Presenting a live 90 ‐ minute webinar with interactive Q&A 1031 Like ‐ Kind Exchanges: Pursuing 1031 Like Kind Exchanges: Pursuing Opportunities in a Rebounding Market Mastering Complex Tax Rules and Leveraging the New Net Investment Income Tax WEDNES DAY, AUGUS T 28, 2013 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific T d Today’s faculty features: ’ f l f John (Trey) Webb, S hareholder, Bennett Thrasher , Atlanta Ricky Novak, Strategic 1031 Exchange Advisors , Atlanta The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10 .
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Tax law changes and IRC 1031 Tax law changes and IRC 1031 August 28, 2013 Trey Webb TWebb@btcpa net TWebb@btcpa.net
Circular 230 Disclosure To comply with Treasury Department regulations, we inform you that, unless otherwise expressly indicated, any tax advice contained in this communication is not intended or written to be contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties that may be imposed under the Internal Revenue Code or any other applicable tax law or (ii) promoting, marketing, or th li bl t l (ii) ti k ti recommending to another party any transaction, arrangement, or other matter. PAGE 6
Why like kind exchanges should regain momentum… They defer income taxes! American Taxpayer Relief Act of 2012 o Net Investment Income Taxes under PPACA o Depreciation recapture under bonus depreciation rules o PAGE 7
American Taxpayer Relief Act of 2012 Law passed in Senate on January 1, 2013, signed by President Obama on January 2 nd Fulfills President’s pledge to raise taxes on wealthiest F lfill P id t’ l d t i t lthi t Americans Top ordinary tax rate increases from 35% to 39.6% Top capital gains rate increases from 15% to 20% Single $400 000; Married filing joint $450 000 Single $400,000; Married filing joint $450,000 Itemized deductions and personal exemptions phase out Single $250,000; Married filing joint $300,000 PAGE 8
Net Investment Income under PPACA Law was passed in 2010 but taxes delayed until 2013 Net investment income over $250,000 subject to 3.8% surtax t IRS issued proposed regulations December 2012 PAGE 9
Net Investment Income under PPACA Background Investment income includes: Investment income includes: Gross income from interest, dividends, annuities, royalties and rents, other than such w hich is derived in the ordinary course of a trade or derived in the ordinary course of a trade or business except… (IRC § 1411(c)(1)(A)(i)) Net gain attributable to the disposition of property other than property held in a trade or business except… (IRC § 1411(c)(1)(A)(iii)) p ( ( )( )( )( )) PAGE 10
Net Investment Income under PPACA Background Tax applies to trades or businesses which are Tax applies to trades or businesses which are Passive activities (IRC § 1411(c)(2)(A)) In the trade or business of trading financial instruments or commodities (IRC § 1411(c)(2)(B)) PAGE 11
Net Investment Income under PPACA Background Income not recognized for regular income tax will Income not recognized for regular income tax will not be recognized for net investment income tax (see Preamble to Proposed Regulations) Planning opportunities for : Planning opportunities for : 1031 Like kind exchanges Installment sales Involuntary conversions excluded under IRC § 1033 PAGE 12
Net Investment Income under PPACA Challenges Our guidance comes from Our guidance comes from Internal Revenue Code Section § 1411 Proposed Regulations Draft Form 8960 issued in August 7, 2013 (without instructions) PAGE 13
Net Investment Income under PPACA Challenges Definition of Rental Trade or Business Definition of Rental Trade or Business Proposed regulations take the approach that two criteria must be met for rental income to be excepted from tax (Prop. Reg. § 1.1411-5(a)) excepted from tax ( ( )) Must be trade or business within the meaning of IRC § 162 Must be non-passive under IRC § 469 PAGE 14
Net Investment Income under PPACA Challenges Definition of Trade or Business There is no definition of trade or business under There is no definition of trade or business under IRC § 162 From 1987 US Supreme Court Case Commissioner v. Robert P. Groetzinger 87-1 U.S.T.C. Par 9191 (Feb 24, R b t P G t i 87 1 U S T C P 9191 (F b 24 1987) – “The phrase “trade or business” has been in § 162(a) and in that section's predecessors for man section's predecessors for many years. Indeed, the phrase is common ears Indeed the phrase is common in the Code, for it appears in over 50 sections and 800 subsections and in hundreds of places in proposed and final income tax regulations. The slightly longer phrases, “carrying on a trade or business” and “engaging in a trade or business,” themselves are used no less than 60 times in the Code. The concept thus has a well-known and almost constant presence on our tax-law terrain. Despite this, the Code has never contained a definition of the words “trade or business” Code has never contained a definition of the words trade or business for general application, and no regulation has been issued expounding its meaning for all purposes” PAGE 15
Net Investment Income under PPACA Challenges Definition of Trade or Business Definition of Trade or Business We have not needed it for rental property Rental expenses are deductible under Code Section § 212 PAGE 16
Net Investment Income under PPACA Challenges Definition of Trade or Business Definition of Trade or Business Must look to case law Edwin R. Curphey v. Commissioner (1980) 73 TC 766 Favorable Favorable Byron K. Anderson and Carolyn Anderson v. Commissioner (1982) TC Memo 1982-576 Unfavorable Amir H. Jafarpour, et ux. v. Commissioner (2012) TC p , ( ) Memo 2012-165 Unfavorable Patrick L. O’Donnell and LaDona S. O’Donnell v. Commissioner (1974) 62 TC 781,785 Unfavorable PAGE 17
Net Investment Income under PPACA Challenges Definition of Trade or Business Definition of Trade or Business It appears that IRS may take a narrow view of what rental properties will qualify as a trade or business business From Prop. Reg. § 1.1411-5(b)(2) Example 1. Rental activity . A, an unmarried individual, rents y a commercial building to B for $50,000 in Year 1. A's rental activity does not involve the conduct of a section 162 trade or business PAGE 18
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