Powerpoint presentation for Edmund & Wheelers 4 HR. CE course for accountants.
- 1.Shhhhh.Dont tell anyone.Your clients are eligible forinterest free loans from the USand State Governmentfor as long as theyd like.for as many times as theyd like.
2. Of the approximately$200 Billion in commercial realestate transactions during 2008, it is estimated that 20-25% could havebenefited from Section 1031 treatment.Only 3% did. 3. Whats In It For You? Absolutely Part of Your Fiduciary Responsibility Tax Ramifications on the Sale of Investment/Trade or Business Property are Key Clients Will Appreciate Your Resourcefulness Section 1031 has wide applicability in youraccounting practice Help Your Clients strategize the sale and repurchase of their holdings. Property portfolios may be realigned tax free. Become Involved With Clients Real Estate Strategy Strengthen & Expand Your Referral Base 4. Today We Will Explore What Is Section 1031? Section 1031s Misconceptions How To Recognize When to Use Section 1031? Who Qualifies For an Exchange? How to Report an Exchange What Qualifies For an Exchange? Real-life Examples of Our Exchanges Alternative Exchange Strategies 5. Primary Objectives of This Course Provide a Basic Section 1031 Education Provide Tools & Information Enabling You toBetter Serve Your Clients Assist You In Recognizing the StrategicApplications of Section 1031 and to ExploreAlternative Replacement Strategies 6. Primary Objectives of This Course Help You to Understand HowSection 1031 Integrates IntoYour Clients Overall FinancialGoals & Objectives We will Demonstrate our Abilityto Become Your Section 1031Resource in the Future 7. What Is An Exchange? Method to sell Investment and/or Trade or Business Propertyand replace it with New Property that doesnt trigger any tax. Its essential elements are: The Client must: Give a Deed (or a Bill of Sale); Get a Deed (or a Bill of Sale); and Dont handle Cash 8. The Five Critical Elements1. Intent2. Form and Documentation3. Control of Funds4. Like-Kind Properties5. Time Limits 9. The Regulation - Section 1.1031(k)-1A deferred exchange isdefined as an exchange inwhich, pursuant to anagreement, the taxpayertransfers property held forproductive use in a trade orbusiness or for investment(the relinquished property)and subsequently receivesQIproperty to be held eitherfor productive use in a tradeor business or forinvestment (thereplacement property). 10. Section 1031(a)(1)No gain or loss shall be recognized on theexchange of property held for productive use in trade orbusiness or for investment if such property is exchangedsolely for property of like kind which is held either forproductive use in a trade or business or for investment. Section 1031 Works ONLY with Investment/Trade or Business PropertyYOU MUST PROVE INTENT! 11. Exceptions to Section 1031 (Sec.1031(a)-(2)) A. Stock in trade or other property held primarily for sale B. Stocks, bonds or notes C. Other securities or evidences of indebtednessor interest D. Interests in a partnership E. Certificates of trust or beneficial interest F. Choses in action (litigation rights) 12. What is Investment Purpose? Investment is the passive holding of property for morethan a temporary period with the expectation ofappreciation Real estate (even if unproductive) held by a non dealer forfuture use or increment in value is held for investment andnot primarily for sale (Reg. 1.1031(a)-1(b)) Thus property held for sale in theimmediate future is not held forinvestment 13. What are the benefits of an Exchange? Full capital gains tax deferral (Exchange goes Even or Up) Relocation of investment Change in investment type Diversification of investment Planning of investment Solve problem of joint ownership Increase cash flow 14. Three Essential Elements: The properties must be exchanged (not sold) Both the Relinquished Property and the ReplacementProperty must be held by the same taxpayer forinvestment or productive use (Identity of Taxpayer Rule) The properties must be Like-Kind with one another Real property for real property Personal property for personal property Matching in value or the new property more expensive Boot results when the old property is more expensive 15. Replacement Property Rules @ Reg 1.1031(k)-1-(c)(4) The Three Property Rule - The Exchangor may identify up tothree (3) properties, without regard to value; or The 200% Rule - The Exchangor may identify more than threeproperties, provided their combined fair market values does notexceed 200% of the value of the Relinquished Property; or The 95% Rule - The Exchangor may identify any number ofproperties, provided the Exchangor acquires 95% of thoseproperties (by value). Properties received before the 45th day do not have to beidentified, but must appear on one of the IDs after Day 45. 16. Like-Kind Requirement: The term like-kind refers to the nature or character of theproperty and not to its grade or quality (Reg 1.1031(a)-1(2)(b)) Real property cannot be exchanged for personal property(Reg 1.1031(a)-1(2)(b)) Qualifying personal property can be exchanged forproperty of a similar character (NAICS (formerly SIC)Codes must match; the Code must fall within Sector 31, 32or 33 of NAICS; last digit cannot be a 9.) (Regs 1.1031(a)-2,et seq.) 17. Examples of Like-kind Improved real property for Unimproved real property (Reg1.1031(a)-1(2)(b)) Lease for >30 years (Reg 1.1031(a)-1(2)(c)) Partial interest for a whole interest One property for more than oneproperty and vice versa 18. Apartments Single Family Dwelling Like - KindCondos Land Commercial Development 19. What is Like Kind?ANY REAL PROPERTY IS LIKE KIND WITH ANY OTHER REALPROPERTY.Single Family DwellingApartment Building 20. What is Like Kind?ANY REAL PROPERTY IS LIKE KIND WITH ANY OTHER REALPROPERTY. Multi-family DwellingSingle Family Dwelling 21. What is Like Kind?ANY REAL PROPERTY IS LIKE KIND WITH ANY OTHER REALPROPERTY.Land DevelopmentSingle Family Dwelling 22. What is Like Kind?ANY REAL PROPERTY IS LIKE KIND WITH ANY OTHER REALPROPERTY.Single Family DwellingCommercial Property 23. Personal Property (Regs 1.1031(a)-2, et seq.) Same General Asset Class or Product Code North American Industry Classification System Sector 31-33: Manufacturing Examples: Construction Equipment, Well Drilling Equipment, LoggingEquipment, Commercial Vessels, Commercial Laundry Equipment See www.census.gov/naics 24. Timing is everything! The Exchange Period begins on the transfer of theRelinquished Property This is Day #0 Exchangor must identify qualified Replacement Propertywithin 45 days of closing (the Identification Period) Exchangor must acquire within 180 days, or due date ofthe tax return (counting extensions) for the tax year of thesale (the Exchange Period) (Reg 1.1031(k)-1(b), et seq.) There are no extensions unless a federal disaster isdeclared in the vicinity of the taxpayer or the property. 25. Can Anyone Handle An Exchange? No! It must be a Qualified Intermediary(QI) as defined byregulation: see Regs 1.1031(k)-1(k), et seq. Cannot Be the Exchangor or a Relative (Sec. 267(b) or Sec.707(b)(1)) Cannot be an Agent of the Taxpayer One who has acted as employee, attorney, accountant, investmentbanker, broker or real estate agent within the past 2 years The QI Handles All Aspects of the Exchange and Should beInvolved EARLY in the Process 26. What does the QI do? Regs 1.1031(k)-1(g)(4), et seq. Creates Exchange Agreement; signed by Taxpayer. Has Legal Standing as the substitute Seller of RelinquishedProperty and substitute Buyer of Replacement Property(Assignee Seller/Buyer). Notice of the Assignment required to be given to Buyer andSeller, with Closing Instructions to both Settlement Agents. Banking, Safeguarding & Delivery of Exchange Funds Assurance of Critical Deadlines Including the 45 & 180 DayDeadlines Final accounting for tax purposes 27. Who Qualifies for an Exchange?Owners of investment property and business property mayqualify for a Section 1031 deferral. Individuals, C Corporations,S corporations, partnerships (general or limited), limited liabilitycorporations, trusts and any other taxpaying entity may set upan exchange of business or investment properties for businessor investment properties under Section 1031.Ref - www.irs.gov 28. Does Your Situation Qualify? 29. The Five Most Common Section 1031Misconceptions 1All 1031 Exchanges must involveswapping or trading with otherproperty owners...... 30. The Five Most Common Section 1031Misconceptions 2Its required that all types of 1031exchanges must closesimultaneously...... 31. The Five Most Common Section 1031Misconceptions 3"Like-kind" means purchasing thesame type of property which wassold....... 32. The Five Most Common Section 1031Misconceptions 41031 Exchanges must be limited to 1exchange and 1 replacementproperty....... 33. The Five Most Common Section 1031Misconceptions 5A Section 1031 is NOT a path to cash. 34. What about the States? All states but one (PA) allow a Section 1031 withinor outside the state; PA taxes even in-state 1031s States follow the Federal rules closely. Some states w/ income taxes (e.g. CA, ME, NJ, NY,RI, VT) require a Waiver of (state tax) Withholding Other states w/ income taxes (MA) dont bother Land Gains Tax in VT: Old & New properties mustbe in-state; New Property takes Old Holding Period Some states (ME, VT) have a formal Waiver; othersCA, HI, NJ, NY, RI, SC) permit a Seller Affidavit. 35. IRS Form 8824 Reporting anExchange 36. 123 Main Street, City, State; 4 Family Rental 456 Main Street, City, State; Single Family Rental 1 2 1997 Property Information 6 1 2008 & Exchange Dates716200811 28 2008Related Party? YESLine 8, NO Line 12 Part II Part IIIRelated Party - Sec. 267(b) or Sec. 707(b)(1) 37. Joe Related TaxpayerBrother XXX-XX-XXXX Related Party789 Main Street, City, State, Zip Information Must remain NO for two tax yearsRelated Party -Sec. 267(b) orSec. 707(b)(1)If 9 or 10 is YES, 11 C is most probable answer (attach statement) 38. Multi-assetExchangesBootFMVOld bas