1031 Exchange Explained

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3 Table of Contents About Landmark Dividend What is a 1031 exchange 1031 Exchange and Your Ground Lease How a 1031 exchange works Exchange Procedure and Documentation Requirments Types of 1031 Exchanges What Kind of Property is Eligible Reasons for Exchanging Exchange Common Terms Exchange Basics Properties Not Available for 1031 Exchange

4 About Landmark Dividend Landmark Dividend LLC is one of the nation s largest and most successful ground lease acquisition companies. We provide value, capital and liquidity to qualified property owners who lease their property for cell towers, billboards, wind turbines, solar farms and fiber optic networks. Landmark Dividend is the General Partner of its publicly-traded subsidiary, Landmark Infrastructure Partners LP. Landmark Infrastructure Partners was formed to acquire, own and manage a portfolio of real property interests leased to companies in the wireless communication, outdoor advertising and renewable power generation industries. Landmark Infrastructure Partners is traded on the NASDAQ under the symbol LMRK; more information can be found at Whether you have a ground lease for a billboard that has been in your family for generations, a cell site with one or multiple wireless tenants, or hold a lease to renewable energy asset or fiber optic cables, we understand that your asset is important to you and generates income. Yet with the uncertain financial climate and ever-changing regulatory environment, you may be questioning the potential risks of relying on the income from these assets. What if you could get the liquidity you need in a lump-sum cash payout right now? What if you had the upfront cash to invest in another real estate asset or business, send your kids to college, fund your retirements, pay off your mortgage or explore other opportunities? With our capital solutions, you can! Landmark Dividend can help you maximize the value of your property today in order to secure your future. We have a passion for creating value for property owners just like you. It s our only business. Please call us at or click here to submit your information online so that we may contact you Landmark Dividend P: info@landmarkdividend.com

5 What is a 1031 like-kind exchange Section 1031 of the tax code allows owners of qualified real estate or personal property (such as business use assets) to sell property without having to pay taxes on the gain from the sale, as long as this revenue is used to acquire like-kind replacement property. Broadly speaking, a 1031 exchange is a swap of one business or investment asset for another. In effect, you can change the form of your investment without (as the IRS views it) cashing out, or recognizing a capital gain. That allows your investment to continue to grow tax deferred. There s no limit on how many times or how frequently you can do a You can roll over the gain from one piece of investment real estate to another to another and another. Although you may have a profit on each swap, you avoid tax until you actually sell for cash in the future. Any property held for productive use of trade or business or for investment can be exchanged for any other property held for productive use in trade or business or for investment that s the definition of like-kind Exchange and Your Ground Lease Helping our clients save money on their taxes is part of our job at Landmark Dividend. A 1031 exchange is one of the ways we achieve that goal. Instead of just selling us your lease (referred to as a lease assignment), which will likely result in a capital gains tax bill for you, you can defer this tax by granting us an easement around your cell tower site. You may be thinking, If a 1031 exchange is about selling one property and buying another, how can I participate by selling your cell tower lease? The answer is by placing an easement under the cell tower site (which can simply mirror the existing easement, if there is one), it turns your cell tower lease sale into a real property sale, generally making it eligible for a 1031 exchange. Having an easement generally does not affect your ownership of the land, including your ability to sell it Rosecrans Ave., Ste El Segundo, CA

6 How a 1031 Exchange works: 1. Engage a qualified intermediary A qualified intermediary or QI will structure the exchange, prepare related documentation, and hold proceeds from the sale of relinquished property. 2. Assign rights to sell relinquished property After negotiating a price and executing a sales contract with the buyer of the relinquished property (the property you wish to sell), you assign your rights to sell the relinquished property to the QI. 3. Sell relinquished property The sale proceeds go to the QI who holds the funds in a special type of account required by Treasury regulations. You have 45 days to identify up to three properties to replace the one you just sold. 4. Assign rights to buy replacement property After negotiating a price and executing a purchase contract with the seller of the replacement property (the property you wish to buy), you assign your rights to buy the replacement property to the QI. 5. Buy replacement property Upon your signed direction to the QI, your exchange funds will be paid directly to the seller or to the closing agent. You must close no later than 180 days after the closing of your relinquished property. 6. Exchange is complete Congratulations! The taxes on gains are deferred, so you don t owe anything to Uncle Sam, but the IRS is happy because you followed the process laid out by the Internal Revenue Code and Treasury regulations. 3. Landmark Dividend P: info@landmarkdividend.com

7 1031 Exchange Procedure and Documentation Requirements 1. Taxpayer adds addendum to buyer s offer to show that transaction is a like kind exchange and to allow contract to be assigned to Qualified Intermediary A copy of the sales contract is sent to the QI with the name and phone number of the settlement agent/attorney. Taxpayer signs QI provided exchange and escrow account agreement and assignment of contract prior to settlement. Signed documents are returned to QI. Written notification of assignment is provided to all parties of the contract prior to settlement. At settlement, QI receives exchange funds and places in qualified escrow account. Taxpayer has no control of funds. 5. Within 45 days of transfer, taxpayer provides signed written notification to QI listing identified replacement properties. 6. Taxpayer adds to replacement property contract addendum to show transaction is part of a tax deferred exchange and that taxpayer s/exchanger s rights may be assigned. 7. Taxpayer s rights in the replacement property contract are assigned to QI prior to settlement and written notification of assignment is provided prior to settlement to all parties of the contract. 8. Within 180 days of transfer of first relinquished property, taxpayer must receive replacement property. 9. At the end of the exchange period, QI provides any remaining escrow account funds and interest earned to taxpayer. 10. Taxpayer/exchanger files IRS Form 8824 for tax year in which first relinquished property was transferred Rosecrans Ave., Ste El Segundo, CA

8 Types of 1031 Exchanges Simultaneous Exchange - The investor will close on their relinquished property and immediately after close on their replacement property, usually within one business day. An investor may or may not use a Qualified Intermediary to handle the funds, although it is not required. Deferred or Delayed Exchange - Another method allows the investor to close on the relinquished property, then identify and close on the replacement property within 180 days. It requires a Qualified Intermediary. The replacement property must be identified within 45 days from the closing on the relinquished property. Build-to-Suit (Improvement or Construction) Exchange - This technique allows the taxpayer to build on, or make improvements to, the replacement property, using the exchange proceeds. Reverse Exchange - The exchanger acquires the replacement property before conveying the relinquished property. These are used when individuals wish to exchange property they own for property which must be purchased prior to the sale of the relinquished property. What kind of property is eligible? Nearly all real property held for investment purposes is considered to be like-kind to all other real property. The following types of real property are often exchanged and thus tax-deferrable: Single or multi-family rental properties Office buildings Apartment buildings Shopping centers Vacant land held for investment Farm land Billboards Cell towers Wind farms Hotels and motels Warehouses Mineral rights Franchises And many more 5. Landmark Dividend P: info@landmarkdividend.com

9 Reasons for Exchanging include: Deferring taxes on gains allows the investor to reinvest more money from the sale into the next property. Consolidation of several smaller properties into one larger investment to facilitate management or improved cash flow. Shifting investment from one area, locale or type of asset to another to take advantage of local market opportunities. Avoiding deferred maintenance, and the associated capital investment, by trading out the older properties into newer ones. Diversification of investment portfolios by trading out of a single property, or type of property, into various investments or multiple properties Rosecrans Ave., Ste El Segundo, CA

10 1031 Exchange Common Terms: Exchanger: The investor involved in a 1031 Exchange Like Kind: Properties are of like-kind if they are of the same nature or character, even if they differ in grade or quality Disqualified Person: May not be qualified intermediaries. A disqualified Person is any party who has acted as your agent, employee, attorney, accountant, investment banker/ broker, or real estate agent or broker within the two-year period ending on the date of the first transfer of any relinquished property. Also disqualified are the family members of the disqualified Persons, as well as partnerships, corporations and other entities in which you, or your related party, own directly or indirectly, more than a 10% interest. Safe Harbor: An accounting method that avoids legal or tax regulations Identification Period: The time frame (45 days from the closing on the relinquished property) the exchanger has to identify the replacement property Exchange Period: The period in which the replacement property must be received (180 days after the closing of the relinquished property). Boot: Taxable income received from a 1031 Exchange Qualified Intermediary: (QI ) or accommodator - an uninvolved third party who does any buying of replacement property or selling of the relinquished property necessary on behalf of the exchanger and holds the funds in escrow since the rules to an exchange disallow the investor from having access to the funds in interim. Relinquished Property: The property the exchanger is selling Replacement Property: The property the exchanger acquires 7. Landmark Dividend P: info@landmarkdividend.com

11 1031 Exchange Basics Rules to Identifying the Replacement Property: There are three rules that limit the number of properties that can be identified. The taxpayer must meet the requirements of at least one of these rules: 3-Property Rule: The taxpayer may identify up to three potential replacement properties, without regard to their value; or 200% Rule: Any number of properties may be identified, but their total value cannot exceed twice the value of the relinquished property; or 95% Rule: The taxpayer may identify as many properties as he wants, but before the end of the exchange period, the taxpayer must acquire replacement properties with an aggregate fair market value equal to at least 95% of the aggregate fair market value of all the identified properties. Properties not Available for 1031 Exchange Real Property located outside of the United States Personal residence, unless it has been a rental property for 2 years Stock in trade or other property held primarily for sale Stocks, Bonds, Notes or other Securities or Evidence of Indebtedness or Interest Interests in a Partnership Certificates of trust or beneficial interest Property or business something that can only be obtained or enforced through legal action Land which was acquired for the express purpose of subdivision and resale and only held long enough to effect such subdivision and resale Homes held for sale by speculation builders, such as builder s inventory of unsold homes 2141 Rosecrans Ave., Ste El Segundo, CA

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