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Section 1031 Exchanges in the 21st Century - Reducing Taxes on Investment Property Presented by: Citibank, N.A. – 1031 Exchange Services David M. Gorenberg, Esquire Certified Exchange SpecialistŽ

Presented for: Susanna Kunkel, Coldwell Banker Preferred

February 21, 2013


Important Disclosures This presentation does not constitute legal or tax advice. Citibank and its employees do not provide tax or legal advice and are not responsible for advising customers on the laws or regulations pertaining to any 1031 exchange transaction. Citibank and its employees will not make any representations regarding the tax consequences of any 1031 exchange transaction. It is the customer’s responsibility to seek tax and legal advisors in connection with any 1031 exchange transaction. IRS Circular 230 Disclosure: To the extent that this material or any attachment concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Citibank, N.A., Member FDIC. Citibank and Arc Design is a registered trademark of Citigroup Inc.

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Section 1031 Exchanges in the 21st Century


Why Exchange?

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Section 1031 Exchanges in the 21st Century


Taxation 101 • Generally, all income is taxable, unless specifically exempted by law. • Even illegal income, such as stolen or embezzled funds, must be reported on Line 21 of Form 1040. Source: Department of Treasury, Internal Revenue Service, Publication 525.

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Section 1031 Exchanges in the 21st Century


IRC Section 1031 • “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 for productive use in a trade or business or for investment.” • §1031 provides for deferral of taxes, not complete elimination.

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Section 1031 Exchanges in the 21st Century


§1031 in a Nutshell • To obtain complete deferral of capital gains taxes, the taxpayer should: – Purchase replacement property that is equal or greater in value to the relinquished property – Have equal or greater equity in the replacement property – Have equal or greater debt on the replacement property – Receive nothing except like-kind property – Avoid constructive receipt of exchange proceeds – Use a qualified intermediary

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Section 1031 Exchanges in the 21st Century


Like-kind Property

Foreign real property is not like-kind to U.S. real property. 7

Section 1031 Exchanges in the 21st Century


Business or Investment Use • There are five tax classes of property: 1)

property used in taxpayer’s trade or business;

2)

property held primarily for sale to customers;

3)

property which is used as your principal residence;

4)

property held for investment; and

5)

property used as a vacation home

• Section 1031 applies to the first and fourth categories (and perhaps the fifth)

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Section 1031 Exchanges in the 21st Century


Less than Fee Interests in Real Property that Qualify for Exchanges • Leases with at least 30 years remaining, including renewal options • Vendee’s interest in a land sale contract; not the vendor’s interest • Undivided interest in one property for an undivided or 100% interest in another property • Remainder interest in real property • Timber rights, riparian rights, mineral rights – As determined by state law

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Section 1031 Exchanges in the 21st Century


Common Personal Property Exchanges • Aircraft • Artwork • Collectibles • Equipment • Fleet Vehicles • Intellectual Property – Licenses, Franchises, Patents, Trademarks • Livestock • Others 10

Section 1031 Exchanges in the 21st Century


Time Restrictions

• 1984 Congress amends Section 1031 - 45 day identification period - 180 day exchange period runs concurrent - Or due date of tax return, whichever is earlier - Calendar days, not business days - No extensions

Identification Period Exchange Period Day 0

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Day 45

Section 1031 Exchanges in the 21st Century

Day 180


Identification Requirements • Signed, and in writing • Delivered – QI or seller of replacement property • Unambiguously described – Legal description – Street address – Distinguishable name (e.g., Mayfair Apartment Building) • May be revoked or amended, with same formality as above

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Section 1031 Exchanges in the 21st Century


Identification Rules • 3 Property Rule – up to 3 properties, without regard to FMV; or • 200% Rule – any number of properties, so long as aggregate FMV does not exceed 200% of FMV of relinquished properties; but • 95% Exception – if first two rules violated, must acquire 95% of FMV of all identified properties

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Section 1031 Exchanges in the 21st Century


What is “Constructive Receipt”? How Do I Avoid It?

- “Constructive Receipt” - the taxpayer’s ability to receive, pledge, borrow, or otherwise obtain the benefits of cash proceeds before the end of the exchange period - Avoid constructive receipt by hiring a “Qualified Intermediary” - QI is taxpayer’s agent for all BUT federal income tax purposes - QI typically receives and holds the exchange proceeds until the taxpayer is ready to acquire like-kind replacement property

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Section 1031 Exchanges in the 21st Century


Who Can Be a Qualified Intermediary? - QIs may not be related to or employed by the taxpayer, or provide legal, accounting, investment advice or real estate services. - QIs may provide routine banking, title or trust services, or incidental services related solely to the exchange of property.

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Section 1031 Exchanges in the 21st Century


The Bad and The Ugly

1031 Tax Group – Richmond, VA; Edward H. Okun and others in his business – 2007; 300 +/- open exchanges; $151MM+ – Funds used to acquire jewelry, sports cars, helicopters, shopping malls and other “toys”

Southwest Exchange – Henderson, NV; Donald K. McGhan and others in his family – 2007; 130+ clients; $97.5MM+ – Funds used to acquire breast implant company, 19-passenger jet, lavish meals, etc.

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Section 1031 Exchanges in the 21st Century


Federal Regulation of Qualified Intermediaries

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Section 1031 Exchanges in the 21st Century


State Regulation of Qualified Intermediaries • Enacted

• Pending

– California

– Arizona

– Colorado

– New Jersey

– Connecticut

– Oklahoma

– Idaho

– Texas ≈ Bill Died

– Maine – Nevada – Oregon – Virginia – Washington

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Section 1031 Exchanges in the 21st Century


Choosing a Qualified Intermediary • Phone Book? • Internet? • Referrals

• Qualifications – When was firm established – Primary business, or sideline – How many transactions completed – Financial stability – Security of exchange proceeds – Fees, and what is included – FEA • www.1031.org

– Certified Exchange Specialist® • www.1031ces.org

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Section 1031 Exchanges in the 21st Century


Your Questions

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Section 1031 Exchanges in the 21st Century


Contact Information

David Gorenberg, Esquire Certified Exchange Specialist速 Director, 1031 Exchange Services

Susanna Kunkel Certified Negotiation Expert

Citibank, N.A. 1650 Market Street, Suite 3550 Philadelphia, PA 19103 Office: 267.385.3624 Fax: 866.767.8201 Cell: 856.905.0407 E-mail: david.gorenberg@citi.com

Coldwell Banker Preferred 1401 Walnut Street, 8th Floor Philadelphia, PA 19102 Cell: 215.920.2888 Fax: 215.558.1104 E-mail: susanna.kunkel@gmail.com

Thank You! February 21, 2013 21

Section 1031 Exchanges in the 21st Century


1031 exchange seminar