary.

Taxpayer Assignment

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Taxpayer must give notice of the Assignment to all parties to the exchange.

TaxpayerNotice of

Assignment

Sellers




Taxpayer requests funds for closing.– In writing.

– How much?

– When?

– Where?

– How? One business day notice is required.

Fax request to 312.338.1594

Please use the Disbursement Request for Funds from Exchange Account (ATG Trust Form 8040).

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Qualified Intermediary makes payment to Seller from escrow.


SellerPayment



Seller transfers Replacement Property directly to Taxpayer.

Taxpayer SellerReplacement

Property

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Exchange Agreement (ATG Trust Form 8003)

Exchange Agreement should designate “ATG Trust Company” as the Qualified Intermediary.

To obtain forms:– Download at www.atgtrust.com; or

– Call 312.752.1031


Updates

Capital Gains Tax Hike– Depending on income level, taxpayers can expect to

pay up to 23.8% in federal capital gains tax. Don’t forget that includes the new 3.8% Medicare surtax.

– Add in any state tax and depreciation recapture and there could be a blended tax rate of near 40%.

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Updates

Choosing a Reputable Qualified Intermediary– Kreisers, Inc. v. First Dakota Title Limited Partnership

(Circuit Court, Second Judicial District, S. Dakota, 7/10/2013) Excellent example of how courts analyze and decide a case

assessing negligence on the part of the QI.


Summary

What is a 1031 exchange?

Key Concepts

Like Kind Property

Holding Requirement

Delayed Exchanges

45-Day Rule

180-Day Rule

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Summary

Exchange Requirement

Same Taxpayer Requirement

Constructive Receipt – Qualified Intermediary

Related Parties

Exchange Steps

Updates and Rulings


Structured Sales and Fallback

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Tax Deferral Options

Exchange– What if Taxpayer can’t exchange?

Primary Residence

Vacation Property

Goodwill, etc.

– What if exchange fails? Boot


Cap Rate is Only 15%-20%

But Not So Fast …– Actual rate probably will be greater than 15%.

Recapture Rate: 25% or Ordinary Income Rate

Alternative Minimum Tax

Phase-out of Personal Exemptions

Phase-out of Itemized Deductions

State Income Tax

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Real Rate Could Be Upwards of 40%

So when your client says:– “I’m not concerned about capital gains taxes because

the rate is only 15% or 20%,”

we work through the transaction with them.

Does deferral make sense?


Installment Sale: § 453

Sale of Property where at Least One Payment Is Received in a Tax Year after the Year of Sale– Income is taxed under the “Installment Method.”

– Gain is recognized over the years in which the payments are received.

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Installment Sale Example

First Scenario– Sold for Cash in 2013

Second Scenario– Sold in 2013 for a Series of Equal Payments to Be

Received Over 5 Years


First Scenario

Sale Price $500,000

Less: Tax Basis 0

Gross Profit $500,000

2013 2014 2015 2016 2017

Taxable Capital Gain $500,000

Tax @ 20% Rate $100,000 $0 $0 $0 $0

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Second Scenario

Sale Price $500,000

Less: Tax Basis 0

Gross Profit $500,000

2013 2014 2015 2016 2017

Taxable Capital Gain $100,000 $100,000 $100,000 $100,000 $100,000

Tax @ 15% Rate;Installment Method: Taxable Amount

$15,000 $15,000 $15,000 $15,000 $15,000

Total Taxes Paid: $75,000 vs. $100,000


Installment Sales

Benefits– Defer payment of federal/state capital gains tax.

– Defer taxation on recapture of depreciation.

– Create a stream of income.

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Installment Sales

Disadvantages/Risks– Property Deterioration

– Foreclosure Risk

– Early Payoff

Structured Sale can eliminate disadvantages of an installment sale.


Structured Sale

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Structured Sale Benefits

No ongoing relationship between buyer and seller, unlike a traditional “installment” sale.

Seller can choose investment risk and access a loan.

Enhanced Security– Receipt of payments is not dependent on the solvency

or the future financial performance of the buyer.


Cash Sale

Seller Buyer

Cash

Property

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Installment Sale

Seller Buyer

Cash Plus Promise of Future Periodic Payments

Property


Structured Sale

Seller Buyer

Cash Plus Promise of Future Periodic Payments

Property

Substitute Obligor(Assignment Company)

Future Periodic

PaymentsCash

Liability to make future periodic

payments of fees

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“Custom Tailored” Payment Stream

Payments can be made:– monthly;

– annually;

– in periodic lump sums; or

– any combination thereof)

No Restrictions on Payment Streams– Benefits Matched to Seller’s Needs and Risk Tolerance


“Custom Tailored” Payment Stream

Payments can be structured to keep taxpayer out of AMT trap and/or a higher tax bracket.

Funds lost to taxation (of lump sum payment) are instead put to work for tax-deferred growth.

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§ 1031 Fallback


What is a § 1031 Fallback?

The Exchangor currently has an exchange with Qualified Intermediary.

The Exchangor fails to identify any Replacement Property by Day 45 or does not close on a Replacement Property before Day 180 and, therefore, has a significant boot issue.

The Exchangor still wants to receive beneficial tax treatment for the transaction.

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What is a § 1031 Fallback?

Prior to termination of the exchange, the Exchangor gives Qualified Intermediary an Irrevocable Direction to pay the Exchange Funds to Note Guarantor and the Exchange Agreement is amended to provide for an agreed upon Payment Stream.

The Assignment Company Makes Future Periodic Payments directly to Exchangor, and all parties go on “their merry way.”


§ 1031 Fallback with Assignment Company

ExchangorQualified

Intermediary

Exchange Agreementamended to specify payment

schedule

Irrevocable Direction to Pay Exchange Funds to

Assignment Company

Substitute Obligor(Assignment Company)

Future Periodic

PaymentsCash

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IRS Approval

Installment sales are authorized under Section 453 of the Internal Revenue Code (where at least one payment is received in a tax year after the year of sale).

IRS Permits the substitution of obligors under Revenue Ruling 75-457 and Revenue Ruling 82-122.

Tax Court has also approved the substitution of obligors in installment transactions.– Wynne v. Comm., and Cunningham v. Comm., 44 T.C.

103 (1965), acq., 1966-2 C.B. 4


Opportunities for Structured Sale/Fallback

§ 1031 Exchange when the Exchangor:– fails to identify Replacement Property in 45 days;

– fails to purchase Replacement Property within 180 days;

– fails to use all exchange funds (boot). “Get ‘em and keep ‘em.”

Failed Reverse Exchange

Non-Exchangeable Assets, i.e.:– personal residence;

– vacation home;

– goodwill.

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Opportunities for Structured Sale/Fallback

Exchangor wants to leave real estate.

Busted Installment Sale – Early Payoff

Large Commissions/Bonuses

Structured Settlements, Attorney Fees, Qualified Settlements


Updates

Investment Options and Loans

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Your Investment Choices Are Endless

Cash Money Markets

Fixed Income– U.S.

– High Yield

– International

Equities– U.S. Large Cap

– U.S. Mid Cap

– U.S. Small Cap

– International

– Emerging Markets



Commodities

Structured Notes and Managed Portfolios

Hedge Funds

Managed Futures

Private Placements

Private Equity

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Money Managers– Credit Suisse

A balanced portfolio

– Goldman Sachs The structured not specialist

– RBC Individualized portfolio construction

– Morgan Stanley International wealth management

– ATG Trust Trust and custodial firm with 30+ years of experience


Analysis Example

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Access Up to 80% of Your Pre-Tax Sale

Pay Loan (with deferral)

$350,000 lost to taxes

$650,000 available

Access up to $800,000 now.


Access Up to 80% of Your Pre-Tax Sale

Loan– You have $800,000 available now. This significantly

increases the amount of capital working for you.

– There are many benefits and uses for your available proceeds: Comfort of Liquidity

– Defer tax while having ready access to cash.

Parking Lot– Failed exchange; still purchase property.

Paying off an existing bank loan.

Achieve lifestyle goals, i.e., successful retirement planning.

65


Christopher J. PrincisSenior Vice PresidentBrook-Hollow Financial, LLC– 312.550.4658 (Cell)

– 312.529.4017 (Office)

– [email protected]


Thank you for attending today’s ATG Legal Education seminar.

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deferring capital gains 131218 - atgf...deferring capital gains using § 1031 tax-deferred exchanges...

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