Presenting a live 90-minute webinar with interactive Q&A Structuring 1031 Like-Kind Exchanges After IRS Victory in North Central Leasing Preserving Tax-Deferral Treatment for Transactions Involving Related Parties and Qualified Intermediaries TUESDAY, MAY 19, 2015 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Today’s faculty features: Joseph C. Mandarino, Attorney, Cohen Pollock Merlin & Small , Atlanta Renato Matos, Partner, Capell Barnett Matalon & Schoenfeld , Jericho, N.Y . Ricky Novak, CEO, 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 . NOTE: If you are seeking CPE credit, you must listen via your computer — phone listening is no longer permitted.
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Tax-Deferred Exchange Strategies: Beyond the Basics Ricky B. Novak, Esq. Qualified to be more than just your Intermediary…….
1031 Exchange Fundamentals Qualified to be more than just your Intermediary……. 6
1031 Exchange Basics Internal Revenue Code § 1031 allows for the deferral of capital gains tax on the sale of like-kind property either held for investment or productively used in a trade or business Also allows for the deferral of depreciation recapture and deferral of state taxes (where applicable) Deferral can be indefinite, as the taxpayer will not recognize capital gain until the replacement property is sold without the use of an exchange Estate planning opportunities include leaving the assets to one’s heirs, whereby at the taxpayer’s death, heirs receive the assets at a stepped-up basis (e.g. current fair market value) Essentially, the taxpayer deferred payment of capital gains tax and the heirs are only taxed if and when they sell the inherited asset at a value that exceeds the stepped-up basis Qualified to be more than just your Intermediary……. 7
1031 Exchange Basics Taxpayer has 45 days from the date of the relinquished property sale to identify potential replacement property, and 180 days to close on this property Identification Rules include the 3 Property Rule, 200% Rule and the 95% Rule Like-Kind is broadly defined for real property exchanges, allowing the taxpayer to trade between: raw land, retail, office, warehouse/industrial, residential rental, and other property types. Like-Kind is very narrowly defined for personal property, and often requires the taxpayer to exchange assets within the same general asset or product class. Personal property assets can include: aircraft, watercraft, collectibles, art, FF&E, certain intangible rights, etc. Qualified to be more than just your Intermediary……. 8
1031 Exchange Basics Requirements for complete tax deferral: – Taxpayer must acquire replacement property that equals or exceeds in value the property which was relinquished – Taxpayer must roll relinquished sale proceeds (referred to as “cash boot”) forward into the replacement property, and replace any debt that was extinguished at the relinquished sale (referred to as “mortgage boot”) with either new debt, new cash or any combination of the two Should the taxpayer fail to acquire replacement property that equals or exceeds the value of the relinquished property, taxpayer may still complete a partial exchange – Replacement property value must exceed the adjusted basis of the relinquished property in order for taxpayer to defer taxation Exchanges require involvement by a third-party known as a Qualified Intermediary (“QI”) Qualified to be more than just your Intermediary……. 9
1031 Exchange Basics Exchange Tax Deferral Example: – Taxpayer purchases income producing commercial property for $1 million in 2004 (using $250,000 in cash and a $750,000 interest only loan to acquire the property), and enters into a contract to sell the property in 2015 for $1.4 million. – From 2004-2014, Taxpayer takes depreciation on the property in the amount of $250,000 and performs capital improvements to the property in the amount of $100,000. Therefore the adjusted basis of the property is $850,000 (sum of $1 million purchase price, minus $250,000 in depreciation, plus $100,000 in capital improvements). –Taxpayer’s potential taxable gain is $550,000 (sum of $1.4 million sales price, minus $850,000 adjusted basis). – In order to defer all potential taxable gain, the Taxpayer will need to acquire replacement property that equals or exceed the relinquished property sales price ($1.4 million) AND must roll all $650,000 in cash boot ($1.4 million sale price, minus $750,000 mortgage boot) into the replacement property). Qualified to be more than just your Intermediary……. 10
Understanding the Math $100,000 Taxable Gain $600,000 Capital Taxable Gain Gain $500,000 Deferred Deferred Gain Capital Gain Basis $400,000 Basis $400,000 Basis $1,000,000 $900,000 Relinquished Sale Replacement Purchase Qualified to be more than just your Intermediary……. 11
Current Issues for 1031 Transactions Qualified to be more than just your Intermediary……. 12
Qualifying the Intermediary Over the past few years, there have been numerous instances of intermediaries filing bankruptcy or misappropriating client funds. Top areas to focus on when considering a QI: • Disinterested – QI must be a disinterested third party and not have acted in any agency capacity for the prior two years • Knowledge – Do they understand complex exchange issues, and truly appreciate how these issues affect the taxpayer’s short & long term tax, real estate, and other objectives? • Security – How are funds invested, is this a transparent process that allows input from the taxpayer, and what security measures are in place to protect principal and ensure liquidity? • Service – Do you have direct access to the person with 1031 expertise at all times, or do you get handed off to a less qualified back office paper processor with “ 9-5 ” hours? Qualified to be more than just your Intermediary……. 13
Cash-Out Options for 1031 Transactions Qualified to be more than just your Intermediary……. 14
Cash-Out Options Taxpayers may perform a partial exchange whereby cash is taken at closing Cash is taxed as it is deemed to be paid from the gain portion of the transaction; this also applies to any refund of initial equity investments Note that debt repayment for amounts legitimately loaned to an entity (LLC, S-Corp, C-Corp, Partnership) are not characterized as cash out Solution to achieve 100% tax deferral: taxpayer does not take cash at closing, but instead performs a post-closing cash-out refinance Qualified to be more than just your Intermediary……. 15
Title & Partnership Issues for 1031 Transactions Qualified to be more than just your Intermediary……. 16
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