Upload
others
View
6
Download
0
Embed Size (px)
Citation preview
Page i © Copyright 2008, All Rights Reserved.
1031 Exchanges
The Basics and Pitfalls
Seminar Topic: This material provides an in-depth examination
of the process and procedure in a 1031 Exchange including structuring the transaction as an exchange of one property for another of "like kind".
Since 1921, tax-deferred or “1031” exchanges have evolved from a simple but restrictive two-party swap to today’s highly strategic and sophisticated exchanges. Now possible for taxpayers large or small, 1031 exchanges can only be facilitated with the guidance and specialized services of a Qualified Intermediary, like LandAmerica 1031 Exchange Services.
This material is intended to be a guide for insurance issues in general. As always, if you have any specific question regarding the state of the law in any particular jurisdiction, we recommend that you seek legal guidance relating to your particular fact situation.
The course materials will provide the attendee with the knowledge and tools necessary to identify the current legal trends with respect to these issues. The course materials are designed to provide the attendee with current law, impending issues and future trends that can be applied in practical situations.
Page ii © Copyright 2008, All Rights Reserved.
Copyright © 2008 Printed in the United States of America. All rights reserved. No part of this
monograph may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or by any information storage and retrieval system, except for citation within legal documents filed with a tribunal, without permission in writing from the publisher.
Disclaimer: The views expressed herein are not a legal opinion. Every fact situation is different and the reader is encouraged to seek legal advice for their particular situation.
The Apex Jurist, www.ApexJurst.com is Published by ApexCLE, Inc.
www.ApexCLE.com
Ordering Information: Copies of this monograph may be ordered direct from the publisher for $24.95
plus $4.25 shipping and handling. Please enclose your check or money order and shipping information. For educational, government or multiple copy pricing, please contact the publisher.
Library of Congress Cataloging-in-Publication Data
ApexCLE, Inc.
Professionalism in Illinois
1. ApexCLE, Inc. 2. Law-United States – Guide-books. 3. Real Estate. 4. Investment.
500 North Michigan Avenue, Suite 300 Chicago, Illinois 60611 Toll Free 8666572004
920 South Spring Street Springfield, Illinois 62704
Toll Free 8666572004
Page iii © Copyright 2008, All Rights Reserved.
Author’s Email Address: [email protected]
Author’s Website: www.Landam.com
Author’s Mailing Address: 10 S. LaSalle St. Chicago, IL 60603
Author’s Phone Number: (312) 899-1031
About The Author Noel Hara is Vice President and Manager of LandAmerica 1031 Exchange
Services. His current responsibilities include management of the sales and production of 1031 Tax-Deferred Exchange qualified intermediary services within the Midwest states. Noel was hired by LandAmerica’s Houston, TX office in May of 2004 to open the Southwest regional offices of LandAmerica 1031 and then relocated to Chicago in March of 2006 to do the same in the Midwest.
Noel has been a featured speaker and MCE/MCLE/CPE educator for DePaul University, multiple real estate associations, The Illinois CPA Society and the CCIM. Additionally, he regularly teaches these courses in-house to law firms. His accomplishments have been published in The Houston Business Journal, Houston Realtor and Houston InTown. Noel has written articles published in UrbanLand Magazine, The Illinois Real Estate Journal, Midwest Real Estate News, Texas Real Estate Business and RedNews. Additionally, Noel is an active member of The Urban Land Institute where he sits on the National Membership Committee.
Noel began his real estate career with a Chicago-based condominium developer in 1999. Upon being promoted to sales manager, he moved to Houston, TX and resided there from 2000 to 2006. Noel currently holds active real estate brokers licenses in Illinois and Texas and is a graduate of Illinois State University
Page iv © Copyright 2008, All Rights Reserved.
1031 Exhanges: The Basics and Pitfalls By Noel Hara
Table of Contents
Introduction ..................................................................................................... 1 The Basic Process ........................................................................................ 1 For Your Reference ..................................................................................... 2 From the IRS Website: ................................................................................ 2
Appendix 1 ....................................................................................................... 3 Title 26, Subtitle A, Chapter 1, Subchapter, O, Part III, Section 1031 ......... 3
Page 1 © Copyright 2008, All Rights Reserved.
Introduction
The Internal Revenue Code imposes taxes when property is sold or
transferred and a gain is realized. According to Section 1031 of the tax code, if a taxpayer adheres to strict code guidelines, then all or a portion of the gains from the disposition of business or investment property can be deferred or reinvested into a new replacement property. These deferred gains, as well as the gains from the new property, are not taxed until the new property is transferred and fails to qualify for tax deferral.
To qualify for tax deferment, the taxpayer must structure the transaction as an exchange of one property for another of "like kind". Since 1921, tax-deferred or “1031” exchanges have evolved from a simple but restrictive two-party swap to today’s highly strategic and sophisticated exchanges. Now possible for taxpayers large or small, 1031 exchanges can only be facilitated with the guidance and specialized services of a Qualified Intermediary, like LandAmerica 1031 Exchange Services.
LandAmerica established its 1031 Exchange Services Division in 1990 solely to facilitate tax-deferred exchanges. To ensure our best possible service to the taxpayer, LandAmerica offices that specialize in 1031 Exchange Services have passed a LandAmerica certification standard. To find a LandAmerica 1031 Exchange Services office, please use this Locate a 1031 Exchange Office link, or the link at the right.
The Basic Process
A 1031 exchange, also known as a tax deferred exchange is a strategy and method for selling one property, and buying another property within a specific time frame.
The process of selling one property and then buying another property are the same as a typical real estate transaction. The 1031 exchange is the key to the tax savings by deferring income.
Page 2 © Copyright 2008, All Rights Reserved.
For Your Reference
IRS:
http://www.irs.gov/businesses/small/industries/article/0,,id=98491,00.html
Cornell:
http://www.law.cornell.edu/uscode/26/usc_sec_26_00001031----000-.html
From the IRS Website:
Like-Kind Exchanges - Real Estate Tax Tips
Generally, if you exchange business or investment property solely for business or investment property of a like-kind, no gain or loss is recognized under Internal Revenue Code Section 1031. If, as part of the exchange, you also receive other (not like-kind) property or money, gain is recognized to the extent of the other property and money received, but a loss is not recognized.
Section 1031 does not apply to exchanges of inventory, stocks, bonds, notes, other securities or evidence of indebtedness, or certain other assets.
Like-Kind Property
Properties are of like-kind, if they are of the same nature or character, even if they differ in grade or quality. Personal properties of a like class are like-kind properties. However, livestock of different sexes are not like-kind properties. Also, personal property used predominantly in the United States and personal property used predominantly outside the United States are not like-kind properties.
Real properties generally are of like-kind, regardless of whether the properties are improved or unimproved. However, real property in the United States and real property outside the United States are not like-kind properties.
Page 3 © Copyright 2008, All Rights Reserved.
Appendix 1
Title 26, Subtitle A, Chapter 1, Subchapter, O, Part III, Section 1031
(a) Nonrecognition of gain or loss from exchanges solely in kind
(1) In general
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.
(2) Exception
This subsection 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.
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.
(3) Requirement that property be identified and that exchange be completed not more than 180 days after transfer of exchanged property
For purposes of this subsection, any property received by the taxpayer shall be treated as property which is not like-kind property if—
(A) such property is not identified as property to be received in the exchange on or before the day which is 45 days after the date on which the taxpayer transfers the property relinquished in the exchange, or
(B) such property is received after the earlier of—
Page 4 © Copyright 2008, All Rights Reserved.
(i) the day which is 180 days after the date on which the taxpayer transfers the property relinquished in the exchange, or
(ii) the due date (determined with regard to extension) for the transferor’s return of the tax imposed by this chapter for the taxable year in which the transfer of the relinquished property occurs.
(b) Gain from exchanges not solely in kind
If an exchange would be within the provisions of subsection (a), of section 1035(a), of section 1036(a), or of section 1037(a), if it were not for the fact that the property received in exchange consists not only of property permitted by such provisions to be received without the recognition of gain, but also of other property or money, then the gain, if any, to the recipient shall be recognized, but in an amount not in excess of the sum of such money and the fair market value of such other property.
(c) Loss from exchanges not solely in kind
If an exchange would be within the provisions of subsection (a), of section 1035(a), of section 1036(a), or of section 1037(a), if it were not for the fact that the property received in exchange consists not only of property permitted by such provisions to be received without the recognition of gain or loss, but also of other property or money, then no loss from the exchange shall be recognized.
(d) Basis
If property was acquired on an exchange described in this section, section 1035 (a), section 1036(a), or section 1037 (a), then the basis shall be the same as that of the property exchanged, decreased in the amount of any money received by the taxpayer and increased in the amount of gain or decreased in the amount of loss to the taxpayer that was recognized on such exchange. If the property so acquired consisted in part of the type of property permitted by this section, section 1035 (a), section 1036(a), or section 1037 (a), to be received without the recognition of gain or loss, and in part of other property, the basis provided in this subsection shall be allocated between the properties (other than money) received, and for the purpose of the allocation there shall be assigned to such other property an amount equivalent to its fair market value at the date of the exchange. For purposes of this section, section 1035 (a), and section 1036 (a), where as part of the consideration to the taxpayer another party to the exchange assumed (as determined under section 357 (d)) a liability of the taxpayer, such assumption shall be considered as money received by the taxpayer on the exchange.
Page 5 © Copyright 2008, All Rights Reserved.
(e) Exchanges of livestock of different sexes
For purposes of this section, livestock of different sexes are not property of a like kind.
(f) Special rules for exchanges between related persons
(1) In general
If—
(A) a taxpayer exchanges property with a related person,
(B) there is nonrecognition of gain or loss to the taxpayer under this section with respect to the exchange of such property (determined without regard to this subsection), and
(C) before the date 2 years after the date of the last transfer which was part of such exchange—
(i) the related person disposes of such property, or
(ii) the taxpayer disposes of the property received in the exchange from the related person which was of like kind to the property transferred by the taxpayer,
there shall be no nonrecognition of gain or loss under this section to the taxpayer with respect to such exchange; except that any gain or loss recognized by the taxpayer by reason of this subsection shall be taken into account as of the date on which the disposition referred to in subparagraph (C) occurs.
(2) Certain dispositions not taken into account
For purposes of paragraph (1)(C), there shall not be taken into account any disposition—
(A) after the earlier of the death of the taxpayer or the death of the related person,
(B) in a compulsory or involuntary conversion (within the meaning of section 1033) if the exchange occurred before the threat or imminence of such conversion, or
(C) with respect to which it is established to the satisfaction of the Secretary that neither the exchange nor such disposition had as one of its principal purposes the avoidance of Federal income tax.
(3) Related person
Page 6 © Copyright 2008, All Rights Reserved.
For purposes of this subsection, the term “related person” means any person bearing a relationship to the taxpayer described in section 267 (b) or 707 (b)(1).
(4) Treatment of certain transactions
This section shall not apply to any exchange which is part of a transaction (or series of transactions) structured to avoid the purposes of this subsection.
(g) Special rule where substantial diminution of risk
(1) In general
If paragraph (2) applies to any property for any period, the running of the period set forth in subsection (f)(1)(C) with respect to such property shall be suspended during such period.
(2) Property to which subsection applies
This paragraph shall apply to any property for any period during which the holder’s risk of loss with respect to the property is substantially diminished by—
(A) the holding of a put with respect to such property,
(B) the holding by another person of a right to acquire such property, or
(C) a short sale or any other transaction.
(h) Special rules for foreign real and personal property
For purposes of this section—
(1) Real property
Real property located in the United States and real property located outside the United States are not property of a like kind.
(2) Personal property
(A) In general
Personal property used predominantly within the United States and personal property used predominantly outside the United States are not property of a like kind.
(B) Predominant use
Except as provided in subparagraphs (C) and (D), the predominant use of any property shall be determined based on—
(i) in the case of the property relinquished in the exchange, the 2-year period ending on the date of such relinquishment, and
Page 7 © Copyright 2008, All Rights Reserved.
(ii) in the case of the property acquired in the exchange, the 2-year period beginning on the date of such acquisition.
(C) Property held for less than 2 years
Except in the case of an exchange which is part of a transaction (or series of transactions) structured to avoid the purposes of this subsection—
(i) only the periods the property was held by the person relinquishing the property (or any related person) shall be taken into account under subparagraph (B)(i), and
(ii) only the periods the property was held by the person acquiring the property (or any related person) shall be taken into account under subparagraph (B)(ii).
(D) Special rule for certain property
Property described in any subparagraph of section 168 (g)(4) shall be treated as used predominantly in the United States.
Copyright © 2006 LandAmerica Financial Group, Inc. All Rights Reserved
Copyright © 2006 LandAmerica Financial Group, Inc. All Rights Reserved
1031 Exchanges
The Basics…
The Pitfalls
Copyright © 2006 LandAmerica Financial Group, Inc. All Rights Reserved
The Basics:What?
Since 1921, there has been an exception in the tax Code that Capital Gain Tax is deferred when investment property is “exchanged” as opposed to “sold.” The policy behind Section 1031 is that Taxpayers should be able to dispose of investment or income property and acquire replacement investment or income property without incurring a large cost of sale – the Capital Gain Tax. This exception has changed very little since 1921.
Copyright © 2006 LandAmerica Financial Group, Inc. All Rights Reserved
What “Tax” is Deferred by 1031?
+
Two Components:
1. Tax due on the profit earned on the sale of investment or
income property; generally, the rate is 15%. The profit earned
is the appreciation in value of the property and is determined
by gross sales price minus the adjusted basis and the cost of
sale.
2. Tax due on the recapture of depreciation previously taken by
Taxpayer during the time Taxpayer owned the property;
generally the rate is 25%.
Copyright © 2006 LandAmerica Financial Group, Inc. All Rights Reserved
Original Purchase Price $300,000
Original Purchase Price
Calculating Capital Gain
Step One: Calculate Adjusted Basis
Step Two: Calculate Capital Gain
Minus Cost of Sale 10,000
Capital
Gain
Equals Capital Gain 240,000
Minus Adjusted Basis 200,000
Minus Depreciation 150,000
Depreciation Recapture
Equals Adjusted Basis
200,000
Adjusted Basis
Add Capital Improvements 50,000
Capital Improvements
Fair Market Value
FMV or Sales Price $450,000
Copyright © 2006 LandAmerica Financial Group, Inc. All Rights Reserved
Federal Tax TreatmentStep Three:
Calculating Capital Gain Taxes
Total Capital Gain $240,000 – with
Depreciation Recapture of $150,000.
25%Recaptured Depreciation Tax Rate = 25%
$150,000 x 25% $37,500
15%
+ Appreciation Gain Tax Rate = 15%
$90,000 x 15%
$13,500
TAXES
Total Taxes Due $51,000
Under Section 1031 treatment, Capital Gain
Taxes are deferred and are not due when
property is exchanged.
Copyright © 2006 LandAmerica Financial Group, Inc. All Rights Reserved
Who Can Take Advantage of 1031’s?
Any tax paying entity is entitled to the benefits
of Section 1031:
Corporations
Partnerships
Individuals
Limited Liability Companies
Trusts
Foreigners who own property in the U.S.
Copyright © 2006 LandAmerica Financial Group, Inc. All Rights Reserved
“Why” an Exchange is done is as
important as “How” to do one . . .
Copyright © 2006 LandAmerica Financial Group, Inc. All Rights Reserved
“Exchanging” is a tool to help Taxpayers
achieve their goals and/or solve
problems.”
Copyright © 2006 LandAmerica Financial Group, Inc. All Rights Reserved
Why Exchange?
– Improve investment performance
– Change property types
– Consolidate (many properties into few)
– Diversify (few properties into many)
– Life transition
– Relocate
– Change tenants
– Change management
– Defer maintenance
Copyright © 2006 LandAmerica Financial Group, Inc. All Rights Reserved
There Are Four (4) Basic
Requirements Under Section 1031
Copyright © 2006 LandAmerica Financial Group, Inc. All Rights Reserved
First Requirement:
1. A 1031 Transaction must involve a
transfer of Real or Personal Property
Copyright © 2006 LandAmerica Financial Group, Inc. All Rights Reserved
Qualifying Real Property
Apartments
Shopping centers
Medical facilities
Warehouses
Terminal properties
Factories
Hotels
Casinos
Vacant land
Oil, gas, mineral, water rights
Leases
Farm Land
Copyright © 2006 LandAmerica Financial Group, Inc. All Rights Reserved
Qualifying Personal Property
Airplanes
Boats
Tractors
Trailers
Licenses
Copyrights
Equipment
Copyright © 2006 LandAmerica Financial Group, Inc. All Rights Reserved
Property Excluded from 1031 Treatment
Stocks, bonds or notes
Other securities or evidences of indebtedness or interest
Interests in a Partnership
Certificates of trust or beneficial interest
Primary residences
Good Will
Inventory / Property held primarily for resale
Copyright © 2006 LandAmerica Financial Group, Inc. All Rights Reserved
Second Requirement:
2. That property must be held for a Qualified Purpose,
either as an investment, or used in a trade or business
1. A 1031 Transaction must involve a transfer of Real or
Personal Property; and
Copyright © 2006 LandAmerica Financial Group, Inc. All Rights Reserved
The Property Must be Held for a
“Qualified Purpose”
Purpose For Holding Is NOT Based on Length of Time.
The Code specifically states that property must be held by the
Taxpayer, for either…1) Productive use in a trade or business; or,
2) Investment to qualify for Exchange consideration.
Purpose for holding is:
• Fact Sensitive
• Determined at the time of exchange
• Applies to Both Properties
Copyright © 2006 LandAmerica Financial Group, Inc. All Rights Reserved
Third Requirement:
2. That property must be held for a Qualified Purpose,
either as an investment, or used in a trade or business
1. A 1031 Transaction must involve a transfer of Real or
Personal Property; and
3. The Relinquished Property must be Like-Kind with the
Replacement Property
OK
Copyright © 2006 LandAmerica Financial Group, Inc. All Rights Reserved
Real property exchanges
SFR RentalSFR Rental
Multi-family
Office
Retail
Industrial
Hospitality
Medical Care
Land
SFR Rental
Office
Retail
Industrial
Hospitality
Medical Care
Land
Multi-family
Copyright © 2006 LandAmerica Financial Group, Inc. All Rights Reserved
Real property exchanges
Medical Care
SFR Rental
Office
Retail
Industrial
Hospitality
Land
Multi-family
SFR Rental
Multi-family
Office
Retail
Industrial
Hospitality
Medical Care
Land
Copyright © 2006 LandAmerica Financial Group, Inc. All Rights Reserved
Non Like-Kind
Money, cash or cash equivalents
Personal Property for Real Property
Inventory: “Property held primarily for sale”
Copyright © 2006 LandAmerica Financial Group, Inc. All Rights Reserved
Fourth Requirement:1. A 1031 Transaction must involve a transfer of Real or
Personal Property; and
2. That property must be held for a Qualified Purpose,
either as an investment, or used in a trade or business
3. The Relinquished Property must be Like-Kind with the
Replacement Property
4. The transaction must be an Exchange as distinguished from a
sale with a new purchase
Copyright © 2006 LandAmerica Financial Group, Inc. All Rights Reserved
Compare a Sale and Purchase vs. an Exchange
The essence of an Exchange is the transfer of property for
property. The Exchange is what distinguishes a Section
1031 tax-deferred transaction from a Sale and Purchase.
The essence of a Sale and Purchase of real estate is the
receipt of cash for property.
Copyright © 2006 LandAmerica Financial Group, Inc. All Rights Reserved
How do you restructure a
sale into an exchange?
Copyright © 2006 LandAmerica Financial Group, Inc. All Rights Reserved
Qualified Intermediary’s Role…
To structure your exchange with proper
documentation
Copyright © 2006 LandAmerica Financial Group, Inc. All Rights Reserved
Escrow versus Qualified IntermediaryDifferent Roles in Real Estate Transactions
What is a QI?
No certification or licensing requirement.
“Defined” in the Regulations as Safe Harbor number 3.
No requirement that accommodator be “Qualified Intermediary”.
Elements to achieve QI status:
1. Written agreement that contains (g)(6) language,
2. QI must acquire relinquished property from Taxpayer and transfer to Buyer,
3. Control sales proceeds from Relinquished Property,
4. Acquire like-kind replacement property from Seller and transfer to
Taxpayer.
Safe Harbor eliminates “agency” designation and constructive receipt issues.
Copyright © 2006 LandAmerica Financial Group, Inc. All Rights Reserved
Qualified Intermediary
QI
Copyright © 2006 LandAmerica Financial Group, Inc. All Rights Reserved
Escrow versus Qualified Intermediary
A Qualified Intermediary is not…
Escrow Agent
QI should not hold funds before an exchange begins.
Investment Banker
Attorney
CPA / Tax Advisor
Copyright © 2006 LandAmerica Financial Group, Inc. All Rights Reserved
Escrow Agent Roles
a.k.a., “Closing Agent”
1. Written Escrow Agreement
2. Prepares Closing Statement
3. Collects Documents
4. Responsible for Certificate of Non-Foreign Status
Affidavit (FIRPTA)
5. Responsible for 1099-S Reporting
6. Disburses Funds and Documents According to Written
Instructions or Escrow Agreement
Copyright © 2006 LandAmerica Financial Group, Inc. All Rights Reserved
Most Common Exchange“Straight-Deferred” or “Forward” Exchange
CBuyer of your
property
Q IB
Seller of
replacement
property
A
You the
Taxpayer
Copyright © 2006 LandAmerica Financial Group, Inc. All Rights Reserved
A
A
C Q I B
Copyright © 2006 LandAmerica Financial Group, Inc. All Rights Reserved
A
A
CQ I
B
B
Copyright © 2006 LandAmerica Financial Group, Inc. All Rights Reserved
What do you need for a valid exchange?
Proper exchange documents!
Proves INTENT
Prevents CONSTRUCTIVE RECEIPT
Provides ACCOMMODATING PARTY
Copyright © 2006 LandAmerica Financial Group, Inc. All Rights Reserved
Types of Exchanges
Deferred (aka Delayed)
Simultaneous
Construction (aka To-Be-Built)
Reverse
Reverse Construction
Non-Safe Harbor Reverse
Personal Property
Copyright © 2006 LandAmerica Financial Group, Inc. All Rights Reserved
…The Basics, and now
The Pitfalls…
Copyright © 2006 LandAmerica Financial Group, Inc. All Rights Reserved
Pitfall: Control of Proceeds
Q IC B
A
A B
Not “Like Kind”
Copyright © 2006 LandAmerica Financial Group, Inc. All Rights Reserved
Pitfall: Settlement Statements
Improperly Done
“Cash due Seller”
Copyright © 2006 LandAmerica Financial Group, Inc. All Rights Reserved
Potential Pitfall: Time Frame 1
The 45-Day Property Identification Period
A
C
A
Q I 45 days to
identify
Copyright © 2006 LandAmerica Financial Group, Inc. All Rights Reserved
Identification Rules
before midnight of the 45th day
1. In writing
2. Unambiguous
3. Signed by taxpayer
4. Sent
Copyright © 2006 LandAmerica Financial Group, Inc. All Rights Reserved
Identification Rules
alternate and multiple properties
1. 3 property rule
2. 200% rule
3. 95% exception
Copyright © 2006 LandAmerica Financial Group, Inc. All Rights Reserved
A
A
C Q I B
B
180 days to
complete exchange
Potential Pitfall: Time Frame 2
The 180-Day Exchange Completion Deadline
Copyright © 2006 LandAmerica Financial Group, Inc. All Rights Reserved
Pitfall: Related Parties
two-party swap
24 month holding period
A
A B
B
Copyright © 2006 LandAmerica Financial Group, Inc. All Rights Reserved
Pitfall: Related Party Exchanges
New
Buyer BA
B
B
A
A New
Buyer
If less than 24 months…
Copyright © 2006 LandAmerica Financial Group, Inc. All Rights Reserved
Major Pitfall: Acquiring Replacement Property From A Related Party
Q I
A
BC
A B
What does B hold?
Third Party
Buyer
Copyright © 2006 LandAmerica Financial Group, Inc. All Rights Reserved
New Revenue Ruling 2002-83
General Rule: Taxpayer cannot acquire
replacement property from a related party.
Many Exchange Agreement reflects this prohibition.
[… Taxpayer’s Representations. Taxpayer hereby
represents to QI as follows…
(b) Taxpayer will not purchase any Replacement Property
from a related person as such term is defined in Section
1031(f)(3) of the Code.]
Revised Form 8824 requires more than “check-the-box.”
Copyright © 2006 LandAmerica Financial Group, Inc. All Rights Reserved
Potential Pitfall:
Change of Entity
Entity must not changeB
New property as
ABC PartnershipB
A
Old property as
ABC Partnership
Copyright © 2006 LandAmerica Financial Group, Inc. All Rights Reserved
Same Taxpayer Rule
1. Husband & Wife are TWO Taxpayers
2. Disregarded or Pass-through entity
3 . Single member LLC means ONE member*
*except in a community property state if LLC members
are Husband and Wife who reside in the community
property state, and the 1031 property is located in a
community property state( Rev. Ruling 2002-69)
Copyright © 2006 LandAmerica Financial Group, Inc. All Rights Reserved
Examples of Disregarded Entities:
• Grantor Trust (which is not a Testamentary Trust)
• Single member limited liability company
-However, Sub S Corp is not a disregarded entity
&
-A general or limited partnership is not a disregarded entity.
Copyright © 2006 LandAmerica Financial Group, Inc. All Rights Reserved
Pitfall: Failure to Trade Up or Trade Even
Two (2) Rules:
1. Equal or Increased Sales Price.
2. All Cash or Equity Applied to Acquisition.
Copyright © 2006 LandAmerica Financial Group, Inc. All Rights Reserved
Pitfalls: Failure to Trade Up or Trade Even
Or… A Reason Not to Add a Party to the Deed
A Taxpayer (Husband) desires to take advantage of the
1031 Exchange process. The gross sales price of the
Relinquished Property is $200,000.00
The acquired Replacement Property must have a gross
sales price equal to or greater than $200,000.00, and all the
cash or equity from the sale of the Relinquished Property
must be applied toward the acquisition of the Replacement
Property.
Copyright © 2006 LandAmerica Financial Group, Inc. All Rights Reserved
Potential Pitfall:
Taxpayer has scheduled back-to-back
closings for the relinquished property
and the replacement property, but the
relinquished property buyer is
backing out.
Copyright © 2006 LandAmerica Financial Group, Inc. All Rights Reserved
Noel M. Hara
Vice President
(312) 899-1031