Deferred ExchangesDeferred ExchangesTaxationTaxation

Michael Hurwitz, CPA, MST Michael Hurwitz, CPA, MST Marks Paneth, LLPMarks Paneth, LLP

May 18th, 2016May 18th, 2016

Agenda / Topic’s of Discussion:Agenda / Topic’s of Discussion:

• Deferred Exchange Terminology Deferred Exchange Terminology

• Basic’s of Deferred ExchangesBasic’s of Deferred Exchanges

• Time FramesTime Frames

• IdentificationIdentification

• Like-KindLike-Kind

• ExamplesExamples

• Other IssuesOther Issues

Definitions / Terminology:Definitions / Terminology:• 1031 Exchange and Safe Harbor 1031 Exchange and Safe Harbor

• Qualified Intermediary and Exchange Qualified Intermediary and Exchange Accommodator TitleholderAccommodator Titleholder

• Boot and Capital GainBoot and Capital Gain

• Identification and Exchange PeriodsIdentification and Exchange Periods

• Tax Basis and Fair Market ValueTax Basis and Fair Market Value

• Relinquished and Replacement PropertyRelinquished and Replacement Property

Common Misconceptions:Common Misconceptions:• Property held for investment or productive use in a trade Property held for investment or productive use in a trade

or business – or business – yesyes, qualify for deferral treatment, qualify for deferral treatment

• Simultaneous transaction – no, not necessarySimultaneous transaction – no, not necessary

• Same type of assets exchanges – no, not necessarySame type of assets exchanges – no, not necessary

• Capital gains tax is Capital gains tax is eliminatedeliminated – no, just – no, just deferreddeferred

• Extension of time to completed exchange – no, unless Extension of time to completed exchange – no, unless presidential order in rare cases of declared emergenciespresidential order in rare cases of declared emergencies

• Livestock of different sexes – no, must be of the same sexLivestock of different sexes – no, must be of the same sex

• Tenancy-in-Common interests – Tenancy-in-Common interests – yesyes, qualify for gain , qualify for gain deferral deferral

Basic’s of a Deferred Exchange::

• Sale of Relinquished or Purchase of Replacement PropertySale of Relinquished or Purchase of Replacement Property

• Identification of Replacement PropertyIdentification of Replacement Property

• Purchase of Replacement or Sale of Relinquished Property Purchase of Replacement or Sale of Relinquished Property

• Equal or greater value & invest all cash proceeds (Napkin Rule)Equal or greater value & invest all cash proceeds (Napkin Rule)

• Use of Qualified Intermediary or Exchange Accommodator Use of Qualified Intermediary or Exchange Accommodator Titleholder Titleholder

• “ “Common Ownership” (same party selling and purchasing)Common Ownership” (same party selling and purchasing)

Depending whether the exchange is a forward or reverse transaction

Forward Exchange:Forward Exchange:

Taxpayer(Exchanger)

Ownership to

Replacement Property

Seller

Ownership to

Relinquished Property

Buyer

FacilitatorQI – Forward or EAT - Reverse

Cash

Cash

Master LeaseAgreement

1031 Time Frames (Deadlines):1031 Time Frames (Deadlines):

• 45 days to identify replacement property45 days to identify replacement property

• 180 days to close transaction180 days to close transaction

• Deadlines are firm regardless of whether the date Deadlines are firm regardless of whether the date falls on a weekend or holidayfalls on a weekend or holiday

• Time frames start when the benefits and burdens Time frames start when the benefits and burdens are transferredare transferred

Rules for Identification:Rules for Identification:

• Three Property Rule; one to three properties without ; one to three properties without regard to fair market value - (most common)regard to fair market value - (most common)

• The 200% Rule; any number of properties provided that ; any number of properties provided that the aggregate fair market value of the replacement the aggregate fair market value of the replacement property does not exceed 200% of the fair market value property does not exceed 200% of the fair market value of the relinquished propertyof the relinquished property

• The 95% Rule; any number of properties as long as the ; any number of properties as long as the acquisition of the replacement property represents 95% acquisition of the replacement property represents 95% of the identified propertiesof the identified properties

Like-Kind Property:Like-Kind Property:

OfficeRentals

Storage Centers

Healthcare Facilities

Hotels/LodgingResorts

Industry Properties

Raw/Unimproved Land

Residential Rentals

Commercial/RetailRentals

Like-Kind

Example A:Example A:

First Variation Relinquished Replacement

Fair Market Value $ 450,000 $ 600,000

Net Equity $ 200,000 $ 200,000

Debt $ 250,000 $ 400,000

The taxpayer is acquiring property of greater value, reinvesting the entire net equity and increasing the

mortgage on the replacement property.

Analysis: There is no boot and none of any realized gain would be recognized currently as taxable gain.

Example A (continued):Example A (continued):

Second Variation Relinquished Replacement

Fair Market Value $ 450,000 $ 600,000

Net Equity $ 200,000 $ 150,000

Debt $ 250,000 $ 450,000

The taxpayer keeps $50,000 of the exchange proceeds, reinvesting only $150,000 as a down payment on the replacement property.

Analysis: There is $50,000 of “cash boot” which results in the recognition

of a current taxable gain of $50,000.

Example A (continued):Example A (continued):

The taxpayer acquires property of a lower value and while reinvesting all equity in the replacement property, acquires less debt in the process.

Analysis: The taxpayer has reduced the debt by $100,000 (“mortgage

boot”) which results in the recognition of current taxable gain of $100,000.

Third Variation Relinquished Replacement

Fair Market Value $ 450,000 $ 350,000

Net Equity $ 200,000 $ 200,000

Debt $ 250,000 $ 150,000

Example B:Example B:Hurko, LLC sells a shopping center through a Qualified Intermediary for $875,000 with an adjusted tax basis of $375,000. Within the mandatory identification period (45 days) Hurko, LLC identifies land valued at $925,000 and ultimately takes title within 180 days of the sale. At the time of the sale, the shopping center (relinquished property) was encumbered by a $300,000 mortgage. The land (replacement property) upon transfer to Hurko, LLC will have a $325,000 mortgage. Hurko, LLC received no cash upon the sale of the relinquished property. Assume this fact pattern demonstrates an acceptable tax deferred gain that satisfies the requirements set forth in IRC Section 1031!

Prepare schedules that reflects Hurko, LLC’s Prepare schedules that reflects Hurko, LLC’s realized, recognized and tax deferred gains as well as realized, recognized and tax deferred gains as well as the substituted basis in the replacement property!the substituted basis in the replacement property!

Example B (continued):Example B (continued):Sales price of relinquished property $ 875,000

Less: adjusted basis <375,000>

Realized gain on sale $ 500,000

Proceed of the sale from the relinquished property $ 875,000

Less: mortgage balances at the time of the sale <300,000>

Net cash proceed from the relinquished property $ 575,000

Net cash proceeds from relinquished property $ 575,000

Plus: mortgage on replacement property 325,000

Plus: additional cash used to purchase replacement property 25,000

Subtotal purchase price of the replacement property 925,000

Less: gain on sale of the relinquished property <500,000>

Substituted adjusted basis of the replacement property $ 425,000

Example B (continued):Example B (continued):Adjusted basis of relinquished property $ 375,000

Plus: additional cash used to purchase replacement property 25,000

Plus: additional mortgage on replacement property 25,000

Substituted basis of replacement property $ 425,000

Comprehensive Example C (continued):Comprehensive Example C (continued):Jodi, LLC gives up property with an adjusted basis of $250,000 (with a fair market value of $400,000) that is subject to a mortgage of $75,000 (that is assumed by Lauren, LLC). In return for this property, Jodi, LLC receives property with a fair market value of $300,000 (adjusted basis of $200,000 to Lauren, LLC) and cash of $25,000. Assume this fact pattern demonstrates an acceptable tax deferred gain that satisfies the requirements set forth in IRC Section 1031!

Let’s discuss the tax consequences for both parties Let’s discuss the tax consequences for both parties (Jodi, LLC and Lauren, LLC) involved in this like (Jodi, LLC and Lauren, LLC) involved in this like kind exchange!kind exchange!

Comprehensive Example C (continued):Comprehensive Example C (continued):

Jodi, LLC’s realized gain = ?__________

Jodi, LLC’s recognized gain = ?__________

Jodi, LLC’s basis in the real property received = ?__________

Lauren, LLC’s realized gain = ?__________

Lauren, LLC’s recognized gain = ?__________

Lauren, LLC’s basis in the real property received = ?__________

““Lightening Round”Lightening Round”• Related party rules; Related party rules; IRC Section 1031(f)IRC Section 1031(f)

• Not all partnersNot all partners want a deferred exchange want a deferred exchange

• Tenancy-in-common Tenancy-in-common

• Property Property never used in a trade or businessnever used in a trade or business

• Condo / Co-opCondo / Co-op development and sale transactions development and sale transactions

• NettingNetting boot and financings boot and financings

• TimingTiming; how long do you need to hold the ; how long do you need to hold the propertyproperty

• OtherOther issues, concerns, matters recently raised issues, concerns, matters recently raised

Questions?Questions?

Michael Hurwitz, CPA, MSTMichael Hurwitz, CPA, MSTMarks Paneth, LLPMarks Paneth, LLP

646.499.0634 / 914.833.3149646.499.0634 / 914.833.3149