Section 1031 for Real Estate Professionals

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Class workbook for 3HR CE Real Estate class. Approved in NH, ME, VT.

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<ul><li>1.FlawlessSection1031ExchangesforOver30Years Section 1031 For Real Estate Professionals 3 Hour Elective Course Approved by: The New Hampshire, Vermont &amp; Maine Real Estate CommissionsEdmund &amp; Wheeler, Inc. QI It is estimated that 20-25% of the nearly651 Main Street $200B in annual real estate transactionsP.O. Box 863could benefit from a Section 1031Franconia, NH 03580 Exchange, and that only 3% takeadvantage of this powerful tool. 603-444-0020 Edmund &amp; Wheeler, as a QualifiedIntermediary (QI), has been facilitatingSection 1031 Exchanges for over 27 years. www.section1031.comWe have developed The Power of Sectionexchange@section1031.com1031 to provide a solid understanding ofSection 1031 basics and the strategic waysin which Section 1031 can be utilized and toassist real estate professionals inrecognizing opportunities for their clients. 2012 Edmund &amp; Wheeler, Inc. All rights reserved. The enclosed materials and hypothetical examples are provided for educational purposes onlyand do not constitute tax, accounting, legal or investment advice.</li></ul><p>2. Welcome To Section 1031 for Real Estate Professionals. This workbook has been designed to assist you during the course, and to provide a reference tool for you in the future. The session is broken down into three sections as described below. Web references have been made throughout the document so that you can do further topical research as required. Web references are indicated with a grey arrow. www.section1031.com If you have follow-on questions or concerns after you complete this course, Edmund &amp; Wheeler is always available by email at exchange@section1031.com, by phone at 603-444-0020, or on the Web at www.section11031.com. Our practice provides real estate professionals with Section 1031 consulting at no charge!Section1providesyouwithanoutlineofthiscourse,anintroductionSectiontotheSection1031Exchangeandtheessentialelementsrequiredfor1 successfulexchanges. Introduction &amp; 1031 Basics Thissectionlastsapproximately1hourandbeginsonPage3.Section2containscasestudiesofthevarioustypesofExchangesasSection wellasreallifeexamplesofactualtransactionsthatwillassistyouin2 developingyourownSection1031strategies.Case Studies &amp; Real-life Examples Thissectionlastsapproximately1hourandbeginsonPage20.Section3outlinestheviablealternativesforExchangesthatcanbeSectionusedfordiversification,relocationorthedesireofaclientwishingto3 exitfromtherealestateinvestmentclass. Alternate Exchange Opportunities Thissectionlastsapproximately1hourandbeginsonPage38.1PageCourseSummaryMustHaveSection1031Concepts SummaryCommonlyusedphrasesandSection1031definitions.BeginsonPage57.Section 1031 Glossary 2008- 2012 Edmund &amp; Wheeler, Inc. All rights reserved. The enclosed materials and hypothetical examples are provided foreducational purposes only and do not constitute tax, accounting, legal or investment advice. 2 3. Section1Introduction &amp; 1031 BasicsContents Introduction.................................................................................................................................... 4 About Edmund &amp; Wheeler, Inc. ..................................................................................................... 5 Course Outline .............................................................................................................................. 6 Primary Objectives of This Course................................................................................................ 6 What Is A Section 1031 Exchange................................................................................................ 7 The Five Critical Elements of an Exchange .................................................................................. 7 The Regulation .............................................................................................................................. 7 An Exchange at A glance .............................................................................................................. 8 Section 1031 (a)(1) IRS Code ....................................................................................................... 8 What is Investment Purpose? ....................................................................................................... 12 What Are the Benefits of an Exchange? ....................................................................................... 12 The Essential Elements ................................................................................................................ 12 Replacement Property Rules ........................................................................................................ 13 Real Property (What is Like Kind?) ............................................................................................... 14 Personal Property.......................................................................................................................... 15 Timing Is Everything ...................................................................................................................... 16 What Does The QI Do? ................................................................................................................. 16 Who Qualifies for an Exchange?................................................................................................... 16 The Qualification Tool ................................................................................................................... 17 The Five Most Common Section 1031 Misconceptions ................................................................ 19 2008- 2012 Edmund &amp; Wheeler, Inc. All rights reserved. The enclosed materials and hypothetical examples are provided foreducational purposes only and do not constitute tax, accounting, legal or investment advice.3 4. ToomanyprofessionalsgetcaughtupinthebeliefthatSection1031isonlyaboutdeferringcapitalgains.Whileitisoneoftheremainingtaxdeferraltoolsavailable,itsactuallyaLOTaboutleverage.Clientsusingwhattheywouldhavepaidimmediatelyincapitalgainstaxestoimprovethequalityandvalueoftheirholdingsandplanfortheirfinancialfuture;isREALLYwhatSection1031isallabout.Section1031hasbeenapartoftheInternalRevenueServiceCodesince1921!LookatitasagiftfromUncleSam,butdonttellanyone. Ok,letsdothemath.Thesenumberssuggestthat investorspaidtheGovernmentover$10Bincapitalgains taxeswheninfact,theycouldhaveusedthismoneyin theirownportfolios,interestfree,foraslongasthey wouldlike.Waitaminute Whyisthisso?Wehavefoundthatmanyprofessionals thatwedealwithonadaytodaybasisareunclearofthe manystrategicusesofSection1031.Unfortunately,there arestillmanythatdontevenknowofitsexistence,and failtorecognizeevenitsmostbasicuses. Dontletyourclientsfindoutyoudidnttellthemthey couldhaveusedthispowerfultool. Asrealestateprofessionals,youhaveacertain responsibilitytoyourclientsregardingthetax ramificationsoftheirtransactions.Holdersofinvestment realestateshouldbemadeawareofthetoolsthatare availabletohelpthemstrengthentheirrealestate portfolios.Section1031isoneofthemorepowerfultools. Wehearoverandoveragainfromrealestate professionalshowthankfultheirclientswerethatthey understoodSection1031andhelpedthemtoexplorethe possibilities.Indeed,manyofourrealestatepartners havesavedtheirclientshundredsofthousandsofdollars incapitalgainexpense,givingthemmoremoneyto invest,whileearningmultiplecommissionsintheprocess! 2008- 2012 Edmund &amp; Wheeler, Inc. All rights reserved. The enclosed materials and hypothetical examples are provided foreducational purposes only and do not constitute tax, accounting, legal or investment advice.4 5. In1981,Mr.GeorgeFoss,III,ourfounderandcoprincipalwasaprominentrealestate brokerinNorthernNewHampshire.AfterreadingabouttheconceptofaSection1031 Exchange,hewasimmediatelyintrigued,andsawtheopportunitytoaddaninterestingtwist tohisrealestatedealsbyhelpingclientstotakeadvantageofthisvirtuallyunknowngift fromUncleSam. 27yearsandthousandsofsuccessfulexchangeslater,GeorgeEdmund&amp;Wheelerremains theforemostauthoritiesonSection1031intheNewEnglandstates,andhavecompleted exchangeswithclientsin48of50states. ThefirmhasprovidedSection1031educationandconsultingtohundredsofNewEngland realestateprofessionalsandhashelpedthemtosavetheirclientsover$100Millionin capitalgainstaxes. GeorgeFoss,Founder,QI JohnHamrick,QI 2008- 2012 Edmund &amp; Wheeler, Inc. All rights reserved. The enclosed materials and hypothetical examples are provided foreducational purposes only and do not constitute tax, accounting, legal or investment advice. 5 6. Thiscoursehasbeendesignedtoassistyouin becomingproficientinthebasicsofaSection 1031Exchange. AnExchangecanbeaverycomplexandtime consumingendeavor.YourQIwillunderstand allofthemechanicsandthemyriadofrulesand regulationssurroundinganExchange.Ourgoal forthissessionistoprovideyoutheknowledge andtoolsyouwillrequiretoassistyourclients inrecognizingthetremendousopportunities thatSection1031provides. Section1031isnotjustataxdeferralvehicle.It isapowerfulpartofyourclientsoverall investmentstrategy,theirexitstrategyfroma business,andanintegralpartoftheirestate planning. Bottomlineisthatthetaxesthataredeferred canbeusedtoleveragelargerinvestments, diversifyportfoliosandsubstantiallyincrease wealthoveraperiodoftime. Dontworry,wewontgradeyou.Wewantto takeaninventoryofwhatourstudentsknow aboutSection1031priortothecourse. Whenthecourseisover,wewillretakethe quiz,andyouwillseehowfaryouvecomein justashorttime. GoodLuck! 2008- 2012 Edmund &amp; Wheeler, Inc. All rights reserved. The enclosed materials and hypothetical examples are provided foreducational purposes only and do not constitute tax, accounting, legal or investment advice.6 7. Section1031fundamentallyisabouttherelocationandreallocationofyourclientsrealestateassets,allwithoutpayingcapitalgainstaxes.Relocationcouldbeacrossthestreet,oracrossthenation.Clientscanrelocatetheirholdingstoseveralmarkets,creatinggeographicaldiversity.Theycanalsoreallocateholdingsbycombiningmultipleholdingsintoonemorevaluableproperty.TheycansellapartmentbuildingsandExchangeforsinglefamilyhousingunits,ortheycanoptforoneofthepassiverealestateinvestmentsavailabletothemandleavethedaytodaymanagementofrealestatetoaprofessionalpropertymanagementteam.Section1031exchangesarereportedonyourtaxreturnbyusingSchedule8824.Itisimportantthatallofthedocumentationleadinguptoandthroughouttheexchangeisexplicitthatanexchangeistakingplaceandnotanordinarysale.Thetaxpayercannottouchthefundsoritwilltriggerthetax.TheRelinquishedPropertyandtheReplacementpropertymustbeinvestment/businessusepropertyinthetaxpayershands.Allexchangesmustbeconcludedwith180days.AnexchangeishandledinthesamemannerasaregularsalewiththeexceptionthatathirdpartyQualifiedIntermediary(QI)providesthedocumentationandhandlesallfunds. 2008- 2012 Edmund &amp; Wheeler, Inc. All rights reserved. The enclosed materials and hypothetical examples are provided foreducational purposes only and do not constitute tax, accounting, legal or investment advice. 7 8. www.section1031.com/PDFs/New PDFs/IRC1031.pdfSection 1031 (a)(1)(a) Nonrecognition of gain or loss from exchanges solely in kind(1) In generalNo gain or loss shall be recognized on the exchange of property held for productive use in a trade orbusiness or for investment if such property is exchanged solely for property of like kind which is to beheld either for productive use in a trade or business or for investment.(2) ExceptionThis subsection shall not apply to any exchange of(A) stock in trade or other property held primarily for sale,(B) stocks, bonds, or notes,(C) other securities or evidences of indebtedness or interest,(D) interests in a partnership,(E) certificates of trust or beneficial interests, or(F) choses in action.For purposes of this section, an interest in a partnership which has in effect a valid election under section 761 (a) to be excluded from the application of all of subchapter K shall be treated as an interestin each of the assets of such partnership and not as an interest in a partnership. 2008- 2012 Edmund &amp; Wheeler, Inc. All rights reserved. The enclosed materials and hypothetical examples are provided foreducational purposes only and do not constitute tax, accounting, legal or investment advice. 8 9. (3) Requirement that property be identified and that exchange be completed not more than 180 days aftertransfer of exchanged propertyFor purposes of this subsection, any property received by the taxpayer shall be treated as property which is notlike-kind property if(A) such property is not identified as property to be received in the exchange on or before the day which is 45days after the date on which the taxpayer transfers the property relinquished in the exchange, or(B) such property is received after the earlier of(i) the day which is 180 days after the date on which the taxpayer transfers the property relinquished in theexchange, or(ii) the due date (determined with regard to extension) for the transferors return of the tax imposed by thischapter for the taxable year in which the transfer of the relinquished property occurs.(b) Gain from exchanges not solely in kindIf an exchange would be within the provisions of subsection (a), of section 1035(a), of section 1036(a), or ofsection 1037(a), if it were not for the fact that the property received in exchange consists not only of propertypermitted by such provisions to be received without the recognition of gain, but also of other property or money,then the gain, if any, to the recipient shall be recognized, but in an amount not in excess of the sum of suchmoney and the fair market value of such other property.(c) Loss from exchanges not solely in kindIf an exchange would be within the provisions of subsection (a), of section 1035(a), of section 1036(a), or ofsection 1037(a), if it were not for the fact that the property received in exchange consists not only of propertypermitted by such provisions to be received without the recognition of gain or loss, but also of other property ormoney, then no loss from the exchange shall be recognized.(d) BasisIf property was acquired on an exchange described in this section, section 1035 (a), section 1036(a), or section1037 (a), then the basis shall be the same as that of the property exchanged, decreased in the amount of anymoney received by the taxpayer and increased in the amount of gain or decreased in the amount of loss to thetaxpayer that was recognized on such exchange. If the property so acquired consisted in part of the type ofproperty permitted by this section, section 1035 (a), section 1036(a), or section 1037 (a), to be received withoutthe recognition of gain or loss, and in part of other property, the basis provided in this subsection shall beallocated between the properties (other than money) received, and for the purpose of the allocation there shall beassigned to such other property an amount equivalent to its fair market value at the date of the exchange. Forpurposes of this section, section...</p>