Internal Revenue Code Section 1031 Fundamental and Advance Concepts

Presented by:

Andrew Gustafson, CES®

Atlas 1031 Exchange, LLC

www.atlas1031.com850-496-0090

Instructional Objectives

What is a 1031 exchange? What is and is not eligible for a 1031. Realtor benefits from recognizing a 1031. Five Reasons to initiate a 1031 exchange. Exchange terminology and requirements. Qualified use test. Forward and reverse strategies.

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Current Law

Starker v. Commissioner, 1979, exchanges may not be kept open indefinitely.

In 1984, Congress added 45 and 180 calendar day time limits.

In 1991, the IRS issued the identification limits and established the code requirement to use a Qualified Intermediary.

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What is a 1031 Exchange?

IRC § 1031(a)(1)– No gain will be recognized on property held for

productive use in business or investment when exchanged for like kind property held for productive use in business or investment.

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What is the outcome of 1031 Exchange?

Defer – Federal capital gains tax– State capital gains tax– Recaptured Depreciation

Interest free loan

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Real Property – partial list

Rental properties Land Office buildings Shopping Centers Retail Stores Golf Courses Trailer Parks Parking lots Motels

Improvements to be constructed

Oil, gas and mineral rights Water rights Tenants in common Timberland Conservation easements Apartments

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Depreciable Tangible Personal Property

Aircraft; Barges, vessels, tugs; Medical and dental equipment; Artwork and collectibles; Construction and farm equipment; Light and Heavy general purpose trucks; Furniture; Taxis, cars; 13 General Asset Classes.

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Intangible Nondepreciable Personal Property

Mitigation credits used by developers Airport take-off and landing rights or slots FCC TV and Radio licenses or station swaps Patents Sport Contracts Copyrights Trade marks Development rights

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Property Excluded from 1031

Primary residence Stock, bonds or notes Partnership Interests Indebtedness Inventory

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Realtor Benefits

Two commissions are better than one 180 calendar day timeframe Distinguishes yourself from the competition Service

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Taxpayer Benefits

Defer tax payment Appreciation Depreciation Cash Flow Consolidation Diversification Relocation of Investment

Exchange Terminology

Relinquished Property Replacement Property Qualified Intermediary or Accommodator Capital Gain Boot Tax Deferral Adjusted Basis

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Qualified Use Test

Intent – must be for the production of income or

investment

Facts – Holding period– Rented– Limited personal use– Schedule E

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Exchange Requirements

Value and equity of new property must be equal to or greater than the old property.

Debt on the new property must be equal to or greater than the old property.

Exchangor does not receive cash or reduction in debt otherwise a tax is triggered.

Cash offsets debt, but debt does not offset cash.

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Constructive Receipt g(6) limitations

In no event can Exchangor receive, pledge, borrow or otherwise obtain the benefits of the exchange proceeds or property held in the Exchange Account.

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Constructive Receipt of Cash

Occurs when Exchangor receives cash. Occurs when cash or other property is held

by an agent on Exchangor’s behalf. What happens when Exchangor receives

Earnest Money Deposit?

Contract Language

It is the Sellers intent to initiate an IRC §1031 Tax Deferred Exchange by assigning the property contract to the Qualified Intermediary.

Buyer/Seller is aware Seller/Buyer has the option to qualify this transaction as an Internal Revenue Code Section 1031 exchange. Seller/Buyer requests

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Contact Language (cont’d)

Buyer’s/Seller’s cooperation in the event of an exchange and agrees to the assignment of this contract to Intermediary by the Seller/Buyer. Seller/Buyer agrees to hold the Buyer/Seller harmless from any and all claims, liabilities and costs of such an exchange.

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Same Taxpayer Requirement

Tax return that sells is the tax return that buys.

Name on the title of the old property is the name that is on the title to the new property.

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1031 Timelines

45 calendar day identification post closing– Three property rule– Two hundred percent rule– 95% exception rule

135 calendar day replacement period. No extension unless Presidentially declared

disaster.

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Identification Requirements

Address, city and state, % ownership, required, parcel id suggested.

In writing, signed by Exchangor, email not acceptable.

Must be received by 11:59 PM of the 45th calendar day.

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Related Party Rules

Related Party – Related by blood– A taxpayer whose interest in an entity is greater

than 50% If exchanged with related party, special two

year period is imposed. If the replacement property is purchased

from a related party, they must also be exchanging and not cashing out.

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Misconceptions about Exchanges

You must swap properties Must be land for land Only for large investors or commercial Very complicated Do not have to replace debt on old property

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Types of Exchanges

Simultaneous Forward or Delayed Reverse Build to Suit

– Improvement

Leasehold Improvement

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Building Wealth and Deferring Taxes

Sales Price $750,000Net Sales Price Less Closing Expenses 690,000Adj Basis of Property Depre of $50,000 400,000Taxable Gain 290,000

Taxes Due $ 58,360Depre Recapture Tax (25%) 12,500Federal Capital Gains Tax (15%) 36,000Indiana Capital Gains Tax (3.4%) 9,860

Tax Due with 1031 Exchange 0

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Wrap Up

Questions