1031s 101

1031s:101Nuts & Bolts of

Lik ki d E hLike-kind Exchanges

Rick Chess, EsquireqChess Law Firm

David Gorenberg Esquire CES®David Gorenberg, Esquire, CES®

Citibank 1031 Exchange Service

Important DisclosuresThis presentation does not constitute legal or tax advice. Citibank and its employees do not provide tax or legal advice and are not responsible for advising customers on the laws or regulations pertaining to any 1031 exchange transaction. Citibank and its employees will not make any representations regarding the tax consequences of any 1031 exchangerepresentations regarding the tax consequences of any 1031 exchange transaction. It is the customer’s responsibility to seek tax and legal advisors in connection with any 1031 exchange transaction.

IRS Circular 230 Disclosure: To the extent that this material or any yattachment concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.

Citibank N A Member FDIC Citibank and Arc Design is a registeredCitibank, N.A., Member FDIC. Citibank and Arc Design is a registered trademark of Citigroup Inc.

Why Exchange?

4 ©2012 David Gorenberg & Rick Chess

Taxation 101

• Generally, all income is taxable, unless specifically exempted y, , p y pby law.

• Even illegal income, such as stolen or embezzled funds, must be reported on Line 21 of Form 1040.

Source: Department of Treasury, Internal Revenue Service, Publication 525.


IRC Section 1031

• “No gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or forproperty 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 for productive use in a trade or business or for investment.”

• §1031 provides for deferral of taxes,not complete elimination.


§1031 in a Nutshell

To obtain complete deferral of capital gains taxes,To obtain complete deferral of capital gains taxes, the taxpayer should:

•Purchase replacement property that is equal or greater in value t th li i h d tto the relinquished property•Have equal or greater equity in the replacement property•Have equal or greater debt on the

l t treplacement property•Receive nothing except like-kind property•Avoid constructive receipt of exchange proceeds•Use a qualified intermediary


Like-Kind Property

Foreign real property is not like-kind to U.S. real property.


Time Restrictions

• 1984 Congress amends Section 1031- 45 day identification period- 180 day exchange period runs concurrent

- Or due date of tax return, whichever is earlier- Calendar days not business daysCalendar days, not business days- No extensions

Identification Period

D 0 D 180D 45

PeriodExchange Period

Day 0 Day 180Day 45


Identification Requirements

•Signed by taxpayer, and in writing•Delivered•Delivered

•QI or seller of replacement property•Unambiguously describedg y

•Legal description•Street address•Distinguishable name (e.g., Mayfair Apartment Building)

May be revoked or amended with same•May be revoked or amended, with same formality as above


Identification Rules

3 Property Rule up to 3 properties without3 Property Rule – up to 3 properties, without regard to FMV;

or200% Rule – any number of properties, so long as aggregate FMV does not exceed 200% of FMV of relinquished properties;200% of FMV of relinquished properties;

but95% Exception – if first two rules violated,95% Exception if first two rules violated, must acquire 95% of FMV of all identified properties


Less-than-Fee Interests in Real Property that Qualify for Exchanges

• Leases with at least 30 years remaining, including renewal options

• Vendee’s interest in a land sale contract; not the vendor’s interestvendor s interest

• Undivided interest in one property for an undivided or 100% interest in another property

• Remainder interest in real property• Timber rights, riparian rights,

i l i htmineral rights– As determined by state law


Common Less-than-Fee Exchanges

• Timber Rights • Tenants in CommonTimber Rights• Mineral Rights• Oil Rights

Ri i Ri ht

Tenants in Common• Transferrable Development

Rights• Others• Riparian Rights • Others


Like-Kind Personal Property• Livestock of the same sex• Automobiles for automobiles• Buses for busesBuses for buses• Manufacturing equipment for manufacturing

equipment

• 13 general asset classes; OMB Standard Industrial Classification (SIC) Manual identifies 4-digit product classes; New North American Industry Classificationclasses; New North American Industry Classification System (NAICS) is 1400 pages• Exchanges within product class


Equipment Exchangesq p g

≈

≈


Common Personal Property Exchanges

Ai ft•Aircraft•Artwork•Collectibles•Equipment•Fleet Vehicles•Intellectual Property•Intellectual Property

•Licenses, Franchises, Patents, Trademarks•Livestock•Others


Common Personal Property ExchangesF hi ft ld ith R l E t t- Franchises often sold with Real Estate

F hi b h d• Franchises may be exchanged for other franchises• Nature of the franchise must also be like-kind

• Re/Max is not like-kind to Ramada• Re/Max is like-kind to Century 21


Oil, Gas & Mineral Exchanges

Estates in Land:-Fee Simple: owner is entitled to the entire property,Fee Simple: owner is entitled to the entire property, without conditions, in perpetuity-Mineral Estate: owner is entitled to only the mineral interests in the property, in perpetuityinterests in the property, in perpetuity-Mineral Lease: lessee is entitled to explore for and remove minerals from the property, usually for a finite term or until the minerals have been exhaustedterm or until the minerals have been exhausted-Mineral Royalty: the right to receive income from the minerals recovered by the lessees

For 1031 exchange purposes, taxpayers may exchange among these interests freely


Regulations 1.1031- safe harbors

• 1.1031(k)-1(g)– (2) Security or Guarantee Arrangements

• Determination of whether the taxpayer is in actual or constructive receipt of the exchange funds is made without regard to existence of mortgage, standby letter of credit, third party guarantee, etc.

(3) Qualified Escrow Accounts and Qualified Trusts– (3) Qualified Escrow Accounts and Qualified Trusts• Determination of whether the taxpayer is in actual or constructive receipt

of the exchange funds is made without regard to whether the funds are held in a Qualified Escrow Account or Qualified Trust

– QEA – Escrow holder is not a disqualified person; escrow t t i “( )(6)” li it tiagreement contains “(g)(6)” limitations

– QT – Trustee is not a disqualified person; trust agreement contains “(g)(6)” limitations

– (4) Qualified IntermediaryQI is not considered an agent of the taxpayer; is not a disqualified– QI is not considered an agent of the taxpayer; is not a disqualified person; QI enters into “exchange agreement” that contains the “(g)(6)” limitations

– (5) Interest and Growth Factors• Determination of whether the taxpayer is in actual or constructive receipt

of exchange funds is made without regard to the fact that the taxpayer is or may be entitled to receive any interest or growth factor with respect to the deferred exchange.


Regulations 1.1031- (g)(6) Limitations

• (i) An agreement limits a taxpayer's rights as provided in this paragraph (g)(6) only if the agreement provides that the taxpayer has no rights(g)(6) only if the agreement provides that the taxpayer has no rights, except as provided in paragraphs (g)(6)(ii) and (g)(6)(iii) of this section, to receive, pledge, borrow, or otherwise obtain the benefits of money or other property before the end of the exchange period.

• (ii) The agreement may provide that if the taxpayer has not identified replacement property by the end of the identification period the taxpayerreplacement property by the end of the identification period, the taxpayer may have rights to receive, pledge, borrow, or otherwise obtain the benefits of money or other property at any time after the end of the identification period.

• (iii) The agreement may provide that if the taxpayer has identified replacement property, the taxpayer may have rights to receive, pledge,replacement property, the taxpayer may have rights to receive, pledge, borrow, or otherwise obtain the benefits of money or other property upon or after

– (A) The receipt by the taxpayer of all of the replacement property to which the taxpayer is entitled under the exchange agreement, or

– (B) The occurrence after the end of the identification period of a– (B) The occurrence after the end of the identification period of a material and substantial contingency that –

• (1) Relates to the deferred exchange,• (2) Is provided for in writing, and• (3) Is beyond the control of the taxpayer and of any disqualified

( d fi d i h (k) f thi ti ) th thperson (as defined in paragraph (k) of this section), other than the person obligated to transfer the replacement property to the taxpayer.


Federal Regulations of QIs


State Regulation of QIs

• Enacted • PendingEnacted– California– Colorado

Pending– Arizona– New Jersey

– Connecticut– Idaho

– Oklahoma– Texas ≈ Bill Died

– Maine– Nevada

Oregon– Oregon– Virginia– WashingtonWashington


Your Questions


Contact Information

David Gorenberg, Esquire®

Richard B. "Rick" Chess, EsquireCertified Exchange Specialist®Director, 1031 Exchange Services

Citibank, N.A.

Managing Partner

Chess Law Firm, PLC1650 Market Street, Suite 3550Philadelphia, PA 19103Office: 267.385.3624Fax: 866.767.8201

2727 Buford Road, Suite DRichmond, VA 23235804.474.9879 Office804.241.9999 Cell

Mobile: 856.905.0407E-mail: [email protected]

www.1031exchange.citibank.com@

[email protected]

[email protected]

855.253.1031

Thank You!24 ©2012 David Gorenberg & Rick Chess

Thank You!

1031s 101

Documents

property oflike kind

property remainder

entire property

real property timber

seller of replacement

purchase replacement

kind remax

exchange service