1031 Exchange Services Eric Brecher, Esq. PRESENTED BY Eric Brecher, Esq. Certified Exchange Specialist® 1031 Exchange Services (917) 455-1551

What you will learn today… Why Exchange? Exchange Timelines & Rules Types of Exchanges 1031 Exchange Recent Developments The Role of the Qualified Intermediary 9/16/2018

Like – Kind Exchanges – The Basics Tax Code Property Qualifications Rules 9/16/2018

1031 Exchange – Tax Code 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, which is to be held for productive use in a trade or business or for investment. OR in Layman’s Terms: A Section 1031 Exchange allows an owner of investment property to exchange property and defer paying federal capital gains tax, depreciation recapture tax and state income taxes if they purchase “like-kind” property following rules and regulations of the IRC. 9/16/2018

20% Federal Capital Gain Tax for assets held > 1 year Why Exchange? Tax Deferral 20% Federal Capital Gain Tax for assets held > 1 year 25% Federal Depreciation Recapture Tax State Income Taxes (if applicable) 3.8% Medicare Tax on net investment income Other Advantages of Exchanging Diversification Consolidation Greater cash flow Estate planning 9/16/2018

Qualifying Properties Properties that DO Qualify Properties that DO NOT Qualify Property held for investment, income, or a trade or business, and not primarily for sale. Stock in trade or other property held primarily for sale. Stocks, bonds, notes Rentals homes/condos/coops Other securities or evidences of indebtedness or interest Raw land Retail Certificates of trust or beneficial interests Industrial/Warehouse Office Choses in action Agricultural Partnership Interests 30 Year Leases Primary Residence Easements NNN & DST’s 9/16/2018

Qualifying for a 1031 Exchange Apartments Rental Homes Raw Land Farms/Ranches Office Buildings Retail Properties Commercial Industrial Like-Kind 9/16/2018

Qualifying Properties Exchanges that NEVER Qualify Real property for personal property Livestock of different sex Real property in the US for foreign real property and vice-versa 9/16/2018

Calculating Gain Facts: $1,000,000 purchase price $100,000 depreciation $50,000 capital improvements $2,000,000 sales price Adjusted Basis Purchase Price $1,000,000 (Depreciation) $100,000 + Capital Improvements $ 50,000 Adjusted Basis $950,000 Gain Calculation: Sale Price $2,000,000 (Adjusted basis) ($950,000) Gain $1,050,000 Taxes: 25% Depreciation Recapture $100,000 X 25% = $25,000 20% Fed. Cap Gains (15%x$450k=$67,500)+(20%x$600k=$120,000)=$187,50 0 13.3% CA State Income Tax $1,050,000 X 13.3% = $139,650* 3.8% “Medicare Tax” $800,000 X 3.8%= $30,400 Total Taxes Due: $382,550 *approximation based on assumed top rate 9/16/2018

1031 Exchange Rules NAPKIN RULE All cash proceeds from the sale of the Relinquished Property must be reinvested in the Replacement Property (or pay tax on the difference) The purchase price of the Replacement Property must be at least as much as the sales price of the Relinquished Property (or pay tax on the difference) The purchaser of the Replacement Property must be the same as the seller of the Relinquished Property, or be a “Disregarded Entity” For safe harbor protection, exchange funds should be held by a Qualified Intermediary 9/16/2018

1031 Exchange Time Periods - 45 180 Day 1 Day after Escrow closes on the relinquished property Deadline to identify replacement property(s) Deadline to purchase replacement property(s) The 1031 Exchange time frame begins the day after escrow closes on the relinquished property. From this point, the 180 day count down begins 9/16/2018

1031 Exchange – Identification Rules 3 Property Rule Without regard to FMV 200% Rule Aggregate FMV not to exceed 200% of RP 95% Rule Acquire 95% of FMV of identified property 9/16/2018

Identification Rules - continued Replacement Property must be designated as such in written document signed by taxpayer and hand delivered, mailed, telecopied, or otherwise sent before the end of the identification period to either: (1) person obligated to transfer Replacement Property to the taxpayer regardless of whether that person is disqualified; or (2) any other person involved in the exchange other than the taxpayer or disqualified person Negligence penalty and/or fraud penalty under IRC 6663; criminal charges for delivery of false documents (backdated letter) Release of exchange funds - g(6) limits rights to receive, pledge, borrow or otherwise obtain benefits of money or other property before end of the exchange period 9/16/2018

Construction Exchanges Reverse Exchanges Related Parties Types of Exchanges Construction Exchanges Reverse Exchanges Related Parties Vacation Homes Split Treatment Exchanges DSTs 9/16/2018

1031 Mixing Pot of Issues Rev. Proc. 2013-17: same sex married persons are now “spouses” for Federal tax purposes California Reporting: Rev & Tax code 18032 & 24953 effective 1/1/14, if CA RQ exchanged for out of state RP, TP must file annual reporting form with FTB Seller Financing Closing Costs 9/16/2018

Form 1065 9/16/2018

Form 8824 9/16/2018

Form 8824 continued 9/16/2018

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Qualified Intermediary Role - Initiating an Exchange Security Security should be a client’s most important concern. Select a Qualified Intermediary that can be trusted with client funds Service Clients need to work closely with the QI. Make sure they provide top customer service Experience A client depends on the QI to properly document and facilitate the 1031 Exchange Price Be sure to look at the amount of the exchange fee, including all hidden costs 9/16/2018

Thank You For Attending Eric Brecher, Esq. Certified Exchange Specialist® 917-455-1551 City National Bank its affiliates and subsidiaries, as a matter of policy, do not give tax, accounting, regulatory or legal advice. Rules in the areas of law, tax, and accounting are subject to change and open to varying interpretations. You should consult with your other advisors on the tax, accounting and legal implications of actions you may take based on any strategies presented, taking into account your own particular circumstances, including the possibility of a 1031 tax-deferred property exchange. ©2017  City National Bank. All Rights Reserved. City National Bank is a subsidiary of Royal Bank of Canada CNB Member FDIC 9/16/2018