1031 Exchanges David Gorenberg

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  • 1. 1031 Exchanges The Art & Science of Capital PreservationPresented by:Citibank, N.A. 1031 Exchange ServiceDavid M. Gorenberg, EsquireCertified Exchange SpecialistPresented to:

2. Please Turn Cell Phones and Pagers to Silent or Off.Thank you.21031 Exchanges: The Art & Science of Capital Preservation 3. Important DisclosuresThis presentation does not constitute legal or tax advice. Citibank and its employees do not provide tax orlegal advice and are not responsible for advising customers on the laws or regulations pertaining to any1031 exchange transaction. Citibank and its employees will not make any representations regarding thetax consequences of any 1031 exchange transaction. It is the customers responsibility to seek tax andlegal advisors in connection with any 1031 exchange transaction.IRS Circular 230 Disclosure: To the extent that this material or any attachment concerns tax matters, it isnot intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that maybe imposed by law.Citibank, N.A., Member FDIC. Citibank and Arc Design is a registered trademark of Citigroup Inc.31031 Exchanges: The Art & Science of Capital Preservation 4. Overview of the Statute and Regulations41031 Exchanges: The Art & Science of Capital Preservation 5. Taxation 101 Generally, all income is taxable,unless specifically exempted by law. Even illegal income, such as stolenor embezzled funds, must bereported on Line 21 of Form 1040.Source: Department of Treasury, Internal RevenueService, Publication 525.5 1031 Exchanges: The Art & Science of Capital Preservation 6. IRC Section 1031 No gain or loss shall be recognized on the exchange ofproperty held for productive use in a trade or business orfor investment if such property is exchanged solely forproperty of like kind which is to be held for productive usein a trade or business or for investment. 1031 provides for deferral of taxes,not complete elimination.6 1031 Exchanges: The Art & Science of Capital Preservation 7. Like-kind PropertyForeign real property is not like-kind to U.S. real property.7 1031 Exchanges: The Art & Science of Capital Preservation 8. Business or Investment Use There are five tax classes of property: 1) property used in taxpayers trade or business; 2) property held primarily for sale to customers; 3) property which is used as your principal residence; 4) property held for investment; and 5) property used as a vacation home Section 1031 applies to the first and fourthcategories (and perhaps the fifth)81031 Exchanges: The Art & Science of Capital Preservation 9. Less than Fee Interests in Real Property that Qualify forExchanges Leases with at least 30 years remaining, including renewal options Vendees interest in a land sale contract; not the vendors interest Undivided interest in one property for an undivided or 100% interest inanother property Remainder interest in real property Timber rights, riparian rights,mineral rights As determined by state law91031 Exchanges: The Art & Science of Capital Preservation 10. Like Kind Personal Property Under the regulations, personal depreciable propertyused in business or held for investment is exchangedwith like-kind property if exchanged either for property ofa like kind or like class Properties are of like class if they are in the same: General Asset Class Rev. Proc. 87-56, or Product Class SIC Manual (4 digits) Personal property is like kind if identical10 1031 Exchanges: The Art & Science of Capital Preservation 11. Like Kind Personal Property Livestock of the same sex Automobiles for automobiles Buses for buses Manufacturing equipment for manufacturing equipment 13 general asset classes; OMB Standard Industrial Classification (SIC)Manual identifies 4-digit product classes; New North American IndustryClassification System (NAICS) is 1400 pages Exchanges within product class111031 Exchanges: The Art & Science of Capital Preservation 12. Common Personal Property Exchanges Aircraft Artwork Collectibles Equipment Fleet Vehicles Intellectual Property Licenses, Franchises, Patents, Trademarks Others121031 Exchanges: The Art & Science of Capital Preservation 13. 1031 in a Nutshell To obtain complete deferral of capital gains taxes, thetaxpayer should: Purchase replacement property that is equal or greater in value to the relinquished property Have equal or greater equity in the replacement property Have equal or greater debt on the replacement property Receive nothing except like-kind property Avoid constructive receipt of exchange proceeds Use a qualified intermediary131031 Exchanges: The Art & Science of Capital Preservation 14. Why Exchange?141031 Exchanges: The Art & Science of Capital Preservation 15. Delayed Exchanges- Statutory Requirements 1984 Congress amends Section 1031 45 day identification period 180 day exchange period runs concurrent Or due date of tax return, whichever is earlier Calendar days, not business days No extensions Exchange starts on date of recording, or when burdens and benefits of ownership of relinquished property are transferred, whichever is first15 1031 Exchanges: The Art & Science of Capital Preservation 16. Identification Requirements Signed, and in writing Delivered QI or seller of replacement property Unambiguously described Legal description Street address Distinguishable name (e.g., Mayfair Apartment Building) May be revoked or amended, with same formality as above16 1031 Exchanges: The Art & Science of Capital Preservation 17. Identification Rules 3 Property Rule up to 3 properties, without regard to FMV; or 200% Rule any number of properties, so long as aggregate FMVdoes not exceed 200% of FMV of relinquished properties; but 95% Exception if first two rules violated, must acquire 95% of FMVof all identified properties17 1031 Exchanges: The Art & Science of Capital Preservation 18. Time Restrictions IdentificationPeriod ExchangePeriod Day 0 Day 45 Day 180 NOTE: The total exchange period cannot exceed 180days, under any circumstances.1031 Exchanges: The Art & Science of Capital Preservation18 19. Regulations: 1.1031- safe harbors1.1031(k)-1(g) (2) Security or Guarantee Arrangements Determination of whether the taxpayer is in actual or constructive receipt of the exchange funds is made without regard to existence of mortgage, standby letter of credit, third party guarantee, etc. (3) Qualified Escrow Accounts and Qualified Trusts Determination of whether the taxpayer is in actual or constructive receipt of the exchange funds is made without regard to whether the funds are held in a Qualified Escrow Account or Qualified Trust QEA Escrow holder is not a disqualified person; escrow agreement contains (g)(6) limitations QT Trustee is not a disqualified person; trust agreement contains (g)(6) limitations (4) Qualified Intermediary QI is not considered an agent of the taxpayer; is not a disqualified person; QI enters into exchange agreement that contains the (g)(6) limitations (5) Interest and Growth Factors Determination of whether the taxpayer is in actual or constructive receipt of exchange funds is made without regard to the fact that the taxpayer is or may be entitled to receive any interest or growth factor with respect to the deferred exchange. 1031 Exchanges: The Art & Science of Capital Preservation19 20. Regulations: 1.1031- (g)(6) Limitations(i) An agreement limits a taxpayers rights as provided in this paragraph (g)(6) only if the agreement provides that the taxpayer has no rights, except as provided in paragraphs (g)(6)(ii) and (g)(6)(iii) of this section, to receive, pledge, borrow, or otherwise obtain the benefits of money or other property before the end of the exchange period.(ii) The agreement may provide that if the taxpayer has not identified replacement property by the end of the identification period, the taxpayer may have rights to receive, pledge, borrow, or otherwise obtain the benefits of money or other property at any time after the end of the identification period.(iii) The agreement may provide that if the taxpayer has identified replacement property, the taxpayer may have rights to receive, pledge, borrow, or otherwise obtain the benefits of money or other property upon or after (A) The receipt by the taxpayer of all of the replacement property to which the taxpayer is entitled under the exchange agreement, or (B) The occurrence after the end of the identification period of a material and substantial contingency that (1) Relates to the deferred exchange, (2) Is provided for in writing, and (3) Is beyond the control of the taxpayer and of any disqualified person (as defined in paragraph (k) of this section), other than the person obligated to transfer the replacement property to the taxpayer.1031 Exchanges: The Art & Science of Capital Preservation20 21. Treasury Inspector General forTax Administration21 1031 Exchanges: The Art & Science of Capital Preservation 22. Treasury Inspector General for Tax Administration Reference 2008-30-154; August 27, 2008 Guidance Could Be Enhanced for Deciding to Use a Qualified Intermediary in Like-Kind Exchanges This report presents the results of our review of qualified intermediary regulations and qualification requirements. The objectives of this review were to examine transactions subject to Internal Revenue Code Section 1031, assess the qualification requirements for qualified intermediaries, and determine the legal protections available to taxpayers. We conducted this review in response to a request by the Chairman of the United States House of Representatives Committee on Financial Services.1031 Exchanges: The Art & Science of Capital Preservation22 23. Regulations under Sections 468B and 787223 1031 Exchanges: The Art & Science of Capital Preservation 24. Treasury deci