1. 1031 Exchange Services Eric Brecher, Esq.
PRESENTED BY
Eric Brecher, Esq.
Certified Exchange Specialist®
1031 Exchange Services
(917)

2. What you will learn today…
Why Exchange?
Exchange Timelines & Rules
Types of Exchanges
1031 Exchange Recent Developments
The Role of the Qualified Intermediary
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3. Like – Kind Exchanges – The Basics
Tax Code
Property Qualifications
Rules
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4. 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.
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5. 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
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6. 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
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7. Qualifying for a 1031 Exchange
Apartments
Rental Homes
Raw Land
Farms/Ranches
Office Buildings
Retail Properties
Commercial
Industrial
Like-Kind
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8. 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
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9. 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
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10. 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
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11. 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
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12. 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
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13. 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
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14. Construction Exchanges Reverse Exchanges Related Parties
Types of Exchanges
Construction Exchanges
Reverse Exchanges
Related Parties
Vacation Homes
Split Treatment Exchanges
DSTs
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15. 1031 Mixing Pot of Issues
Rev. Proc : same sex married persons are now “spouses” for Federal tax purposes
California Reporting: Rev & Tax code & 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
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16. Form 1065
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17. Form 8824
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18. Form 8824 continued
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22. 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
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23. Thank You For Attending
Eric Brecher, Esq.
Certified Exchange Specialist®
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
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