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21
Jan

President Obama’s Proposed Tax Increases

Use 1031 Exchanges to Purchase More Property

President Obama, in his State of the Union address on January 20th, outlined a number of tax increase proposals that his Administration projects would raise $320 billion in new revenue. Two of the President’s proposals would, if enacted, have a significant impact on real estate investors:

  • Increase Capital Gain Tax Rate: The President has proposed increasing the top capital gain tax rate from 20% to 28%. Under current law, many real estate investors in the top tax bracket face an additional 3.8% tax on Net Investment Income under IRC Section 1411, resulting in a total tax rate of 23.8%. Under the President’s proposal, this would increase to 31.8%.
  • Eliminate Stepped Basis at Death: Under current tax law, when a taxpayer dies, the taxpayer’s heirs receive a step-up in the basis of inherited property. The basis is stepped up to the fair market value of the asset on the date of death. President Obama has proposed eliminating this stepped-up basis, which will result in the built-in gain remaining in the property after it passes to the heirs. Although the President has proposed some small exclusions ($200,000 on general asset gains and $500,000 for a taxpayer’s primary residence), eliminating the stepped-up basis would seriously impact the heirs of investors who die with appreciated assets.

Tax Planning Certainty – 1031 Exchanges

Tax strategies which take advantage of the current tax code are a much better way to achieve tax benefits today. IRC Section 1031 tax-deferred exchanges have been a part of the tax code since 1921. Section 1031 allows an investor who holds property for investment purposes, or for use in a trade or business, to defer all four (4) levels of potential capital gain taxes (federal capital gain, federal depreciation recapture, net investment income, and state capital gain) by exchanging for qualifying like-kind property under Section 1031. By deferring the capital gain tax, an investor has significantly more purchasing power and better overall investment returns.

Let’s compare the tax treatment for the sale of an investment property between: (i) paying all the taxes owed, or (ii) using a 1031 exchange to defer 100% of the taxes owed. We will assume the property has total capital gain of $1,300,000, $300,000 of which is from depreciation recapture, and $1,000,000 of which is from asset appreciation. For this example, we will assume this is a California investor who has a 13.3% state tax rate, and we will assume the investor is also paying the 3.8% net investment income tax (NIIT) on the entire capital gain:

Depreciation Recapture $300,000 X 25% = $75,000
Federal Capital Gain Taxes $1,000,000 X 20% = $200,000
Net Investment Income Taxes $1,300,000 X 3.8% = $49,400
CA State Taxes $1,300,000 X 13.3% = $172,900

Total Taxes Owed:      $497,300
Sell in 2015, Pay Taxes:      $497,300 in taxes
Exchange in 2015, Defer Taxes:      $0 (no taxes owed)

 

Replacement Property Purchase Comparison – Sale vs. Exchange

Assume the investor in the previous example sold the relinquished property for a total net sales price of $2,000,000, with, as stated above, $1,300,000 of total capital gain. Assume the investor intends to apply the sales proceeds toward a 25% down payment on a replacement property, with conventional financing for the remaining 75% of the replacement property purchase price. We will compare how much property the investor who sells and pays all the taxes can purchase, versus how much property the investor who exchanges and defers 100% of the capital gains tax can purchase.

Sell in 2015 and Pay Taxes: ($2,000,000 – $497,300) = $1,502,700 X 4 = $6,010,800
Exchange in 2015 and Defer Taxes: ($2,000,000 – $0) = $2,000,000 X 4 = $8,000,000

 

By taking advantage of a 1031 exchange, the investor defers all taxes thus preserving their net sales proceeds for the purchase of better performing replacement property. In this comparison, the investor who exchanges versus sells is able to purchase a replacement property worth considerably more ($8,000,000 versus $6,010,800).

In times of economic and tax uncertainty, it is important to utilize the tax advantages currently available in the tax code. Call the experts at Asset Preservation to discuss 1031 exchanges and your investment property situation.

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1031 Basics: Requirements For Full Tax Deferral

1031 Basics

How much replacement property must I acquire in my tax deferred exchange in order to defer all of my capital gains tax? In our experience, some investors often confuse 1031’s requirement for tax deferral with their estimates of their potential capital gain. To learn what is required for full tax deferral in a 1031 exchange, click on Requirements for Full Tax Deferral.


Congress Threatens To Eliminate 1031 Exchanges

Congress Threatens to Eliminate 1031 Exchanges

Three separate tax reform proposals have been advanced by the House Ways and Means Committee, the Senate Finance Committee and the Treasury Department to either repeal or restrict tax deferral of gain from Section 1031 exchanges of like-kind property.

Like-kind exchanges benefit millions of American investors and businesses every year. 1031 exchanges encourage businesses to expand and help keep dollars moving in the U.S. economy.

Without the tax-deferral benefit that 1031 exchanges provide, small and medium sized businesses would not be as equipped to reinvest in their businesses, real estate values would decline, the U.S. economy would suffer, and businesses of all sizes would lose the opportunity to expand. The repeal of Section 1031 will cause a decline in real estate values as investors will be motivated to hold on to properties and to invest in more liquid, non-real estate investments with faster returns. The proposals effectively impose punitive and targeted tax increases on economically sound commercial real estate investment, the likely unintended consequence of which will be similar to implementation of 1986 tax reform modifications that resulted in a recession.

Tak Action Now!
Send a strong message to congress that 1031 exchanges are a powerful economic tool. Learn more and voice your opposition to these proposals with these critical actions at www.1031taxreform.com.


From Forbes: Best Buy Cities and Where To Invest In Housing In 2015

If you are an investor wanting to purchase rental properties, there are many places where housing should perform well. The key is to buy in cities with strong job growth that people are moving to, so that the stock of potential tenants for would-be landlords is abundant. Forbes teamed up with Local Market Monitor, a North Carolina-based data company that tracks home prices and economic factors in more than 300 housing markets, to find 2015’s Best Buy Cities—the top 20 housing markets to invest in this year. Read More…


America’s Best Performing Cities in 2014

The knowledge and energy hubs of San Francisco and Texas are among the year’s biggest economic winners. Read More…


2014 National Movers Study Shows Top Moving Destinations

2014 National Movers Study Shows Top Moving Destinations

United Van Lines 38th Annual Movers Study results track the migration patterns state-to-state during the course of the past year. The study found that Oregon was the top moving destination of 2014. To see the other top moving destinations, Read More…


Where Wall Street is Most Likely to Cash Out of the Single Family Rental Market

After nearly three years and hundreds of thousands of property purchases, the nascent single family rental industry is at a crossroads in terms of future growth and long-term staying power. Many are wondering how many of the players will “cash out” of their property portfolios given the strong home price appreciation over the past few years — and if so how that liquidation would impact local markets with a high density of single family homes purchased as rentals. Read More…


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07
Aug

When to Pay the Piper (and how much will he charge)?

By Jon Christianson, Esq., JD, LLM Tax

Tax rates on capital gains are scheduled to increase in 2013 if Congress fails to extend the current rates. Should I pay my tax now or take a wait and see approach with a 1031 exchange?

For the full article on When to Pay the Piper (and how much will he charge)?, read more…


1031 Basics: Capital Gain Tax Calculator

1031 Exchange Basics

It is always prudent to consult with your tax and/or legal advisors about the tax consequences of selling before closing on the sale of a relinquished property, as a 1031 exchange generally cannot be set up after closing has occurred. Prior to seeking the input of your tax advisors and your specific situation, you can use Asset Preservation’s Capital Gain Calculator to obtain an approximate estimate of your capital gain tax liability. Enter your figures in the fields provided and click on the “Calculate” button in each area to determine your capital gain. Calculate Your Capital Gain Taxes Now…


New IRS Regulations Clarify "Repair" vs. "Capitalization"

This past Spring the IRS released Bulletin 2012-14 (T.D. 9654), Guidance Regarding Deduction and Capitalization of Expenditures Related to Tangible Property. The intent of the IRS was to clarify the current rules for capitalization. The new regulations define an improvement as a betterment, adaptation or restoration to a unit of property. The new regulations also list eight building systems that should be evaluated as their “own unit of property” and tax advisors preparing returns for investment property owners should review these new regulations thoroughly.

For more information on IRS Regulations Clarify Repair vs Capitalization, read more…


Correctly Reporting Rental Real Estate

Real estate investors should correctly report rental real estate activity. Investors who are not real estate professionals generally must follow the passive activity loss limitations even if they materially participate in their rental real estate activities. Real estate professionals report rental real estate activities in which they materially participated as non-passive. However, real estate professionals who do not materially participate in rental activities are generally subject to passive activity loss limitations. Publication 925, Passive Activity and At-Risk Rules, includes more information on who qualifies as a real estate professional and the passive activity limits.

For more information, see the Passive Activity Loss Audit Technique Guide.


Recent Case Affirms Liability Because TICs
Not Sold in Conformity with Security Laws

In Redding vs. Montana First Judicial District Court, 2012 WL 2628053 (Supreme Court of Montana, 2012), the Court ruled on an aspect of the bankruptcy of DBSI, the largest company in the tenant-in-common (TIC) industry to go bankrupt. There had been significant debate in the past about whether or not TIC investments should be treated as securities (and promoted in adherence to all applicable securities laws) or treated as real estate investments. In this case involving a 1031 exchange into a replacement property that was a TIC promoted by DBSI, the Court determined that every applicable test of what comprises a security was met by the DBSI TIC property. In the end, the Court concluded that both the accounting firm and brokerage firm that recommended DBSI could be liable for losses the exchanger experienced due to the fact the TIC investment had not been promoted or sold in accordance with security laws.

For more information on Redding vs. Montana First Judicial District Court, read more…


20
Aug

New Leasehold Case & Other 1031 Exchange Updates

Recent Case: Leasehold Interests Not Like-Kind to Fee Interest

In order to qualify for tax deferral under Internal Revenue Code §1031, both the property sold as relinquished property and the property acquired as replacement property must be like-kind. §1.1031(a)-1(b) of the Treasury Regulations clarifies that the term “like-kind” refers to the nature or character of the property interests involved, but not the grade or quality of the specific property. Under this test, the courts have generally concluded that a fee simple interest in real property is like-kind to a wide range of real property interests. Thus, developed land is like-kind to undeveloped land and a fee interest is like-kind to certain mineral interests, water rights and certain long term leasehold estates. Along those lines, Treasury Regulation §1.1031(a)-1(c) provides that a tenant’s interest in a leasehold estate with 30 years or more remaining to run, including option extensions, is like-kind to a fee simple interest in real property. Given the specificity of the regulation, most tax advisors believe that a taxpayer attempting to exchange a leasehold interest with less than 30 years remaining at the time of the exchange would not be like-kind to a fee simple interest in other property.

In VIP Industries Inc. & Subsidiaries v. Commissioner, T.C. Memo 2013-357, the taxpayer exchanged a leasehold interest with a remaining term of 21 years for fee simple interests in two Oregon replacement properties. There were no option extensions. After citing regulation §1.1031(a)-1(c) and reviewing precedent cases, the court concluded that leasehold interests with remaining terms similar to the one at issue are not like-kind to fee interests in real property. Precedent cases included May Department Stores Co. v. Commissioner, 16 T.C at 556, (holding that a 20-year leasehold was not like-kind to a fee interest); Standard Envelope Mfg. Co. v. Commissioner, 15 T.C. at 48 (holding that leasehold interest with a terms of 1 year and an option to renew for a term of 24 years was not like-kind to a fee interest). Thus, in the VIP Industries case, the court found that the taxpayer’s leasehold interest in VIP Industries with a term of 21 years and 4 months remaining is closer in nature to the leasehold interests and not like-kind to a fee interest. As such, the exchanger was not entitled to deferral of tax under Section 1031.

In light of the VIP Industries case, taxpayers who wish to exchange a leasehold interest for a fee interest should only proceed if the leasehold interest has more than 30 years remaining, including options to renew that would extend the leasehold interest over the 30 year threshold. As always, consult with your tax and legal advisors about your specific situation well in advance of a contemplated 1031 exchange.


Vacation Homes and Other Ownership Tax Issues

Vacation Homes Handbook
» Click here to download

According to the National Association of Realtors, the
vacation home market is heating up again and many real estate professionals are reporting strong sales in many vacation home hot spots.

In response to increased activity in many vacation markets, Asset Preservation has created a brand-new Vacation Home Handbook that covers many tax issues related to the ownership and sale of a vacation or second home. This brochure is very comprehensive, contains hyperlinks to key tax code sections and provides useful guidance to property owners, real estate professionals, closers, attorneys and CPAs in resort communities and vacation home marketplaces throughout the United States. This is a “must have” resource for anyone involved with real estate in a vacation area or resort market!!

API’s Vacation Homes Handbook contains the following information:

 
  1. TAX TREATMENT AT DISPOSITION: QUALIFYING FOR A 1031 EXCHANGE:
    This section discusses the “safe harbor” for exchanges of vacation homes and also what will not qualify for an exchange of a vacation home property.
  2. TAX TREATMENT DURING OWNERSHIP
    1. Second Home/Vacation Home with No Rental Activity
      1. Tax Consequences during Ownership
      2. Tax Consequences at Disposition
      3. How to determine if a vacation property could be considered a principal residence and qualify for Section 121 tax exclusion
    2. Second Home/Vacation Home Rented Less than 15 Days a Year
      1. Tax Consequences during Ownership
      2. Tax Consequences at Disposition
    3. Vacation Home Rented for More than 15 Days a Year
      1. Tax Consequences during Ownership
      2. Tax Consequences at Disposition
    4. Property Held Primarily for Investment in a Vacation Area
      1. Tax Consequences during Ownership
      2. Tax Consequences at Disposition
  3. CONVERTING A VACATION HOME INTO AN INVESTMENT PROPERTY
  4. USEFUL LINKS TO CALCULATE CAPITAL GAIN TAXES AND MUCH, MUCH MORE…

U.S. Median House Price Climbs the Most in 7 1/2 Years

The median selling price of an existing single-family home reached $203,500 in the second quarter, a 12.2% increase compared with Q2 of 2012 and the sharpest year-on-year gain since Q4 of 2005, according to the National Association of Realtors. Tightening inventory is a major factor, Chief Economist Lawrence Yun says. Read More…


New Reporting Requirement For Certain California 1031 Exchanges

California has enacted a new reporting for taxpayers who exchange out of a relinquished property located in California and into replacement property located outside of California. For tax years beginning on and after January 1, 2014, taxpayers that exchange out of California must file a report with the Franchise Tax Board for the year of the exchange and for subsequent tax years. The statue creates a new procedure for tracking deferred gain and Section 18032 has been added to the California Revenue and Taxation Code. California has always maintained that the deferred gain was taxable in California and this new procedure will make it easier to enforce these rules. Read More…


National Council of Real Estate Investment Fiduciaries Property Index

Privately owned real estate produced a return of 2.87% in this year’s second quarter, according to the property index managed by the National Council of Real Estate Investment Fiduciaries. That was the highest return indicated by the NCREIF index since the fourth quarter of 2011. Read More…


Top 10 Places in the U.S. to Buy a Vacation Home

According to a National Association of Realtors study, approximately one-in-four vacation home market buyers purchased with the intention to rent out their vacation area property. VacationHomeRentals.com, reported their list of the most popular June destinations, and compiled a Top-10 listTo see the top-10 June destinations reported by VacationHomeRentals.com, Read More…


Webinar: Exchanges & Tax Planning in an Environment of Increasing Taxation

This 1.5 hour CPE course provides a concise and thorough overview of IRC Section 1031 tax deferred exchanges for accountants, CPAs and financial advisors. In addition to covering critical IRS time deadlines, “like-kind” requirements and other exchange related issues, the class will provide a summary of current developments including applicable Revenue Rulings, PLR’s and other IRS guidance on current issues related to exchanges. Register Now…

Dates: September 23rd
Time: 12:00 p.m. – 1:00 p.m.
EST
Cost: Free
Credit: 1.5 Hours (CPE)


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10
Dec

Happy Holidays from Asset Preservation

Happy Holidays from API’s President

To all of our Clients and Associates,

I extend to you a sincere HAPPY HOLIDAYS! 2013 has been a very busy year for all of us involved in 1031 exchanges and it has been a pleasure working with many past clients and new ones as well. In light of the significant increase in exchange activity, I had the pleasure of bringing on many new associates to API who are eager to carry out API’s longstanding tradition of providing excellent service and superior transactional expertise. I wish you and your families a safe and joyous Holiday Season, and I look forward to working with you in 2014.

Javier G. Vande Steeg


Javier G. Vande Steeg
President


California Tax Filing Requirement for Exchanges Beginning 1/1/14

Under IRC Section 1031, taxpayers can defer capital gains by exchanging real property held for use in a trade or business, or for investment, for other like-kind property. For sellers subject to California income tax, California’s tax law follows federal law for purposes of deferral under Section 1031, so California’s income tax is also deferred. In each case, the deferred capital gain continues as a tax attribute of the replacement property acquired by the taxpayer in the exchange. In the past, taxpayers sometimes used Section 1031 to acquire replacement property outside California in order to avoid California’s income tax in a later taxable sale. Read More…

California Tax Filing Requirement for Exchanges Beginning 1/1/14

Do you have a Property Closing before the End of 2013?

Contact Us

Many investors and their advisors have real estate transactions closing near the end of December. If you or your client have an investment property transaction closing before the end of 2013 – and you have not already set up a 1031 exchange – keep in mind Asset Preservation is available to set up your exchange at the last minute! We can often set up a new 1031 exchange, converting an otherwise taxable sale into a deferred transaction, within a matter of hours. A properly structured exchange provides an investor with up to 45 calendar days to potentially find suitable replacement property. For more information, please call us toll-free at 800-282-1031 or via email at info@apiexchange.com.


Year-End Tax Tips from the IRS – 2013

Watch a video from the IRS’s YouTubeChannel about suggestions for taxpayers at the end of the year, Watch Now…


Good News for Owners of Smaller Residential Rental Properties

The IRS has finally issued the final version of its monumentally long and complex regulations explaining how to deduct improvements and repairs to business property, including commercial buildings and residential rentals. The final regulations, which take effect Jan. 1, 2014, contain several pleasant surprises for small-business owners, including owners of rental properties. One of these is the “safe harbor for small taxpayers”. Read More…


Housing Markets Continue Slow Climb Back to Normal

Markets in 54 out of the approximately 350 metro areas nationwide returned to or exceeded their last normal levels of economic and housing activity, according to the National Association of Home Builders/First American Leading Markets Index (LMI), released recently. The index’s nationwide score of .86 indicates that, based on current permits, prices and employment data, the nationwide market is running at 86 percent of normal economic and housing activity. Read More…


Top 10 Multi-Family Rent Growth Markets of 2014

According to Multifamily Executive, industry experts project the top 10 metro markets that should see the largest growth in multifamily rents in 2014. Seattle is at the top of this list and other markets like Denver, San Francisco, Austin, and New York City are also included. To see the top 10 multifamily growth markets, Read More…


Attend a Complimentary 1031 Exchange Webinar (1hr CPE Credit)

Title: The Power of Strategy: Mastering 1031 Tax Deferred Exchanges
Presenter: Scott Saunders, Asset Preservation, Inc.

Course Description
This one hour course provides a concise and thorough overview of IRC Section 1031 tax deferred exchanges for accountants, CPA’s and tax advisors. In addition to covering critical IRS time deadlines, like-kind requirements and other exchange-related issues, the class will provide a summary of current developments including applicable Revenue Rulings, PLR’s and other IRS guidance on current issues related to exchanges.

Course Details:
Date: Wednesday, January 8, 2014
Time:
9:00 a.m. – 10:00 a.m. (PST)
Cost: Free
CPE
Credits: 1.0 hour (Accountants & CPAs)

Click here to View Details and Registration Info at cpaacademy.org


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an Exchange

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Materials

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05
Dec

Happy Holidays from Asset Preservation

 Happy Holidays From API’s President 

To all of our Clients and Associates,

Happy Holidays! As 2014 winds down, I must say that it has been quite a year. 2014 brought us enormous transactional volume, iconic U.S. property exchanges, art and collectible activity, and a resurgence in activity in the “alternative investment” market for replacement property. Both the residential and commercial property markets were extremely active as investors took advantage of newly found appreciation, and utilized 1031 exchanges to enhance their real property investment positions. All said, it was a very good year for all of us in the investment property market.

As I look forward to 2015, I see much of the same growth and prosperity, with one important caveat: the real estate industry saw a serious attack on Section 1031 exchanges as part of tax reform in 2014. Congress and President Obama have put forth three separate proposals which either completely eliminate or restrict tax-deferred 1031 exchanges. If 1031 exchanges are eliminated, obviously this would be detrimental to real estate investors, and would negatively affect the economy and many ancillary real estate-related services. If you would like to learn more and to consider adding your voice to the efforts to repeal 1031 exchanges, please visit www.1031taxreform.com.

I want to thank our long-term customers, and those customers who have worked with Asset Preservation for the first time this year. As we enter our 25th year of providing excellent service and the highest level of security for exchange proceeds, we are very grateful for the opportunity to be your qualified intermediary of choice. I wish you a safe and joyous Holiday Season and I look forward to working with you again in 2015.

Javier G. Vande Steeg


Javier G. Vande Steeg, President


 Do You Have A Property Closing in December? 

Rush Deal

Many investors and their advisors have real estate transactions closing near the end of December. If you or your client have an investment property transaction closing before the end of 2014 – and you have not already set up a 1031 exchange – keep in mind Asset Preservation is available to set up your exchange at the last minute! We can often set up a new 1031 exchange, converting an otherwise taxable sale into a tax deferred transaction, within an hour. A properly structured exchange provides an investor with up to 45 calendar days to potentially find suitable replacement property. For more information, please call us toll-free at 800-282-1031 or via email at info@apiexchange.com.


 2014 Year-End Tax Planning 

Exchanges Over Two Tax Years May Be Treated As An Installment Sale

In a delayed exchange transaction structured to satisfy the requirements of §1031, an exchanger has up to 180 calendar days to acquire like-kind replacement property measured from the day the relinquished property is sold. Once initiated, the delayed exchange may be successfully completed (resulting in complete tax deferral), partially completed (resulting in recognition of some capital gain) or it may fail if no like-kind replacement property is acquired (resulting in the recognition of all capital gain generated by the sale). If the exchange begins in one tax year and extends into the subsequent tax year, the question arises whether the gain realized on the sale is recognized in the year in which the relinquished property was sold or in the subsequent year in which the exchanger received the cash sale proceeds from the qualified intermediary.

In a perfect world, gain would be recognized in the subsequent year when the proceeds were actually received by the exchanger. In many cases, this turns out to be wholly or partially true. Read More…

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Home Prices Forecasts for 2015

To see housing forecasts for 2015 from Fannie Mae, Merrill Lynch, MBA, NAHB, NAR, Wells Fargo and Zillow, Read More…


 Dispositions Of Tangible Property 

Recently, the IRS issued final regulations on dispositions of tangible depreciable property under Sec. 168 (T.D. 9689) that are generally effective for taxable years beginning on or after January 1, 2014. Taxpayers can realize significant benefits from these regulations by identifying building components that have been replaced or demolished in current or prior years. Read More…


 Congress Threatens To Eliminate 1031 Exchanges 

Congress Threatens to<br />
                                        Eliminate 1031 Exchanges

Three separate tax reform proposals have been advanced by the House Ways and Means Committee, the Senate Finance Committee and the Treasury Department to either repeal or restrict tax deferral of gain from Section 1031 exchanges of like-kind property.

Like-kind exchanges benefit millions of American investors and businesses every year. 1031 exchanges encourage businesses to expand and help keep dollars moving in the U.S. economy.

Without the tax-deferral benefit that 1031 exchanges provide, small and medium sized businesses would not be as equipped to reinvest in their businesses, real estate values would decline, the U.S. economy would suffer, and businesses of all sizes would lose the opportunity to expand. The repeal of Section 1031 will cause a decline in real estate values as investors will be motivated to hold on to properties and to invest in more liquid, non-real estate investments with faster returns. The proposals effectively impose punitive and targeted tax increases on economically sound commercial real estate investment, the likely unintended consequence of which will be similar to implementation of 1986 tax reform modifications that resulted in a recession.

Take Action Now!
Send a strong message to congress that 1031 exchanges are a powerful economic tool. Learn more and voice your opposition to these proposals with these critical actions at 1031taxreform.com.


 Call Us! 

Asset Preservation would appreciate the opportunity to work with you on your next exchange regardless of how simple or complex. Give us a call at 800-282-1031 with any 1031 related questions you may have.  Or to open a 1031 exchange online, email us at info@apiexchange.com.

Call Us

 The College Town Effect On House Prices 

Clear Capital has a new report showing college towns unique immunity to boom-bust-bubble cycle. According to the firm’s Home Data Index Market Report, metropolitan statistical areas (MSAs) with noteworthy university influence boast home price trends that far outperform the national rates of growth since 2004. Read More…


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an Exchange

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Materials

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06
Nov

Introducing Stewart Institutional Exchange Services, LLC
And Its Partnership Installment Note Solution

Approximately one and a half years ago, Asset Preservation, Inc. formed Stewart Institutional Exchange Services, LLC, to serve the unique needs of our institutional customers. Under the guidance of Lou Weller, Managing Director, and Javier G. Vande Steeg, Executive Director, the Stewart Institutional team has proven to be very effective in providing innovative and technically sound strategies to unique and complex 1031 transactions. The following is an example of an innovative strategy which can be very effective.

Partnership Installment Note Solution

A common problem occurs when a partnership (or LLC taxed as a partnership) plans to sell an investment property and some partners want cash while others want to defer taxable gain by having the partnership complete a Section 1031 exchange. If the partnership disposes of its property by taking some cash at the closing of the relinquished property sale for distribution to those who want to “cash-out” and placing the balance of cash from closing with a Section 1031 qualified intermediary, it’s likely that the partners wanting to exchange will still be allocated taxable gain. This is the fact pattern that sometimes gives rise to a transaction commonly referred to as a “drop and swap,” where the partnership distributes tenancy-in-common interests in the relinquished property to some or all partners before the sale, hoping that this will allow each former partner to treat the transfer of the resulting tenancy-in-common interest as a separate transaction.

A number of technical and practical issues arise when a partnership attempts a drop and swap transaction, creating the need for alternatives. One attractive option involves the conversion of the cash intended to go to cash-out partners into an installment note. This allows the partnership to avoid recognizing gain and allows all gain associated with the installment note amount to be allocated to those willing and planning to take it, namely the cash-out partners to whom the note is transferred in complete redemption of their interests in the partnership. We refer to this as a Partnership Installment Note transaction, or PIN transaction. So long as a valid installment note is received as “boot” in a PIN transaction where the selling partnership also completes a Section 1031 exchange, the gain represented by the note is taxed only when principal payments on the note are received. This would be after the note is transferred to, and is held only by, the cash-out partners. Since Treasury Regulations provide that a Section 1031 qualified intermediary is expressly regarded as the transferee of an exchanger’s property in a properly structured exchange, we believe that the qualified intermediary is able to deliver a valid installment note (which must come from the buyer of property).

In many cases, a PIN transaction can offer a very effective solution to a partnership planning to sell property where some partners want cash and others want tax deferral in a 1031 exchange. Even where a partnership has already signed a contract to sell property, which some advisors think is an event that adds significant risk to a “drop and swap” transaction, or where a property distribution would violate loan covenants, the PIN option may be available. As with most solutions, there may be circumstances where the solution isn’t appropriate, such as when the partnership percentage interest of cash-out partners is relatively high, or where the partnership’s property has a high debt-to-equity ratio. Further, the cash-out partners must be willing to wait for at least a short period of time after the relinquished property closing to receive any funds, and until the beginning of the year following the closing to receive at least a portion of the funds. However, partners and their advisors who face the scenario described should definitely consider the PIN option among other alternatives available to them.

For more information, contact Stewart Insitutional Exchange Services, LLC at info@sies1031.com.


Congress Threatens To Eliminate 1031 Exchanges

Congress Threatens to<br />
                                        Eliminate 1031 Exchanges

Three separate tax reform proposals have been advanced by the House Ways and Means Committee, the Senate Finance Committee and the Treasury Department to either repeal or restrict tax deferral of gain from Section 1031 exchanges of like-kind property.

Like-kind exchanges benefit millions of American investors and businesses every year. 1031 exchanges encourage businesses to expand and help keep dollars moving in the U.S. economy.

Without the tax-deferral benefit that 1031 exchanges provide, small and medium sized businesses would not be as equipped to reinvest in their businesses, real estate values would decline, the U.S. economy would suffer, and businesses of all sizes would lose the opportunity to expand. The repeal of Section 1031 will cause a decline in real estate values as investors will be motivated to hold on to properties and to invest in more liquid, non-real estate investments with faster returns. The proposals effectively impose punitive and targeted tax increases on economically sound commercial real estate investment, the likely unintended consequence of which will be similar to implementation of 1986 tax reform modifications that resulted in a recession.

Take Action Now!
Send a strong message to congress that 1031 exchanges are a powerful economic tool. Learn more and voice your opposition to these proposals with these critical actions at www.1031taxreform.com.


1031 Basics: Air Rights As Like-Kind Property

1031 Basics

Air rights, also known as “Development Rights,” are defined as unused rights to develop a property to the extent permitted under state or local law. As states and municipalities have acted to restrict and regulate new construction, the value of air rights has skyrocketed. In recent years, some states and local governments have adopted rules permitting unused air rights to be transferred to another parcel. These air rights can then be used to construct improvements, such as a building with greater floor space or height than would be permitted in the absence of those air rights. Accordingly, an owner of excess air rights may reap a substantial financial windfall by selling the Transferable Development Rights (“TDRs”) to the owner of another parcel who desires to develop the other parcel. Read More…


Another U.S. Housing Gauge Points Up

Sales of existing homes in the U.S. rose 2.4% last month to the highest level in a year, another bright note for the key property market. In another positive sign, the Philadelphia Federal Reserve Bank reported its gauge of nonmanufacturing activity in the mid-Atlantic region has climbed to 44.1 this month from 35.7 in September. Read More…


Five Recovery Bright Spots: From Life Support to Downright Lively

Data from the Bureau of Labor Statistics points to five cities that had some of the worst unemployment rates before and during the recession but also some of the most dramatic recoveries in recent years. Read More…


America’s 13 Hottest Real Estate Markets

America's 13 Hottest Real<br />
                                        Estate Markets

Real estate data firm Trulia compiles statistics on both the amount of home price appreciation in each U.S. metro area as well as estimates of how overvalued homes are in those areas compared with historical trends. According to Trulia, even if many of these metro areas appear overvalued, there’s no reason to believe that we should expect a crash in prices anytime soon, as we’re nowhere near the price levels we saw in the years leading up to the housing crisis. By combining Trulia’s estimates on cities with overvalued real estate with figures on the speed at which prices have gone up year-over-year as of August 2014, Fortune Magazine has arrived at the 13 hottest real estate markets in the country. Read More…


Attend a Complimentary 1031 Exchange Webinar

Title: 1031 Exchanges & Tax Planning in an Environment of Increasing Taxation
Presenter: Scott Saunders, Asset Preservation, Inc.

Course Description:
This 90-minute course provides a concise and thorough overview of IRC Section 1031 tax deferred exchanges for accountants, CPAs and tax advisors. In addition to covering critical IRS time deadlines, like-kind requirements, and other exchange-related issues; the class will provide a summary of current developments including applicable Revenue Rulings, PLRs, and other IRS guidance on current issues related to exchanges.

Course Details:
Date: Friday, December 5, 2014 
Time:
9:00 a.m. – 10:30 a.m. (PST)
Cost: Free
CPE
Credits: 1.5 hour (Accountants & CPAs)

Click here to View Details and Registration Info at cpaacademy.org


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