The Voice of the 1031 Industry

Transcription

1 Building for the Future

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3 Why should a QI know how to fill out an 8824 tax form? Many of us are bombarded with questions that are technically outside our job description. Because this is our subject, many QIs know substantially more about IRC 1031 issues than the legal and tax professionals that we work with. Each of us should have learned methods that are consistent with the level of our training, knowledge and professional credentials so that we can be helpful without being misleading and without overstepping our authority and without risking liability. For what it s worth, here is what I heard at an FEA conference.

4 In that spirit:

5 Name as show on tax return and Identifying number [i.e. taxpayer s TIN] What to do when there is a 708(b)(2)(B) reorganization? In my opinion: Newco LLC as a continuation of Oldco LLC pursuant to IRC 1031, report the exchange on Newco s initial tax return and use Newco s EIN. If Oldco continues in business, make a suitable notation on its return.

6 1 Description of the like-kind property given up 2 Description of the like-kind property received. This is less formal than on an ID notice. A general, useful description is adequate.

7 3 Date like-kind property given up was originally acquired (month, day, year) This can be an uncomfortable question to answer if the holding period was short. Taxpayer should be prepared with a reasonable account of what happened and some proof to support an explanation for a short holding period.

8 4 Date you actually transferred your property to the other party (month, day, year) This can be an interesting question when there is a hard escrow or a Use And Occupancy Agreement. In some cases, taxpayer might consider adding an explanation.

9 5 Date like-kind property you received was identified by written notice to another party (month, day, year) See instructions for 45-day written identification requirement If anyone is unsure of the 45-day identification requirements, please raise your hand. If line 5 minus line 4 is more than 45 days, taxpayer has a big problem.

10 6 Date you actually received the like-kind property from other party (month, day, year) See instructions Interesting question when a hard escrow was used or use and occupancy agreement must be within normal 1031 time limits.

11 7 Was the exchange of the property given up or received made with a related party, either directly or indirectly (such as through an intermediary)? See instructions. If Yes, complete Part II. If No, go to Part III Why is there a question here about whether a related party acquired the relinquished property in light of PLR ? Because the question is addressed only to an exchange. If there was an exchange, the related party will have its own related party transaction issue. #rat-fink rule.

12 Note: Do not file this ofrm if a related party sold property into the exchange, directly or indirectly (such as through an intermediary); that property became your replacement property; and none of the exceptions in line 11 applies to the exchange. Instead, report the disposition of the property as if the exchange had been a sale. If one of the exceptions on line 11 applies to the exchange, complete Part II. Not much to say here that would be enlightening.

13 Part II Related Party Exchange Information 8. Name of related party Relationship to you Related party s TIN Address (no., street, and apt. room, or suite no., city or town, state and zip Note that it is a practical necessity to have the EIN of the related party. Related parties are, of course, determined pursuant to IRC 267(B) and 707(b)(1). Constructive ownership rules apply to corporations and partnerships, but not to trusts. For example, an irrevocable trust where Brother was the grantor does not appear to be a related to Sister without some further connection.

14 9 During this tax year (and before the date that is 2 years after the last transfer of property that was part of the exchange), did the related party sell or dispose of any part of the like-kind property received from you (or an intermediary) in the exchange? Not merely a rat-fink rule, since this relates to the taxpayer s own exchange. Note that this form must be filed for the two years after an exchange with a related party.

15 10 During this tax year (and before the date that is 2 years after the last transfer of property that was part of the exchange), did you sell or dispose of any part of the like-kind property received? It is often appropriate for the taxpayer or the related party to engage in a subsequent like-kind exchange with its current replacement property during the 2-year holding period. In my opinion, in that case, this Box 10 would have to be checked, and an explanation attached pursuant to box 11c.

16 If both lines 9 and 10 are No and this is the year of the exchange, go to Part III. If both lines lines 9 and 10 are No and this is not the year of the exchange, stop here. If either line 9 or line 10 is Yes, complete Part III and report on this year s tax return the deferred gain or (loss) from line 24 unless one of the exceptions on line 11 applies. Nothing to add here.

17 If one of the exceptions below applies to the disposition, check the applicable box. a The disposition was after the death of either of the related parties. b The disposition was an involuntary conversion, and the threat of conversion occurred after the exchange. c You can establish to the satisfaction of the IRS that neither the exchange nor the disposition had tax avoidance as one of its principal purposes. If this box is checked, attach an explanation. See instructions. All three criteria are paraphrased from IRC 1031(f)(2). c, of course, is risky to claim, but sometimes perfectly appropriate.

18 Part III

19 Part III Realized Gain or (Loss), Recognized Gain, and Basis of Like-Kind Property Received Caution: If you transferred and received (a) more than one group of like-kind properties or (b) cash or other (not like-kind) property, see Reporting of muliasset exchanges in the instructions. Multiple property exchanges are not multi-asset exchanges. Multi-asset exchanges involve the exchange different classes of like-kind property. Thay are nearly obsolete (e.g. US and foreign real property, long-term and short-term leases). However, multiple exchanges are not.

20 2007 Instructions for Form 8824 Like-Kind Exchanges (and section 1043 conflict-of-interest sales) Multi-asset exchanges. A multi-asset exchange involves the transfer and receipt of more than one group of like-kind properties. For example, an exchange of land, vehicles, and cash for land and vehicles is a multiasset exchange. An exchange of land, vehicles, and cash for land only isn't a multi-asset exchange. The transfer or receipt of multiple properties within one like-kind group is also a multi-asset exchange. Special rules apply when figuring the amount of gain recognized and your basis in properties received in a multi-asset exchange. For details, see Regulations section (j)-1

21 2007 Instructions for Form 8824 Like-Kind Exchanges (and section 1043 conflict-of-interest sales) Reporting of multi-asset exchanges. If you transferred and received (a) more than one group of like-kind properties or (b) cash or other (not like-kind) property, don't complete lines 12 through 18 of Form Instead, attach your own statement showing how you figured the realized and recognized gain, and enter the correct amount on lines 19 through 25. Report any recognized gains on your Schedule D; Form 4797, Sales of Business Property; or Form 6252, Installment Sale Income, whichever applies.

22 2007 Instructions for Form 8824 Like-Kind Exchanges (and section 1043 conflict-of-interest sales) Multiple exchanges. If you made more than one like-kind exchange, you can file a summary on one Form 8824 and attach your own statement showing all the information requested on Form 8824 for each exchange. Include your name and identifying number at the top of each page of the statement. On the summary Form 8824, enter only your name and identifying number, Summary on line 1, the total recognized gain from all exchanges on line 23, and the total basis of all like-kind property received on line 25.

23 Note: Complete lines 12 through 14 only if you gave a property that was not likekind. Otherwise, go to line Fair Market value (FMV) of other property given up 13. Adjusted basis of other property given up 14. Gain or (loss) recognized on other property given up. Subtract line 13 from line 12. Report the gain or (loss) in the same manner as if the exchange had been a sale.

24 15. Cash received, FMV of other property received, plus net liabilities assumed by other party, reduced (but not below zero) by any exchange expenses you incurred. See instructions. This is the formula for net boot, i.e., everything taxpayer received that was not like-kind property (and not cash used to pay for the replacement property, itself) minus exchange expenses. What about cash boot out before cash boot in? Note the difference between transaction costs and exchange costs. Line 15 cannot be less than zero.

25 16. FMV of like=kind property you received. In my opinion, this is ordinarily the unadjusted gross purchase price of the replacement property, the same FMV that we would use for 200% rule purposes. Transaction/exchange expenses are included in line 15 and/or line 18.

26 17. Add lines 15 and 16 This puts a number on everything that the taxpayer took away from of the transaction: the boot from line 15 plus the value of the replacement property.

27 18. Adjusted basis of like-kind property you gave up, net amounts paid to the other party, plus any exchange expenses not used on line 15. See instructions. Line 18 is a first approach at calculating the taxpayer s basis in the replacement property. It is needed to calculate realized gain. The other party is the seller of the replacement property. Net amounts means outside cash plus new debt. As I understand this form, the exchange expenses included here would be those that were paid for with outside funds, not with exchange proceeds.

28 19. Realized gain or (loss). Subtract line 18 from line 17 Line 17 was about calculating what the taxpayer got out of the exchange. Line 18 is about calculating the new initial basis The difference is the realized gain. Hopefully, little of that gain will be recognized.

29 20. Enter the smaller of line 15 or line 19, but not less than zero. Line 15 is ordinarily the amount of income that will be recognized. But the income recognized will never be more than the income that was actually realized on line 19. therefore, the smaller of the two is entered on line 20.

30 21. Ordinary income under recapture rules. Enter here on Form 4797, line 16. See instructions. Form 4797 Sales of Business Property 16 Ordinary gains or (loss) from like-kind exchanges form 8824 Note that this form properly applies to property used in a trade or business not to investments. But there appears to be no choice.

31 22 Subtract line 21 from line 20. If zero or less enter -0-. If more than zero, enter here and on Schedule D or Form 7897, unless the installment method applies. See Instructions. The lumps together all capital gains (IRC 1(h)(1)), including unrecaptured 1250 gains, subsection (E).

32 23 Recognized gain. Add lines 21 and 22 Notice that this should equal line 20 and (if boot was less than all realized gain) line 15.

33 24 Deferred gain or (loss). Subtract line 23 from line 19. If a related party exchange, see instructions. This is straightforward: The realized gain minus the recognized gain equals the deferred gain.

34 25 Basis of like-kind property received. Subtract line 15 from the sum of lines 18 and 23. This, for once, is straightforward: The realized gain minus the recognized gain equals the deferred gain.

35 We are going to skip Part IV Deferral of Gain from Section 1043 Conflict-of-Interest-Sales. This is literally none of my business... at least so far.

36 Thank you.