Post on 01-Apr-2015
1031 Exchanges:Yesterday, Today and Tomorrow
PRESENTED BYMargo McDonnell, CES®Certified Exchange Specialist®1031 CORP., President
Certified Exchange Specialist® Over 19 years in 1031 industry Involved in thousands of exchanges of
various size and complexity Serve on Board of Directors of FEA Spearheaded industry’s effort to launch
a 1031 certification and CE program Frequent presenter of 1031 courses
ABOUT ME
Margo McDonnellCertified Exchange Specialist®
Current 1031 trends Anticipated 1031 activity over next decade Misconceptions about capital gains and their
unexpected tax bills Quick overview of 1031 exchanges Using your 1031 knowledge to your advantage Selecting a Qualified Intermediary (QI) Q & A
TODAY’S OBJECTIVES
WHAT IS A 1031 EXCHANGE?
Section 1031 of Internal Revenue Code provides no gain or loss will be recognized on the exchange of property held for productive use in a trade or business or for investment.
Not for primary residences, flips or most vacation homes.
1031 EXCHANGE
1031 BENEFITS
Immediate Tax Avoidance Time Value of Deferral Avoid higher income tax
bracket and new 3.8% Medicare Tax
Preserve personal exemptions and stay out of Pease Tax
Greater Buying Power Increased ROI Less Management Consolidation
Fresh depreciation schedule
Create new cash flow Diversification of assets Relocation or expansion
of business Future conversion to
primary residence or vacation home
Possible elimination of gain Estate preservation with
stepped up basis
Tax Facts and RatesThe Power of a 1031 Exchange
FACTS Taxes are due on capital gain
Due on appreciation Short-term capital gains are taxed as ordinary income Maximum long-term capital gain tax rate for individuals
who held property more than 12 months
TAX FACTS AND RATES
CAPITAL GAINS* 20% for taxpayers with ordinary incomes exceeding
$400,000 ($450,000 for married taxpayers) 15% for incomes more than approx. $36,000 ($71,000
for married taxpayers) and less than $400,000 ($450,000 for married taxpayers)
0% for incomes less than approx. $36,000 ($71,000 for married taxpayers)
*Consult tax advisor to determine actual tax rates.
TAX FACTS AND RATES
NEW 3.8% UNEARNED INCOME MEDICARE CONTRIBUTION
New tax goes went into effect 1/1/2013; part of Affordable Care Act (Obama Care)
Applies to unearned income (rental income, capital gains, dividends, annuities)
Affects individuals with a gross annual income exceeding $200,000 and married couples exceeding $250,000
TAX FACTS AND RATES
DEPRECIATION MUST BE RECAPTURED Generally taxed at 25% regardless of tax bracket.
TAX FACTS AND RATES
Each state has different rules regarding exchanges. The Commonwealth of Pennsylvania generally does
NOT recognize a 1031 exchange. PA Gov. Corbett called for a PA version of section 1031 in 2013
budget address. Many states simply follow the Federal Code or have
adopted similar regulations Some states have special requirements such as the
replacement property must be located within the state Some states have no income tax
STATE INCOME TAX
ASSUMPTIONS Individual owned property for many years Annual Salary of $125,000 and $50,000 of add’l income
(interest, dividends, rental income) Paid $250,000 Made no capital improvements Depreciated down to $100,000 Selling for $500,000
1031 vs. SALE
ASSUMPTIONS Capital gains of $250,000 With $175,000 of income, falls into 20% capital gains tax
rate Subject to 3.8% Medicare Tax Subject to highest income tax bracket of 39.6% Deprecation recapture of $150,000 @ 25% Would likely face a phase out of Personal Exemptions and
be subject to the Pease Tax
1031 vs. SALE
1031 vs. SALE
Taxable Sale 1031 Exchange
Sale Price $500,000 $500,000Capital Gains $37,500* 03.8% Medicare Tax $9,500Depreciation Recapture $37,500 0Federal Tax Liability $84,500 0Net Proceeds $415,500 $500,000Buying Power (30% down) $1,385,000 $1,666,667
*Calculated at 15%. Actual amount could be higher.
Immediately avoids $84,500 federal tax liability Able to invest all proceeds Leverage extra $84,500 Acquire new property worth $281,667 MORE than
you could if you paid the tax Collect higher rents from Day 1 More depreciation available Enjoy greater appreciation long-term
1031 vs. SALE
1031 Trends and Projections
MULTIPLE REPLACEMENT PROPERTIES Investors are taking advantage of current CRE
market opportunities and historically low interest rates to leverage into several replacement properties
CURRENT TRENDS
COMMERCIAL PROPERTIES Commercial properties selling for over $2.5M are
being exchanged as a much faster rate than in many years
CURRENT TRENDS
SHORT EXCHANGE PERIODS Exchangers are lining up their replacement property
and are ready to acquire it immediately after conveying the old property to a buyer Average exchange is now completed within 43 days
(down from average of 93 days just two years ago)
CURRENT TRENDS
REVERSE EXCHANGES More and more investors are finding the ideal
replacement property before lining up a buyer Must be structured several weeks in advance
Preserves clients ability to defer gain when property eventually sells
QI thru an EAT acquires either the old or the new property and “parks” title for up to 180 days
CURRENT TRENDS
OIL & GAS ROYALTIES Investors are acquiring oil and gas royalties as
replacement property Current oil prices make this investment more attractive Provides good returns with no hands on
CURRENT TRENDS
NO MORTGAGES ON REPLACEMENT PROPERTY Higher than usual number of Exchangers choosing
to put in additional equity or trade down in property value rather than put a mortgage on the new property Trade downs are taxed on the amount of the trade down
CURRENT TRENDS
INCREASE IN PERSONAL PROPERTY 1031s Without the 100% bonus depreciation we had for 18
months, we are seeing a big increase in exchanges of other assets held for investment Companies are purchasing capital assets using 1031 New purchases to increase efficiency Examples: airplanes, equipment (cranes, lifts), printing
presses, railroad cars
CURRENT TRENDS
EXCHANGING PROPERTY WITH NO GAIN Investors are exchanging properties with little or no
gain, maybe even selling at a loss, to avoid costly depreciation recapture
CURRENT TRENDS
FEA member surveys estimated exchange activity dropped approximately 80% from 2005 to 2010
Activity is definitely picking up nationwide Using data from FEA member surveys, the Joint
Committee on Taxation (JCT) estimates 1031 deferrals of $2.5B in next 5 years and $18.2B in next 10 years Significant increase is expected as the real estate
market continues its rebound
1031 ACTIVITY: YESTERDAY , TODAY & TOMORROW
Beginning in September 2012, there has been quite a bit of noise regarding section 1031
1031 has been identified as one of the top tax expenditures and a potential target in the tax reform battle
JTC has rescores section 1031. Now $42 – 47B! Entire real estate industry, including FEA, working
together to preserve top real estate expenditures
1031 ACTIVITY: YESTERDAY , TODAY & TOMORROW
Unlocking the Power of ExchangesOverview of 1031 Exchanges
REAL PROPERTY (REAL ESTATE) EXCHANGES Refers to the nature or character of property
Specific type of property not essential
Very broad and liberal definition Must be used for business use or investment Located within 50 states, D.C. or selected territories Can buy or sell multiple properties
LIKE-KIND DEFINED
Examples of like-kind real estate Duplex, apartment building, rental house Office building, warehouse, shopping center Land Tenant-in-Common (TIC) interest Conservation easements, utility easements Leasehold interest of 30 years (including options) Cell tower easements Oil and Gas Royalties; Mineral Interests
LIKE-KIND EXAMPLES
Examples of non like-kind real estate Personal residence and most vacation homes Partnership interests Mortgages and notes Cash Non real estate assets Dealer property and inventory Stocks
LIKE-KIND EXAMPLES
PERSONAL PROPERTY EXCHANGESAny asset held for business use or investment can be exchanged.
Definition of like-kind is much more restrictive for personal property
Assets must be within the same asset classification code or the same kind of asset Examples of personal property assets: Equipment, aircraft,
franchise agreements, livestock, collectibles, antiques, distribution routes, furniture and fixtures, etc.
LIKE-KIND DEFINED
Holding period not defined in regulations One year is good rule of thumb
Taxpayer Relief Act of 1997 defined “long-term” investments as held longer than one year
Two year safe harbor in Rev. Proc. 2008-16
Intent of taxpayer is key Look at the picture you have painted
Personal use must be minimal (§280A)Consult tax and/or legal advisor to determine best strategy.
QUALIFIED USE
QI acts as “middleman” to facilitate an exchange Exchanger cannot have access to exchange
proceeds Time Periods:
Replacement Property* must be identified within 45-Day Identification Period
Replacement Property must be acquired within 180-Day Exchange Period
*Title must be held in the same name as relinquished property
ADDITIONAL REQUIREMENTS
Exchange must be set up (and 1031 docs signed) before title passed to buyer
To maximize deferral, replacement property must have equal or greater VALUE and EQUITY. Value takes closing costs into account. A trade down in property value or equity is taxed just on
the trade down.
ADDITIONAL REQUIREMENTS
Your QI is your partner throughout the exchange Choose company who is responsive, experienced and has
good knowledge of local real estate and title practices Make sure funds are held in segregated FDIC insured
exchange account Look for fidelity bond coverage Seek Certified Exchange Specialist® (CES®) Look for member of Federation of Exchange
Accommodators (FEA)
CHOOSING YOUR QI
1031 exchanges are a great wealth accumulation vehicle. Build real estate portfolio with pre-tax dollars Great way to accomplish long-term objectives Excellent estate planning tool Creates many opportunities to grow your business
The more you know, the more you will benefit. 1031 CORP. can help!
SUMMARY
QUESTIONS & ANSWERS
Margo McDonnell, CES®Certified Exchange Specialist®
1.800.828.1031 Mobile: 610.680.6896margo@1031CORP.com www.1031CORP.com
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