S1031 for Real Estate Professionals

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The Power of Section 1031 for Real Estate Professionals - Slides


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2. Shhhhh.Dont tell anyone.Your clients are eligible forinterest free loans from the USGovernmentfor as long as theyd like.for as many times as theyd like. 3. Of the approximately$200Billion in commercial real estate transactions last year, it isestimated that 20-25% could have benefited from Section 1031 treatment. Only 3% did. 4. Whats In It For You? Absolutely Part of Your Fiduciary Responsibility Tax Ramifications on the Sale of Investment Property are Key Clients Will Appreciate Your Resourcefulness Potentially More Sides & Multiple Commissions! Help Your Client Sell and then Buy Replacement Property(ies) You Never Know Until You Ask Whatcha Want & Whatcha Got Become Involved With Clients Overall Real EstateStrategy Strengthen & Expand Your Referral Base 5. About Our Firm Practice began in 1981; incorporated in 1987 Exchanges are our exclusive line of business Have Completed Exchanges is 48 States Please send us a client from S. Dakota or Alaska Member of Federation of Exchange Accommodators Specialize in Passive Replacement Options 6. Today We Will Explore What Is Section 1031? Section 1031 Misconceptions How To Recognize When to Use Section 1031? Who Qualifies For an Exchange? What Qualifies For an Exchange? Real-life Examples of Our Exchanges Alternative Exchange Strategies 7. 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 ExploreAlternative Replacement Strategies 8. Primary Objectives of This Course Help You to Understand HowSection 1031 Integrates IntoYour Clients Overall FinancialGoals & Objectives Assist you to earn more moneythrough your enhancedknowledge of the tool! 9. Pop Quiz!! Section 1031 Basics 10 Minutes To Complete You Will Be Amazed atHow Much You WillLearn! 10. What Is An Exchange? Method to sell investment real estate and replace it with newproperty that doesnt trigger any tax. Its essential elements are: Give a Deed Get a Deed Dont handle Cash 11. The Five Critical Elements1. Intent2. Form and Documentation3. Control of Funds4. Like-Kind Properties5. Time Limits 12. The Regulation - Section 1.1031(k)-1 A deferred exchange is defined as an exchange in which, pursuant to an agreement, the taxpayer transfers property held for productive use in a trade or business or for investment (the relinquished property) and subsequently receivesQI property to be held either for productive use in a trade or business or for investment (the replacement property). 13. An Exchange at a Glance Exchange Documents Relinquished Property Agreement With QI Assignment of Contract Notification of Assignment Settlement Instructions QI Replacement Property Assignment Notification Settlement Instructions 14. 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 withInvestment propertyYOU MUST PROVE INTENT! 15. 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. Section 1.1031(a)-1(b)) Thus property held for sale in theimmediate future is not held forinvestment 16. What are the benefits of an Exchange? Full capital gains tax deferral Relocation of investment Change in investment type Diversification of investment Passive Fractional ONG Eventual Personal Use Re-leverage Equity Increase cash flow 17. Three essential elements: The properties must be exchanged (not sold) Both the Relinquished property and the Replacementproperty must be held by the same taxpayer for investmentor productive use The properties must be Like-Kind with one another Real property for real property Personal property for personal property 18. Replacement Property Rules The Three Property Rule - The Exchangor may identify up tothree properties, without regard to their value; or The 200% Rule - The Exchangor may identify more than threeproperties, provided their combined fair market value does notexceed 200% of the value of the Relinquished Property; or The 95% Rule - The Exchangor may identify any number ofproperties, without regard to their value, provided theExchangor acquires 95% of those properties. 19. Like-kind requirement The term like-kind refers to the nature or character of theproperty and not to its grade or quality Real property cannot be exchanged for personal property Qualifying personal property can be exchanged forproperty of a similar character 20. Examples of Like-kind Improved real property for Unimproved real property Lease for >30 year Partial interest for a whole interest One property for more than oneproperty and vice versa 21. Apartments Single Family Dwelling Like - KindCondos LandCommercial Development 22. What is Like Kind?ANY REAL PROPERTY IS LIKE KIND WITH ANY OTHER REALPROPERTY.Single Family DwellingApartment Building 23. What is Like Kind?ANY REAL PROPERTY IS LIKE KIND WITH ANY OTHER REALPROPERTY. Multi-family DwellingSingle Family Dwelling 24. What is Like Kind?ANY REAL PROPERTY IS LIKE KIND WITH ANY OTHER REALPROPERTY.Land DevelopmentSingle Family Dwelling 25. What is Like Kind?ANY REAL PROPERTY IS LIKE KIND WITH ANY OTHER REALPROPERTY.Single Family DwellingCommercial Property 26. Personal Property Same General Asset Class or Product Code North American Industry Classification System Sector 31-33-Manufacturing Examples: Heavy Construction Equipment, Well Drilling Equipment,Logging Equipment, Commercial Vessels, Commercial LaundryEquipment See www.census.gov/naics 27. Timing is everything! The Exchange period begins on the transfer of theRelinquished Property Exchangor must identify qualified Replacement Propertywithin 45 days of closing Exchangor must acquire within 180 days There are no extensions unless mandated as a federaldisaster 28. Can Anyone Handle An exchange? No! It must be a Qualified Intermediary(QI) as defined byregulation: Cannot Be the Exchangor or a Relative Cannot be an Agent of the Taxpayer One who has acted as employee, attorney, accountant, investmentbanker, broker or real estate agent with the past 2 years The QI Handles All Aspects of the Exchange and Should beInvolved EARLY in the Process 29. What does the QI do? Creates Exchange Agreement Has Standing in the Sale of Relinquished Property and Purchaseof Replacement Property Notice of Assignment Closing Instructions to Settlement Agent Banking and Safeguarding of Exchange Funds Assurance of Critical Deadlines Including the 45 & 180 DayDeadlines Final accounting for tax purposes 30. 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. 31. Does Your Situation Qualify? 32. The Five Most Common Section 1031Misconceptions 1All 1031 Exchanges must involveswapping or trading with otherproperty owners...... 33. The Five Most Common Section 1031Misconceptions 2Its required that all types of 1031exchanges must closesimultaneously...... 34. The Five Most Common Section 1031Misconceptions 3"Like-kind" means purchasing thesame type of property which wassold....... 35. The Five Most Common Section 1031Misconceptions 41031 Exchanges must be limited to 1exchange and 1 replacementproperty....... 36. The Five Most Common Section 1031Misconceptions 5A Section 1031 is NOT a path to cash. 37. Break Time 38. The Power of Section 1031 What happens when both participate in 3 typical real investment estate transactionswith radically different approaches? 39. The Power of Section 1031 Joe is going to sell his property outright, and pay his taxes! 40. The Power of Section 1031 Joes Boss is going to use Section 1031 to build his wealth while leveraging Uncle Sams money. 41. First Transaction - Today 42. Hypothetical Example Assumptions 43. Second Transaction In 5 Years 44. Third Transaction In 10 Years 45. Fourth Transaction In 15 Years $361,336$507,000 $108,400$152,100 ($21,680) $0 $448,056$659,100 $2,240$3,296 46. Summary of Wealth Building Benefits4th Transaction $448,056 $659,100Cumulative Increase 49.3%119.7% 47. Summary of Increased Cash FlowAt 15th Year 48. The After-Tax Analysis (a sale in Year 15) Joe The Plumber (in Year 15) Has Property worth $448,056; all taxes have been paid His Boss (in Year 15) Has property worth $659,100, with $136,810 tax due Net Result (after tax): His Boss has $74,234 more wealth than Joe, and hasreceived $92,779 more income. But why would his Boss ever pay the tax when he can exchange over & over? 49. The Most Common Exchange Types Delayed Exchange The client sells his property, identifies replacement property optionswithin 45 days, then purchases the property(ies) within 180 days. Reverse Exchange The client purchases (with a Single Purpose Entity) the replacementproperty before his current property is sold. The client then has 180days to close on his relinquished property. Build-to-Suit The client wishes to purchase and improve a property(ies) with theproceeds from the sale of his relinquished property. This is alsoaccomplished with a Single Purpose Entity. 50. Case StudiesThe case studies outlinedare presented as arepresentation of the 5 mostcommon types of Section1031 exchanges.Please note that the casestudies have been simplifiedand several essential stepshave been omitted for clarity.Click on the case study youwould like to review.www.section1031.com 51. Case Study 1ABDC-Delayed Exchange (Existing Property)Direct Format 52. CAMPGROUND FOR SEVERAL SINGLE FAMILYRESIDENCESOne campgroundexchanged for 16 newpropertiesincluding 2 newcampgrounds. 53. 6 PROPERTIES FOR A DOZEN CONDOMINIUMS Sold six properties to aggregate funds to buy over a dozen brand new condo units. 54. CONVERTING INVESTMENT PROPERTY TO PERSONALRESIDENCEExchange for your dreamhome, rent it for twoyearsconvert it to your primaryresidence. 55. Case Study 2ACBD-Delayed/Simultaneous Exchange (Existing Property)Reverse Format - Exchange Last 56. BUYING A NEW PROPERTY BEFORE THE OLD PROPERTY SELLS Negotiated the Purchase of a Significant New Property but unable to sell a piece of existing property in time to do the the deal. 57. ACQUIRE A RENTAL PROPERTY FOR A FAMILY MEMBER Exchange for a home for the kids charge fair market rent. Then gift the property. 58. Case Study 3ACBD-Delayed, Build-to-suit (or Improvement) ExchangeDirect Format 59. COMMERCIAL PROPERTY FOR RAW LAND WITHIMPROVEMENTSSell a commercialpropertybuy a vacant lot andbuild a new building. 60. Case Study 4ACBD-Delayed/Simultaneous Build-to-suit ExchangeReverse Format - Exchange Last 61. INDUSTRY SPECIFIC BUILDING ON IDENTIFIED PROPERTY Build a new building then sell existing property. 62. Case Study 5Delayed Exchange (Existing Property) Reverse Format -Exchange First 63. ACQUIRING ABUTTING PROPERTY TO PRIMARY RESIDENCEPurchasing shore frontland with bank fundsselling rental property topay down the debt. 64. 4 $imple QualificationQuestions 65. 1. Whatcha Got?2. Howdya Get It?3. What else ya Got?4. Whatcha Want? 66. 1. Whatcha Got? How has the property been used in the clients hands? Has there been personal use of the property? Does the property include personal property or other intangibles? 67. 2. Howdya Get It? As the result of a previous Exchange? Is the property from an estate or family? How long has the property been owned? 68. 3. What else ya Got? Is there other property being sold? Are there other property rights or easements? Any excess land associated with their primary residence? Does the transaction need to be bigger, smaller or done in stages? 69. 4. Whatcha Want? What is the short term/long term strategy for the property? Ideally the value should be even or up. An important element of building wealth using untaxed funds. Diversification i.e. type, location, quantity. 70. Break Time 71. Alternate Exchange Opportunities THERE ARE A MYRIAD OF OTHER INVESTMENT OPPORTUNITIES THAT CAN BE ACCOMPLISHED WITH AN EXCHANGE! 72. Tenants - In - CommonTENANTS-IN-COMMON (TICs) OFFER A STRESS FREEOPTION TO OWN INVESTMENT GRADE REAL ESTATE Tenants-in-common Any Real Property 73. Who is a Typical SEC TICInvestor? Courtesy of Grubb & Ellis Commercial Real Estate Services 74. Why Use TICS in an Exchange? Courtesy of Grubb & Ellis Commercial Real Estate Services 75. What is a TIC? Courtesy of Grubb & Ellis Commercial Real Estate Services 76. SEC TIC Property Characteristics Undivided Fractional Ownership in Real Estate Each Owner Receives a Proportional Share of NetRevenues Under Sponsored Structure, TICs are: Grade A Real Estate Investments Professionally Managed The Result Is A Passive OwnershipCourtesy of Grubb & EllisCommercial Real Estate Services 77. RE TIC Property Characteristics Undivided Fractional Ownership in Real Estate Each Owner Receives a Proportional Share of NetRevenues RE TICS are Marketed as REAL ESTATE and NOTBroker / Dealers. Real Estate Commissions are Earned! 78. RE TIC Property Characteristics Undivided Fractional Ownership in Real Estate Sponsor does not manage or own interest in theProperties. Smaller amount required for entry. Typically smaller properties Single Tenant Single Purpose No Debt TICS for the rest of us! 79. TICS for The Rest of Us! Undivided Fractional Ownership in Real Estate Sponsor does not manage or own interest in theProperties. Smaller amount required for entry. Typically smaller properties Single Tenant Single Purpose 80. Rockwell Properties Specialize inFreseniusMedical Care &Other SingleTenantOpportunities Properties CarryNo Debt! Rockwelldevelops three tofive projects peryear. 6-7% Cash onCash paid Courtesy of Grubb & EllisCommercial Real Estate Servicesmonthly. 81. Direct Ownership vs. TICConventional Direct Ownership1031 Tenant-in-Common Property Exchange Property ExchangeLower returns on less desirable propertiesHigher returns on institutional-quality propertiesDifficult to comply with Section 1031 45 day ID Easy to comply with Section 1031 45 day ID rulesrules; Exchangor must find properties when properties are pre-identifiedDifficult to match Section 1031 exchange debt Easy to match Section 1031 exchange debt andand equityequityInvestor must negotiate and arrange loanPrearranged financingExpensive and time-consuming property Professional proven property management inmanagementplace. You receive a monthly or quarterly incomecheck.Cash flow, depreciation, and appreciation Cash flow, depreciation, and appreciation potentialpotentialAbility to use the Section 1031 exchange againAbility to use the Section 1031 exchange againAbility to refinance and distribute proceeds tax Ability to refinance and distribute proceeds taxfree free 82. DiversificationCourtesy of Grubb & EllisCommercial Real Estate Services 83. How Does it Work?1. Client sells investment property.2. Proceeds transferred to QI (Edmund & Wheeler)3. Client and advisor identify potential properties through a myriad of sources within their 45-day ID period.4. Client is granted a reservation.5. Client and advisor fill out necessary paperwork to close.6. Client is on title and receives a deed to the property.7. Client assumes % interest of non-recourse financing (1)8. Client receives % interest of the income generated from the property.9. At the sale, the client receives % share of any and all potential profits.Courtesy of Grubb & EllisCommercial Real Estate Services 84. Umbrella Partnership Real EstateInvestment Trust (UP-REIT) Exchange! Any Real Property 85. What Is An UPREIT? Similar to a Mutual Fund For Real Estate Investors. Allows Exchanging Real Property Into OperatingPartnership (OP) Shares of Existing REITs REITS can convert existing properties into TICs allowing 35ownership positions; then TICs are then converted back to REIT shares and investors then hold shares in the REITs entire portfolio. Portfolio is professionally managed with 95% of the net income to investors. 86. Section 721 Exchange Overview Instead of Sellingand Exchanging,The InvestorContributesProperty to aPartnership Receives OperatingPartnership (OP)units. 87. UPREIT Benefits Transaction completed on a tax-deferred basis. If shares goto an estate the ultimate recipients will receive a stepped upbasis. Transaction can be structured enabling property owner toconvert an interest in a specific property into a larger, morebalanced portfolio held by the UPREIT. Allows an interest in illiquid individual properties to becomemore easily saleable. 88. Oil & Gas LeasesINVESTORS CAN EXCHANGE REAL PROPERTY FORINTERESTS IN PRODUCING OIL & GAS ENTERPRISES Any Real Property 89. A Viable Alternative Investment for "like-kind" 1031 Exchange.Oil & Gas Lease AN EXTREMELY VIABLE ALTERNATIVE FOR AN EXCHANGE. Working and Royalty Interest Leasehold Interest Allows the Right toSearch for and Produce Oil and Gas Fractional Owners Have the SameRights as a Single Owner and Cansubdivide or Offer for Sale on the OpenMarket 90. Oil & Gas Lease Characteristics Liquidity Active Secondary Market Life of Production Supported by Qualified 3rd Party Reports Annual Return Average 15% - 18% Over Term Tax Treatment 15% Tax Free Depletion Allowance Valuation Valued on the Amount of PotentialProduction 91. Oil & Gas Lease Benefits Immediate Economic Closing With Predictable Cash Flow Ability to Participate in the Future Production Highly Liquid Individual Fractional Ownership Diversification By Investing In One or Several Qualified Working Interests in Different Markets 92. Structured SalesSTRUCTURED SALES ALLOWS THE INVESTOR TOARRANGE FOR A FUTURE PAYCHECK Exchange! Any Real Property 93. The Structured SaleThe Structured Sale is a method for selling appreciated assets such asreal estate and businesses that allows sellers to:Defer capital gains taxes to future yearsCollect a stream of guaranteed payments over a set number of yearsIn Addition:Makes the transaction safer for the sellerDoesnt require the seller to acquire new property.This method was developed in 2005 and is becoming a sought aftermethod for tax deferral when selling a business or real estate. 94. The Structured Sale & Section 1031 Identified as an Alternative Strategy In ExchangeAgreement Gives Buyer Full Title Can Be Used When Replacement Properties Cannot BeIdentified and/or Purchased in the 45/180 Day TimeRestraints Can Be Used For Taxable Boot 95. The Structured Sale & Selling a Business There is Inherent Risk Associated With a TypicalInstallment Sale The Structured Sale Provides a Safe Alternative Can Be Used in an Exchange for non like-kind Items likegoodwill and FF&E, or; Can be used for the entire transaction amount if the clientwants to exit the real estate class 96. The Structured Sale 97. How Do You Summarize 104 Slides? 98. Quickly! 99. Section 1031 is AnInterest Free LoanFrom The Government 100. Section 1031 is used in less than 10% of thetransactions that it should be! 101. Real EstateProfessionals owe it totheir clients to understand thispowerful tool! 102. More Commissions.More Commissions.More Commissions. 103. Section 1031 is aboutRelocation andReallocation of Assetswithout Paying Capital Gains!!! 104. Any Real Property CanBe Exchanged For Any Other Real Property! 105. Section 1031 can beused to dramatically increase the value ofholdings by leveragingUncle Sams money. 106. Ask the 4 Questions 1.Whatcha Got2.Howdya Get It?3.What Else ya Got? 4.Whatcha Want? 107. Nearly every tax paying entity qualifies for a Section 1031Exchange! 108. Personal property can also be Exchanged. Like-kind is literal! 109. There are replacement options available for Section 1031Understand Them! 110. Tenants-In-CommonManagement Free Real Estate Investments inGrade A Properties 111. UPREITExchange into a Real Estate Investment Trust 112. Oil & Gas A timely alternative toowning real-estate withthe same benefits and flexibility. 113. Structured SalesAn annuity basedPaycheck for failed exchanges and business transfers. 114. Also Must employ a Qualified Intermediary Time limits of 45 and 180 days Properties must be Like-Kind Business or Investment Purpose Relinquished and Replacement Properties heldby same taxpayer Exchanges can be done either forward or reverse 115. If you have questions. If your clients havequestions. If you want to strategize.. 116. Congratulations!You are now a member of the elite, theproud, the educated.Edmund & Wheeler, Inc.Alumni AssociationMembership has its benefits!www.section1031.com/alumni 117. Contact UsFor over 30 Years Edmund & Wheeler has helpedclients to defer $Millions 118. Thank you for your valuable time!!!