Basic Structures & How to Preserve Wealth Through a 1031 Exchange

Transcription

1 Basic Structures & How to Preserve Wealth Through a 1031 Exchange Jennifer Keen Executive Vice President IPX William K. Tanaka, Esq. General Counsel Fidelity National Title william.tanaka@fnf.com jennifer.keen@ipx1031.com Basic Structures & How To Preserve Wealth Through a 1031 Exchange 1

2 Disclaimer Fidelity National Title & Escrow of Hawaii, Inc. and Investment Property Exchange Services, Inc. cannot provide advice regarding specific tax consequences. Investors considering an IRC section 1031 Exchange should seek the counsel of their accountant and attorney to obtain professional and legal advice. Basic Structures & How To Preserve Wealth Through a 1031 Exchange 2

3 Agenda Review 1031 Terms & Definitions Discuss Original Taxation Laws Origins, Structure & Benefits of a 1031 Exchange When & How to Set up a 1031 Tax Deferred Exchange Updates Basic Structures & How To Preserve Wealth Through a 1031 Exchange 3

4 What is a 1031Exchange? Exchanges have been around since 1921 Whatis a 1031 Exchange? Primary vs. Investment Tax Deferral Treatment Basic Structures & How To Preserve Wealth Through a 1031 Exchange 4

5 Terms & Definitions Boot Any cash or consideration remaining after the Exchange is complete Direct Deeding The seller transfers title directly to the buyer (excluding the QI) Disqualified Party Anyone who has acted as the taxpayer s employee, attorney, accountant, investment banker/broker or real estate agent/broker within the 2 year period ending on the date of the transfer of the relinquished property. Exchange Agreement Documentation that sets forth the intent to Exchange, as well as, the terms of the transaction and responsibilities of both the QI and Taxpayer Related Party Any person bearing a relationship to the taxpayer. (Further described in 267(b)) Basic Structures & How To Preserve Wealth Through a 1031 Exchange 5

6 History of 1031Tax Deferred Exchanges 1921 Revenue Act of 1921 allowed exchange of securities and non like kind property under IRC Section 202(c) 1928 Revenue Act of 1928 changed section number that applies to tax deferred exchanges to Section 112(b)(1) 1935 Board of Tax Appeals approved first use of a QI 1954 Tax code amended and Section 112(b)(1) re codified as Section Starker Case justified non simultaneous exchanges 1984 Deficit Reduction Act of 1984 introduced 45 & 180 day deadlines 1986 Tax Reform Act of 1986 took away special tax treatments to investors Basic Structures & How To Preserve Wealth Through a 1031 Exchange 6

7 History of 1031Tax Deferred Exchanges (cont) 1989 Revenue Reconciliation Act of 1989 created related party restrictions and disallowed exchanges of U.S. property for foreign property 1991 Amendment to IRC 1031 defined the role of a QI 2000 Rev. Proc created safe harbors that would allow for a Reverse Exchange (buy first, sell second) 2002 Rev. Proc addresses federal tax treatment for undivided Tenant In Common (TIC) ownership interests in property 2002 Rev. Proc clarifies the IRS s position that a taxpayer may not acquire replacement property from a related party 2005 Rev. Proc recognizes that a single disposition of property could qualify under both IRC 121 and 1031 Basic Structures & How To Preserve Wealth Through a 1031 Exchange 7

8 Reasons Investors Exchange Defer Tax what taxes? Federal Capital Gains Tax State Capital Gains Tax State Withholding Depreciation Recapture Basic Structures & How To Preserve Wealth Through a 1031 Exchange 8

9 Capital Gain Taxes Example 15% Federal Rate based on the gain $500,000 $100,000 = $400,000 x 15% = $60,000 20% Federal Rate earning $400K/$450K $500,000 $100,000 = $400,000 x 20% = $80, % State of HI based on the gain (long term) $400,000 x 7.25% = $29,000 = $89,000 = $109,000 25% based on depreciation taken $3,700/yr x 10yr = $37,000 x 25% = $9,250 TOTAL = $98,250 TOTAL = $118,250 Basic Structures & How To Preserve Wealth Through a 1031 Exchange 9

10 Capital Gain Taxes Example (cont) And if that isn t enough, if you earn more than $200K/$250K 3.8% Health Care Bill $500,000 $100,000 = $400,000 x 3.8% = $15,200 $98,250 $118,250 $15,200 $ 15,200 $113,450 $133,450 Doesn t a 1031 Exchange sound exciting? Basic Structures & How To Preserve Wealth Through a 1031 Exchange 10

11 Non-Tax Reasons to Exchange Diversify Your Real Estate Portfolio Interest Rates are at an All Time Low! Great Time to Buy! Consolidate Your Real Estate Portfolio Sell Smaller Assets and Buy One Larger Asset Exchange Into Property Closer to Home Easier to manage closer to home Exchange Into Property with Better Cash Flow Buy Into Property with a New Amortization Schedule Purchase Property to Obtain a New Depreciation Schedule Basic Structures & How To Preserve Wealth Through a 1031 Exchange 11

12 Like-Kind Property In general: No gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of Like Kind. Basic Structures & How To Preserve Wealth Through a 1031 Exchange 12

13 Like-Kind Property Examples Property held for Business, Trade or Investment Basic Structures & How To Preserve Wealth Through a 1031 Exchange 13

14 Non Like-Kind Property Money, cash or cash equivalents Personal property for real property Stocks, bonds or notes Stock in trade or other property held primarily for sale Interests in Partnerships Certificates of Trust or Beneficial Interest Other securities or evidences of indebtedness or interest Primary Residences & Second Homes U.S. property for foreign property Basic Structures & How To Preserve Wealth Through a 1031 Exchange 14

15 Important Concepts Things the IRS is looking for: Intent Reason behind doing the exchange Substance Use of a QI Form Proper documentation Exchange Agreement, 8824, Cooperation Language Constructive Receipt Basic Structures & How To Preserve Wealth Through a 1031 Exchange 15

16 Constructive Receipt The taxpayer must not have the right to receive, pledge, borrow or otherwise obtain the benefits of money or other property before the end of the exchange period Basic Structures & How To Preserve Wealth Through a 1031 Exchange 16

17 Time Frames 45 days to identify replacement property 180 days to acquire replacement property day 1 45 days 180 days Escrow closes, next day is considered day 1 45 days is part of 180 days There are no exceptions or extensions to these time frames, except for federally declared disasters Basic Structures & How To Preserve Wealth Through a 1031 Exchange 17

18 Methods of Identification Replacement Property Manner of identifying property must have complete address, must be signed and dated Alternate & Multiple properties rules: 3 Property Rule identify up to 3 properties without regard to value 200% Rule identify 4 or more properties, the total value of all cannot exceed 200% of the value of the property sold 95% Rule must purchase 95% of the value of all properties identified Basic Structures & How To Preserve Wealth Through a 1031 Exchange 18

19 Broad Strokes of a Reverse 1031 Exchange More complex than a regular Delayed Exchange In a Reverse 1031 Exchange, the taxpayer Buys first and then sells later Must not be on title to the sale & purchase at same time Therefore the QI (IPX 1031 ) must Create a single member LLC & hold title to one of the properties And triple net lease that property to the taxpayer until the exchange can be completed Basic Structures & How To Preserve Wealth Through a 1031 Exchange 19

20 Additional Things to Remember Estate Taxes Old Estate Tax Regs Back Into Play for 2011 If client inherited property in 2010, have them call CPA No step up in basis Short Sale Exchanges Carry Over Basis from Prior Exchanges Federal Capital Gains Rate for 2013 Remained Same for 400/450K or less. 20% for above Healthcare Bill (taxes on Investments) (3.8%) Basic Structures & How To Preserve Wealth Through a 1031 Exchange 20

21 Short Sale Exchange Example Property A Purchased in 1985 for $100,000 Property A Sold in 2004 for $800,000 Exchanges into Property B which is Purchased for $1,500,000 $700k Equity & $800k Loan Refi & Pull Out $200k for Improvements, Vacation & New Car Economy Declines & Property Values Shrink Client Sells Property B in 2012 for $900,000 even though they owe $1,000,000 Lender Approves a Short Sale at $900,000 Even though Client has no Cash at the Close of Property B he/she still NEEDS to Exchange because of Carryover Basis Original Basis in the Exchange is $100,000 Basic Structures & How To Preserve Wealth Through a 1031 Exchange 21

22 Marketing Concepts for 1031 Exchanges What is available to you as a resource for 1031 Exchanges? Free Monthly Online Webinars (Basic & Advanced) E Blasts on 1031 Topics (monthly) Website (interactive) Sales Executives available nationally for meetings, seminars and individual consultations Basic Structures & How To Preserve Wealth Through a 1031 Exchange 22

23 Jennifer Keen Executive Vice President IPX 1031 Exchange Services, Inc mobile toll free William K. Tanaka, Esq. General Counsel Fidelity National Title Basic Structures & How To Preserve Wealth Through a 1031 Exchange 23