1031 Exchanges. by G. Scott Haislet

Transcription

1 1031 Exchanges by G. Scott Haislet

2 G. Scott Haislet, CPA Attorney at Law Certified Specialist Taxation California State Bar, Board of Legal Specialization 1031 exchange qualified intermediary 986 Moraga Road Lafayette, CA Fax (925) Phone (925) Copyright All rights reserved by G. Scott Haislet. No copyright claimed for government works. This work is not legal, tax, or accounting advice, counsel or representation. Taxpayers and their advisers must refer to current applicable law when evaluating any situation.

3 Regarding wills, trust, estate planning, corporations, LLCs, and entities (formation, dissolutions, etc.) 986 Moraga Road Lafayette, CA Fax (925) Phone (925) Ask for Scott Haislet (legal services provided by G. Scott Haislet, attorney at law)

4 1031 exchange qualified intermediary 986 Moraga Road Lafayette, CA Fax (925) Phone (925) Ask for Scott Haislet or Donna Kozel

5 Course Schedule Two 8 hour CPE courses With G. Scott Haislet Fundamentals of 1031 exchanges 07/11/2016 San Diego 11/07/2016 San Francisco 11/07/2016 Webcast (simulcast) 12/12/2016 Orange County 01/09/2017 Webcast Rebroadcast Real Estate Taxation 08/03/2016 Monterey 10/24/2016 San Francisco 10/24/2016 Webcast (simulcast) 11/28/2016 Webcast Rebroadcast 01/16/2017 LAX REGISTRATION Call registration for details. Each course will qualify for 8 hours CPA CPE. Each course will qualify for 6.5 general MCLE hours and 6.5 MCLE hours in Taxation Specialization. 5

6 About the author G. Scott Haislet 1031 exchange qualified intermediary. Licensed California attorney and CPA. Certified Taxation Specialist as certified by California State Bar Board of Legal Specialization. Frequent guest on San Francisco radio, KNBR-680 AM for tax, legal and financial issues regarding real estate. Author of many articles regarding 1031 exchanges, entity formation, and other real estate, legal, and tax issues. Licensed California real estate broker. Admitted to practice in United States Tax Court and other federal courts President East Bay Chapter of California CPA Society; past president of Contra Costa County Bar Association Tax Section. Former sports writer, covering Major League Baseball, National Football League, National Basketball Association, National Hockey League, NCAA football and basketball, among other things (that was a long time ago; I am older than I look!). G stands for Gerald. 6

7 Advisory This publication is not legal, tax, or accounting advice, counsel or representation. Taxpayers and their advisers must refer to current applicable law when evaluating any situation. Concepts illustrated may constitute aggressive tax strategies that may not be appropriate for all circumstances or taxpayers. 7

8 Overview of 1031 Fundamentals 8

9 1031(a)(1) - general rule 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. (emphasis added) 9

10 1031 Elements property Held for investment or business exchange Like kind Not ineligible (a)(2) 10

11 (forward) Deferred Exchange Relinquished Property Replacement Property taxpayer taxpayer 5/15/x1 11/11/x1 QI 5/15/x1 QI 11/11/x1 Buyer Seller Note: 45 day identification deadline is 6/29/x1 11

12 1031 deferred gain Example real estate exchange Relinquished Property: FMV (sale price) $ 30 Basis (10) Deferred Gain $ 20 Replacement property: Purchase price $ 55 Deferred gain (20) Adjusted basis $ 35 Gain deferred - not recognized 12

13 1031 deferred loss Example vehicle trade-in Relinquished Property: FMV (sale price) $ 30 Basis (45) Deferred Loss $ (15) Replacement property: Purchase price $ 55 Deferred loss 15 Adjusted basis $ 70 Loss deferred - not recognized 13

14 Napkin Test 14

15 Napkin Test Value test: Replacement property purchase price equals or exceeds relinquished property net sale price Equity test: Proceeds from relinquished property used fully as down payment for replacement property purchase 15

16 Napkin Test example 1 Relinquished Property: Sale price $1,000 Closing costs (60) Net sale price $ 940 Loan retired (340) Net cash proceeds $ 600 Replacement property: New loan $ 900 Down payment 600 Purchase price $1,500 16

17 Napkin Test example 2 Relinquished Property: Sale price $1,000 Closing costs (60) Net sale price $ 940 Loan retired (340) Net cash proceeds $ 600 Replacement property: Own money $ 700 Mortgage loan -0- Exchange funds 600 Purchase price $1,300 NO (mortgage) boot!!! 17

18 Napkin Test example 3 Relinquished Property: Sale price $1,000 Closing costs (60) Net sale price $ 940 Loan retired (340) Net cash proceeds $ 600 Replacement property: New loan $ 900 Down payment 400 Purchase price $1,300 Resulting cash out = $200 ("boot") 18

19 Napkin Test example 4 Relinquished Property: Sale price $1,000 Closing costs (60) Net sale price $ 940 Loan retired (340) Net cash proceeds $ 600 Replacement property: New loan $ -0- Down payment 600 Purchase price $ 600 Resulting debt relief = $340 ("boot") 19

20 Held for business or Investment held for or holding requirement under IRC 1031(a)(1), and business or investment requirement under IRC 1031(a)(1) Not "plain" meaning of the words Per Bolker (9 th Circuit, 56 AFTR 2d , 1985) 3 categories exist: 1. Property held or acquired to liquidate (e.g., "fixand-flip", inventory or "dealer" property), 2. Personal use property, or 3. "Investment" property within meaning of 1031 is everything not in categories 1 and 2 above. 20

21 1031(a)(2) ineligibility 21

22 1031(a)(2) ineligible assets [S]ubsection 1031(a) 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. 22

23 1031(a)(2)(D) Interests in a Partnership [S]ubsection 1031(a) shall not apply to any exchange of (D) interests in a partnership 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 interest in each of the assets of such partnership and not as an interest in a partnership. (emphasis added) 23

24 Partnership interest per IRC 1031(a)(2)(D) Owner #1 Owner #2 Owner #3 Partnership Property Owner #1, #2, and #3 have partnership interests, presumably covered by IRC 1031(a)(2)(D) thus not eligible for 1031 treatment. Note: the partnership can effect a 1031 exchange. 24

25 IRC 761 exception to IRC 1031(a)(2)(D) Owner #1 Owner #2 Owner #3 Undivided interest Undivided interest Undivided interest Property Owner #1, #2, and #3 have direct fractional interests in the property, presumably an exception to IRC 1031(a)(2)(D) thus each owner is eligible for 1031 treatment. 25

26 (Former) Partners" after "drop" to "TIC" Owner #1 Owner #2 Owner #3 Undivided interest Undivided interest Undivided interest Taxable sale 1031 (QI) 1031 (QI) 26

27 "Investing Partnerships" Reg (a)(2) Election in effect. Reg (a)(2). Not an active business Owned as "co-owners" Separate tax reporting No IRS Form 1065 No restraint on alienation No special allocations (e.g., IRC 704) 27

28 Delayed (Deferred) Exchanges 1031(a)(3) 28

29 "Delayed" exchange 1031(a)(3) Reg (k)-1 "Treatment of deferred exchanges" 45 day identification period Reg (k)-1(c). 180 day exchange period (or tax return deadline!) Reg (k)-1(g) safe harbors 29

30 (forward) Deferred Exchange Relinquished Property Replacement Property taxpayer taxpayer 5/15/x1 11/11/x1 QI 5/15/x1 QI 11/11/x1 Buyer Seller 30

31 Exchange Time Line Day 0 = January 25, 2015 Day 45 = March 11, 2015 Day 180 = July 24,

32 Example Exchange Time Line Day 0 = November 8, 2014 Day 45 = December 23, 2014 Day 180 = May 7, 2015 ** ** assuming calendar year taxpayer, 180 day limit achieved only if taxpayer applies for extension of time to file 32

33 Exchange Time Line Day 0 = July 11, 2015 Day 45 = August 25, 2015 Day 180 = January 7, 2016 Note: this defers gain (generally) 1 year on failed exchange, if exchange fails on 1/8/16 33

34 Identification Rules and Issues 34

35 Identification -- what and how?? Signed writing with unambiguous description Sent (postmarked) not later than 45 th day of exchange period (i.e., 45 days after relinquished property closes) Certified mail is best option Sent to qualified intermediary ( QI ), generally It is not a commitment to purchase anything, not a contract; it is simply a private communication from taxpayer to QI Purchase of replacement property (closing) within 45 day identification period is considered identification of that property 35

36 Identification -- How many?? Reg (k)-1(c) 3 property rule 200% rule 95% rule 36

37 Preferred ID Rule Author's comment: The 3-property rule is the preferred limitation that exchanging taxpayer should observe and use because no controversy about property valuation. 37

38 Other Identification Issues No extensions of 45 day period No substitutions after 45 days Signed written identification Unambiguous description Identification recipient QI or?? Reg (k)-1(c)(2). Property to be produced Reg (k)- 1(e)(2). War stories 38

39 Identification "War Stories" "Are you flexible?" "Extension fee" "I'll just name a sub-division" "My CPA said he will arbitrate with IRS (on ambiguous identification)" "Can't believe IRS would be so inflexible on this" "Empty envelope" Fax machine date-stamping ( Back to the Future ) "Can I come to your office to review forms?" "Betty down at the title company is very friendly" 39

40 1031 Exchange Parking Arrangements Improvement exchanges Reverse exchanges Rev. Proc

41 Improvement Exchanges 41

42 Improvement Exchange Relinquished Property Replacement Property IMPROVE- MENTS 42 Land (Fee Interest) 1. Land parked with EAT (i.e., EAT buys land from 3rd party seller) 2. EAT constructs improvements per QEAA (at taxpayer s direction). 3. EAT (through QI) transfers replacement property to taxpayer.

43 Forward Improvement Exchange Relinquished Property Replacement Property taxpayer taxpayer 5/15/x1 11/11/x1 QI 5/15/x1 QI Buyer Exchange is deferred under IRC 1031(a)(3). IMPROVEMENTS occur Between 5/15 and 11/11. EAT Seller 11/11/x1 5/15/x1 43

44 Reverse Exchanges 44

45 Reverse Exchange "Exchange First" Relinquished Property Replacement Property taxpayer taxpayer QI EAT Buyer 5/15/x1 5/15/x1 On or before 11/11/x1 QI Seller 5/15/x1 5/15/x1 Exchange is concluded on 5/15/x1. 45

46 Reverse Exchange "Exchange Last" Relinquished Property Replacement Property taxpayer taxpayer 11/11/x1 11/11/x1 QI Buyer 11/11/x1 QI EAT 11/11/x1 Exchange is simultaneous on on 11/11/x1. Seller 5/15/x1 46

47 Regarding wills, trust, estate planning, corporations, LLCs, and entities (formation, dissolutions, etc.) 986 Moraga Road Lafayette, CA Fax (925) Phone (925) Ask for Scott Haislet (legal services provided by G. Scott Haislet, attorney at law)

48 1031 exchange qualified intermediary 986 Moraga Road Lafayette, CA Fax (925) Phone (925) Ask for Scott Haislet or Donna Kozel

49 G. Scott Haislet, CPA Attorney at Law Certified Specialist Taxation California State Bar, Board of Legal Specialization 1031 exchange qualified intermediary 986 Moraga Road Lafayette, CA Fax (925) Phone (925) Copyright All rights reserved by G. Scott Haislet. No copyright claimed for government works. This work is not legal, tax, or accounting advice, counsel or representation. Taxpayers and their advisers must refer to current applicable law when evaluating any situation.