Section 1031 bb presentation 7 11 2013

Section 1031 Like-Kind ExchangesGuidance ● Strategies ● Solutions

Business Banking Presentation July 10, 2013

Services

• Forward Exchanges

• Reverse Exchanges

• Improvement Exchanges

• Replacement Property Strategies

April 12, 2023 2

Like Kind ExchangesTypes of Assets Commonly Exchanged

• Real Estate (fee, easements, long-term leaseholds)

• Mineral interests (royalties, leaseholds)

• Aircraft

• Vehicles

• Equipment

• Rolling stock

• Intangibles (licenses, brands, franchise or distribution rights)

April 12, 2023 3

Representative Transactions$1.30 Billion Forward Exchange on 5 Times Square, NYC

$1.25 Billion Forward Exchange on 280 Park Avenue, NYC

$1 Billion Reverse Exchange on 399 Park Avenue, NYC

$300 Million Reverse Exchange on Westin Waterfront Hotel, Boston

$300 Million Forward Exchange on Portfolio of Multifamily assets

$234 Million Forward Exchange on Riverfront Plaza, Richmond VA

$230 Million Forward Exchange on Long Wharf Marriot, Boston

$225 Million Forward Exchange on One California Plaza, Los Angeles

$207 Million Forward Exchange on 100 East Pratt Street, Baltimore

$205 Million Forward Exchange on 5 Embarcadero Center, San Francisco

$45 Million Forward exchange of development rights

$150MM Reverse exchange involving Fortune 50’s replacement of its fleet of Gulfstream aircraft

$33 Million Reverse exchange of Oil & Gas rights

April 12, 2023 4

• Forward Exchange

• Reverse exchange

• Related Party Exchange Rules

April 12, 2023 5

Like Kind Exchange Basics

Forward Exchange – Used When:

• Client is selling a business or investment property.

• Client intends to replace it with new business or

investment property.

• Old property will be sold before the new property is

acquired.

• In a forward exchange, we hold FUNDS.

April 12, 2023 6

Reverse Exchange – Used When:




• New property will be acquired before the old property is

sold.

• In a reverse exchange, we hold PROPERTY.

April 12, 2023 7

Improvement Exchange - Used When:




• FMV of new property < FMV of old property

• The new property will be improved, and the increased

value is needed to defer gain.

• In an improvement exchange, we hold property, and

build on it.

April 12, 2023 8

9

Like-Kind Exchange- Property Limitations

• Property must be:– “Held for” -- means it must have been owned for some

time– Business or investment– Excludes dealer property, inventory, stock and securities

• Like-Kind Standard– Real estate-very broad, improved or not, type of

improvements or use does not matter– Personal property-like class or like-kind (more restrictive)

10

Like-Kind Exchange-Computational Rules

• RP must be of equal or greater value.

• All of the net proceeds from the RQ must be invested in the RP.

• Must cover all the debt on RQ with debt on the RP or additional cash (mortgage boot).

• If there’s a shortfall, the exchange is partially taxable. However, if the value of the RP is less than the taxpayer’s basis in the RQ, then it’s FULLY taxable.

Forward Exchange – “Down Leg”

• Before closing, T enters into exchange agreement with QI.

• T assigns its rights under the P&S to the QI.

• QI sets up a bank account at RTC for T’s exchange.

• QI notifies the buyer of the old property that the sale is part

of an exchange and supplies wiring instructions and

instructions for preparation of the settlement statement.

• T transfers old property directly to buyer (direct deeding).

April 12, 2023 11

Common “Down Leg” Issues

• Identity of the taxpayer.

• Qualified use (holding period, mixed use properties).

• Use of funds to pay debts and closing costs. (Prorations,

security deposits, cross-collateralization, defeasance, etc.)

• Seller financing.

• Taxpayer needs some cash at closing.

April 12, 2023 12

Forward Exchange-Next Steps

• T has 45 days to identify new property (alternative ID rules: 3 property/200% rules).

• If T does not identify, exchange ends on Day 46

• Once T identifies, the funds must be held until the end of the 180 days, and can only be used to acquire identified property

• T has 180 days to close on the new property, any unused funds are then disbursed

• The old and new property must be “like-kind”.

April 12, 2023 13

Common Exchange Problems• Taxpayer changes their mind during the ID period and wants

the funds-–must wait until the 45 day ID period expires

• Taxpayer wants to change the ID -–OK during the ID period, but NOT once the ID period ends

• Taxpayer identifies property, but is unable to close on any of them and wants the funds early -–funds must sit until after Day 180

• Actual or constructive receipt of any amount from the QI during the exchange makes the entire transaction taxable, and may cause the QI to be the taxpayer’s agent, precluding the QI from doing any further exchanges for the client, and according to the IRS, other clients as well

April 12, 2023 14

Common “Up Leg” Issues

• Sufficient value of replacement property.

• Depreciation recapture on personal property.

• Accuracy of ID.

• Use of funds: deposits, paying loan and due diligence costs.

• Sending the funds to taxpayer’s attorney for closing.

• Amount of financing.

• Title and ownership issues on replacement property.

April 12, 2023 15

Reverse Exchanges• Rev. Proc. 2000-37 establishes a “safe harbor for reverse

exchanges (qualified exchange accommodation arrangements).

• Two principal uses:– Timing: new property closing prior to old– Value: Improve the new property while accommodator

owns it

• T can receive all of the economic benefits (except tax depreciation) during the time of the QEAA.

• Accommodator must treat the property as if it is the owner for tax purposes.

April 12, 2023 16

Reverse Exchanges• Significantly more documents and more risk for the

accommodator.

• Risks mitigated by insuring property and T’s indemnity.

• T, an affiliate or third party lender (or combination) can loan purchase price.

• T can manage the property or manage the LLC owning the property.

• Transfer is effected by an option to purchase that is exercised when the old property sells.

April 12, 2023 17

Common Reverse Exchange Issues

• Setting up rents, security deposits.

• Getting rents to the taxpayer for tax purposes.

• Structuring financing on parked replacement property.

• Improvement exchanges- documenting construction

expenses.

• Improvement exchanges -disbursement of exchange funds.

April 12, 2023 18

Related Party Exchange Rules

• Two related parties can enter into a direct exchange, if each holds its replacement property for 2 years.

• Taxpayer cannot sell its property to a third party through a QI and then buy replacement property from a related party (Rev. Rul. 2002-83) using cash held by QI.

• Taxpayer can sell its relinquished property to a related party to commence an exchange, and the related party does not need to hold the property for 2 years.

• Taxpayer can buy its replacement property from a third party PROVIDED that the related party is also doing an exchange.

• THERE ARE MANY STRATEGIC APPLICATIONS OF THESE RULES TO MINIMIZE TAX LIABILITY!

April 12, 2023 19

20

Rev. Proc. 2008-16Safe Harbor for Vacation/Rental Homes

• Creates a safe harbor on whether a mixed vacation/rental house is considered “held for investment.”

• Before this, there was some doubt as to what standard applied. Was it the “primary” purpose? Did ANY personal use disqualify the property from §1031?

• The held for investment requirement applies to both RQ and RP.

21

Rev. Proc. 2008-16 RQ Property Requirements:

• Property must have been held for 24 months before the sale.

• During each 12 month period before the sale the property must meet all of the following:– The property must have actually been rented out.– To a person (cannot be related under §267 unless the

residence is the related person’s principal residence).– For at least 14 days.– At “fair value.”

• The property cannot have been used for personal purposes for more than THE GREATER OF:

– 14 days, or– 10% of the days it was actually rented out.

22

Rev. Proc. 2008-16 RP Property Requirements:

• The same requirements will apply to the RP (24 month hold, minimum 14 days of fair value rental, and personal use limit).

• The IRS says that if you do not meet the RP requirements, you should file an amended return claiming that no exchange occurred. (This should not be the case, it would be outside the safe harbor, but would not necessarily mean that the exchange is a failed exchange…)

What happens when investment property is later converted to personal use?

• As long as Rev. Proc. 2008-16 is satisfied, later conversion to a vacation home is within the safe-harbor and the IRS will not challenge the exchange on the basis of mixed use

• If taxpayer converts to principal residence, then the Section 125 gain exclusion cannot be claimed until after 5 years from the acquisition date of that property

• If taxpayer changes use in year 3 and occupies for 2 of the last 5 years, then the taxpayer may exclude $250K/$500K of capital gain under Section 125

April 12, 2023 23

Case Study #1 –Equipment Dealer

• Customer is selling their old commercial building for $600,000

• Customer has P&S for land for $100,000 and plans to construct a new steel building for $500,000

• Compass set-up an “improvement exchange” using the money from the old building to acquire the new land and fund the improvements by paying the contractors

• For our fee of $12,500 we saved customer approximately $150,000 in tax

April 12, 2023 24

Case Study #2 – McDonald’s Franchises

• Customer is selling 5 McDonald’s restaurants in Western MA for $8MM

• Customer had an agreement to buy 7 McDonald’s in CT for $15MM on the next business day

• Compass set-up an exchange in which we received the purchase funds from Citizens Bank, and paid off the existing loan with Chase on the new stores

• For our fee of $7,500 we saved customer $1.0MM in tax liability

April 12, 2023 25

Case Study #3 – Trucking Company

• Customer is selling several tractors and trailers for $300,000

• Customer is buying a business for $1.0MM that includes specialized tractors and roll-off trailers

• Using customized exchange documents, we used the funds to purchase part of the business assets which were “like-kind” to the tractors and trailers that were sold

• For our fee of $3,500 we saved customer approximately $130,000 in tax liability

April 12, 2023 26

Like Kind ExchangesBenefits to Rockland Trust

• Fee income

• Balances-can be lumpy but balances nonetheless

• Customer goodwill from a service that is always worth more than it costs

• Possibility of lending on replacement property side

April 12, 2023 27

Like Kind ExchangesBenefits to the Business Banker

• Opportunity to be a trusted adviser

• Presentations to centers of influence, attorneys and CPAs to build goodwill

• Help distinguish Rockland Trust from other banks that do not offer this service, or not at our level of sophistication

April 12, 2023 28

BioAndrew F. Gelson, Esq. (Managing Director) is responsible for Compass’ strategic, legal, and product development activities. Andy has 27 years of experience practicing real estate and tax law and specializes in IRC §1031. Prior to co-founding Compass, he was Senior Vice President and General Tax Counsel at J.P. Morgan Property Exchange Inc. (JPEX) where he had primary responsibility for executing more than $20 billion of exchange transactions on behalf of corporate and institutional property owners.

Andy is admitted to the bar in CA and MA and holds a BS from Boston College, a JD from Southwestern University, and an LLM (in Taxation) from New York University. He is also an active member of the American Bar Association (ABA) Tax Section and the Equipment Leasing and Financing Association and has spoken and written about various exchange topics, including exchanges of oil and gas properties.

April 12, 2023 29

Andrew F. GelsonManaging Director

[email protected]

Compass Exchange Advisors LLC2036 Washington Street

Hanover, MA 02339Tel: 508.830.1188

Direct: 781-982-6738Fax: 508.830.1288

www.compass1031.com

April 12, 2023 30