Planning

By BERNARD BURNS, for 1031southdakota.com 9/6/2007

Structured sales allow the seller of an asset to pay taxes over time while having the payments guaranteed by a high credit quality alternate obligor, who accepts assignment of the buyers periodic payment obligation. This seemingly simple transaction is littered with pitfalls. The IRS regulations place restrictions on the number of 1031 Exchange Properties that may be identified during the identification period. Exceptions to this rule do apply under certain circumstances.Real properties are generally named as like-kind.The IDENTIFICATION PERIOD is the first 45 days of the exchange period. Taxpayer loans EAT the full purchase price at below market rate.

Additional comments

Exchange Period: The replacement property must be received by the taxpayer within the "exchange period," which ends within the earlier of 180 days after the date on which the taxpayer transfers the property relinquished, or the due date for the taxpayer tax return for the taxable year in which the transfer of the relinquished property occurs.You can access the section 1031 exchange information on the web. However, as inside block ownership rises above 5%, equity REIT market-to-book ratios decline. The corporation and the ex-spouse exchanged their respective co-tenancy interests so that she and the corporation each owned 100% of one-half of the timberland acreage. Personal property can also be exchanged for other personal property of like-kind or like-class. To protect the EAT against changes in value to the relinquished property from the estimated value on the date of the EAT's receipt of the property to its value upon ultimate disposition by the EAT to the buyer, this provision allows the parties to enter into agreements to make whole.You start to lose the deductibility of rental property losses above the $100,000 limit, whether you're single or married filing jointly.

Common problems with 1031 exchange

While there are 1031 TIC sales occurring outside of the SEC supervision, currently there is some controversy over these properties, and there may be a movement by the SEC to pull these properties under their regulatory umbrella. It doesn't matter whether the properties are improved or unimproved. Increased financing costs associated with loans required for the acquisition of replacement property must be factored in as a cost. Further, the lenders for both parties would have to agree to reverse all lending transactions the payoff of the Investor's debt on the relinquished property and the origination of the buyer's new debt on the acquisition of the replacement property and then renew the obligations for the new sale.Many taxpayers, including seniors who have already used the one-time over-55 $125,000 exclusion, do not realize they are eligible to sell their primary home again - and do it every two years - under the Taxpayer Relief Act of 1997.In order to take advantage of the qualified intermediary "safe harbor" there must be a written agreement between the taxpayer and intermediary expressly limiting the taxpayer's rights to receive, pledge, borrow or otherwise obtain the benefits of the money or property held by the intermediary. A qualified intermediary (also known as an accommodator) is a person or entity that holds the funds received from the sale of the relinquished property, until the replacement property is purchased, thereby ensuring that the rules under section 1031 are abided by. If your vacation home is solely (or primarily) a rental property, then there is no problem.The amounts of the credits range from as little as 10 percent of the expenditures to as much as 90 percent, depending on the property type.If you identify more than three properties and exceed the 200% limitation you must purchase 95% of the aggregate value of the identified properties.

Comparing tenant in commons

Perhaps the investor is first in line to acquire a "hot" replacement property and must close before getting the chance to market the investment property it plans to relinquish in the exchange.If a person owns a real property that will net a gain upon sale, or a property that has been substantially depreciated for tax purposes and/or has appreciated in fair market value, then he should consider a 1031 exchange.Use of a triple net lease may be a prerequisite for credit tenant lease financing, and may permit a lender to lend to the landlord on nonrecourse terms. There are practical issues involved with the use of the Doctrine of Rescission: the cost to complete such a rescission is prohibitively high, and the buyer is most likely not willing to cooperate. The transaction is seen as having reinvested the sale proceeds into another property, thus not having realized any economic gain that would generate funds to pay the taxes.The internal rate of return is comparable to long term high quality debt instruments.

New to 1031 exchange? No problem

The QI holds the proceeds from the sale of the relinquished property beyond the actual or constructive control of the Exchangor. Likewise, the EAT will require hazard and liability insurance during the holding period.In the exchange last structure, taxpayers may park replacement 1031 properties with the EAT at the outset of the transaction. A tax deferred 1031exchange is a transaction involving trade, business, or investment 1031 Exchange Property , which, because it meets the requirements of Section 1031 of the Internal Revenue Code, qualifies for non-recognition of gain or loss. Therefore, we typically recommend our clients to retain the top firms in this field that act as Qualified Intermediaries regularly so that the transactions are documented properly with the latest revisions, if any, to the 1031 Code. The most common form of boot in an exchange is cash. The QI must prepare the exchange agreement and coordinate the exchange with both closing agents.

When to make the decision to buy

A 1031 Exchange allows you to defer payment of taxes due. This could happen for a number of reasons: The taxpayer might intend to transfer the relinquished property before buying the new property but run into problems with the planned transfer, or the taxpayer might identify the replacement property before being able to locate a buyer for the relinquished property. This suggests that a sharp run-up in house prices is due in part to irrational expectations, and thus signals a future correction as prices ultimately reflect market fundamentals. Economist and philosopher Adam Smith once said, Land is the basis of all wealth. The Investor does have the right to elect recognition of the gain in the year in which the relinquished property closes, if they should choose to do so. In some cases, non-real estate property can be used for a 1031 Exchange, however, the proceeds from the sale of the property must be reinvested in a "like kind" type of investment. The tax savings allows your clients to retain equity, and move into properties of higher value each time they perform an exchange.In addition, the debt on the new property must be greater than the debt on the old property or the amount of equity in the new property must be greater than the equity in the old property.

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