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16
Oct

Happy 10-31 Day from Asset Preservation!

Congress Threatens to Eliminate 1031 Exchanges  Important Information For Investors Beginning An Exchange  
From October 17 – December 31, 2014

The time frame an exchanger has to complete the acquisition of a replacement property in a 1031 exchange ends at midnight on the earlier of the 180th day after the date the relinquished property was transferred – or – the due date (including extensions) for the income tax return for the taxable year in which the transfer of the relinquished property occurs. Section 1031(a)(3)(B). Even though an exchanger may be entitled to a filing extension, to extend the 180-day period the exchanger must actually obtain the filing extension. Consequently, some exchangers closing on the sale of relinquished property late in 2014 may need to file for an extension to utilize the entire 180-day exchange period. As a general rule, exchangers should not file a tax return until the 1031 exchange is complete.

More specifically, if the 180th day following the closing of the sale of the first relinquished property falls after the due date for filing the 2014 tax return (generally April 15, 2014 for individuals), an exchanger must file IRS Form 4868 with the IRS to actually extend the filing date. If an exchanger does not file for such an extension, they will not be able to acquire any replacement property in an exchange after the tax return due date.


  Understanding The IRS Guidance  

In its role in administering the tax laws enacted by the Congress, the IRS must take the specifics of these laws and translate them into detailed regulations, rules and procedures. The Office of Chief Counsel fills this crucial role by producing several different kinds of documents and publications noted below that provide guidance to taxpayers, firms and charitable groups. Read More…


Congress Threatens to Eliminate 1031 Exchanges  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.

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.


Congress Threatens to Eliminate 1031 Exchanges  1031 Basics: Top 5 FAQs  

1031 Exchange Basics

FAQs

Congress Threatens to Eliminate 1031 Exchanges  Condo Prices/Apartment Rents Outpacing Single-Family Home Costs  

Nationally, the month-over-month increase in asking home prices rose to 0.8% in September. Year-over-year, asking prices rose 6.4%, down from the 10.4% year-over-year increase in September 2013. Asking prices rose year-over-year in 92 of the 100 largest U.S. metros. Read More…


Congress Threatens to Eliminate 1031 Exchanges  Most Overpriced Housing Market In U.S.  

Most Overpriced Housing Markets

American property prices are all over the map. Which housing markets in the U.S. are the most overvalued? MarketWatch’s Quentin Fottrell reports. Watch Video…


Congress Threatens to Eliminate 1031 Exchanges  Call Us  

Call Asset Preservation

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 to open a 1031 exchange.  Or to open a 1031 exchange online, email us at info@apiexchange.com.

API is committed to providing its exchange customers with unmatched service, and the highest level of security available in the 1031 exchange industry. From the customer’s first contact with an API representative, API’s professional exchange counselors, attorneys and accountants work together to meet the customer’s service needs in order to ensure a smooth transaction with no surprises. In the background, API’s management maintains tight financial controls and multi-layered security systems necessary to provide a level of comfort and performance quality relied on by sophisticated investors and corporate America; we call it the “The API Advantage™.”


Congress Threatens to Eliminate 1031 Exchanges  Best College Towns For Buying Rentals In 2014  

RealtyTrac has ranked the top 10 college towns for buying rental properties in 2014. For these rankings, RealtyTrac looked at public four-year universities with a total 2012 enrollment of 20,000 or more based on data from the National Center for Education Statistics and located in counties with an unemployment rate below the national average of 6.2 percent in June 2014. Read More…


Congress Threatens to Eliminate 1031 Exchanges  August 2014 Home Prices Increased 6.4 Percent Year Over Year  

August 2014 Home Prices Increased 6.4 Percent Year Over Year

CoreLogic reported that August 2014 national home prices increased by 6.4 percent year over year, and by 0.3 percent month over month. This marks the 30th consecutive month of year-over-year increases in the CoreLogic Home Price Index (HPI). Read More…


Happy 10-31 Day


Congress Threatens to Eliminate 1031 Exchanges  1031 Exchange Resources  

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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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06
Oct

1031 Exchanges and Investments in REITs

Real estate investors frequently ask the question “Can I do a 1031 exchange of the relinquished property proceeds into a REIT (Real Estate Investment Trust) as replacement property?” REITs are entities that own and manage portfolios of real estate that are typically diversified by industry, geography and tenant and there are many features to REITs, including professional management, diversification and the potential for current monthly dividends and stock growth. However, an investor cannot do a 1031 exchange into shares of a REIT because the shares of a REIT are considered personal property even though the REIT, at the entity level, owns real property assets. Investors seeking 1031 exchange tax deferral must exchange property that is considered “like-kind” property which means exchanging real property held for investment or business purposes for other real property held in the same manner. REIT shares are not like-kind to real property.

A New Replacement Property Strategy For Investors

However, although investors cannot perform a 1031 exchange into a REIT, there is a creative two-step approach that can allow investors to essentially own the equivalent of shares in a REIT.

Step #1 -1031 Exchange into a DST: An investor exchanges into a Delaware Statutory Trust (DST) that offers the potential to do an UPREIT pursuant to IRC §721 at a later point in time into operating partnership units (OP Units) in a REIT. A DST is a structure that offers fractional ownership of real property and qualifies for tax deferral. A DST has many benefits including the ability for investors to exchange out of actively managed real property and into a passive investment in a fractional ownership of institutional grade replacement property with high quality commercial tenants.

Step #2 – UPREIT from the DST into OP Units of a REIT: The investor utilizes IRC §721 and performs an UPREIT from their DST shares into operating partnership units (OP Units) in a REIT. The OP Units typically have all of the benefits as direct ownership in a REIT and are convertible into REIT shares. The UPREIT is a tax deferred transaction under IRC §721. Generally the investor is able to maintain tax deferral as long as the OP units are held. If the REIT shares are publicly traded, shares can be sold on the open market for cash. Conversion of OP units to REIT shares by the owner does create a taxable event, however, investors may choose to stagger those conversions for liquidity and tax management purposes. In addition, upon an OP Unit holder’s death, the beneficiaries of the OP Units will receive a stepped-up basis in the OP Units, similar to real estate, thereby providing greater tax planning flexibility.

For More Information on 1031 Exchanges into a DST and then a 721 UPREIT
Please contact Jason Pueschel, Managing Director of Tax Deferred Exchange Programs at Four Springs TEN31 Exchange. jpueschel@fscap.net 860-359-9129 www.fsctrust.com

Jason Pueschel is a Registered Representative of and offers securities through EDI Financial Inc., Member FINRA/SIPC, 1431 Greenway Drive, Suite 330, Irving, TX 75038, 214-528-4090. EDI Financial, Four Springs Ten31 Xchange and Asset Preservation are not affiliated.


The Surge in 1031 Exchange Activity in 2014: How Financial Advisors Can Profit

The Perfect Storm, the convergence of two large storm systems led to unusual weather conditions that ultimately resulted in the demise of the ship and its crew. In the real estate market, the convergence of much higher tax rates, a very strong commercial market, and a recovering residential market has resulted in a surge in 1031 exchange activity in 2014 – and new opportunities for financial advisors. Although real estate investors are experiencing solid gains, they are faced with a headwind of high taxation which threatens to significantly reduce investment returns. Consequently, investors are actively seeking out ways to reduce their tax liability. Once again, Section 1031 of the Internal Revenue Code has emerged as a valuable tool for boosting net investment returns by reducing tax liability, and for preserving capital for reinvestment into better performing “like-kind” replacement properties. Financial advisors can harness the opportunities provided by this “perfect storm” and help clients improvement investment returns, defer capital gain taxes, diversify and/or consolidate investments. Advisors can also help boomers near retirement who want to move from actively managed property and exchange into passive ownership such as DST or TIC fractional ownership. This article explores each of the three factors creating this “perfect storm.”

FACTOR #1: HIGHER TAX RATES

Tax rates, and their impact on an investor’s net investment return, can drive investment decisions.
Many investors are surprised to find out that today they may face four different taxes and, when combined together, the aggregate impact can result in a large tax bill owed to the government:

  1. Depreciation Recapture: Depreciation recapture is taxed at 25% on all depreciation recapture.

  2. Federal Capital Gain Taxes: Federal capital gain taxes are assessed on the remaining economic gain depending on an investor’s taxable income. Investors in the highest bracket pay at a 20%
    rate and a 15% capital gain tax rate applies to other investors.

  3. Net Investment Income Tax: Pursuant to IRC Section 1411, an additional 3.8% surtax applies to
    taxpayers with “net investment income” who exceed certain threshold income amounts.

  4. State Taxes: Investors must also pay the applicable state tax (which can be as high as 13.3%).

FACTOR #2: ROBUST COMMERCIAL MARKETS

Currently, commercial real estate (CRE) prices nationwide are about 11% above the previous market peak in 2006. International investors see the U.S. as a safe haven, and their demand further fuels CRE activity. Commercial investors have strong borrowing and buying capacity, allowing them to capitalize on favorable CRE opportunities. More evidence of the strong commercial activity can be seen by the year-to-date rent growth in the U.S. apartment market is the best since the economy started to recover from the Great Recession according to Axiometrics Inc.

FACTOR #3: RESIDENTIAL HOME PRICE RECOVERY

According to the Case-Schiller Index of 20 major cities, home prices nationwide have recovered by about
30% from the market trough The “perfect storm” resulting from the convergence of these three factors has led to an increase in 1031 exchange activity as investors turn to this powerful tax strategy to preserve investment equity and improve returns. This increase in activity has led to a significant increase in demand for financial advisors who can assess their client’s needs and suitability and then help place them in replacement property providing better investment returns. Keep in the mind that the Federal Tax Code provides numerous other ways a property owner can dispose of, exchange or sell an appreciated property and receive tax benefits. Some alternatives include Section 121, Section 453 (Installment Sale), Section 721 “UPREIT”, Section 1031 (tax deferred exchange), Section 1033 (Involuntary Conversion) and Charitable Remainder Trusts (CRT).

To learn more about these tax code sections, read Asset Preservation’s article, Selling Appreciated Property.


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.


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11
Sep

Intent to Hold for Investment: 12-Year Holding Period

Intent To Hold For Investment: 12-Year Holding Period

Lessons From Allen v. United States

Is a 12-year holding period long enough for property to be considered to be “held for investment?" At first blush, a holding period longer than a decade might seem sufficient. However, as shown in Allen v. U.S. 113 aff’d2. d 2014-2262 (2014), the intent of the taxpayer is more important than the length of the holding period.  In Allen, the taxpayer admitted that he originally acquired the property to develop it and resell it.  He argued that, over the course of time, he changed his mind and decided not to develop the property, but continued to hold it “for investment” until he could sell it. 

Whether a taxpayer intends to hold a property for resale, or to hold for investment, it can be a critical issue if an exchange is challenged by the IRS.  Proving such intent can be difficult.  A taxpayer’s intent in holding a property is a question of fact.  See Austin v. Commissioner, 263 F.2d 460, 461 (1959).  Courts take into account a number of factors to determine if property was held for sale or for investment. See Asset Preservation’s article entitled  “Property Held for Sale: Factors the IRS May Examine.”

In Allen, the court found that the taxpayer originally acquired the property for development and resale, and that the taxpayer failed to adequately prove that he changed his intent to “holding the property for investment.”  In deciding the case in favor of the IRS, the Tax Court found the following evidence persuasive:

  • Allen purchased the property in 1987, and from 1987 to 1995 Allen attempted to develop the property on his own;
  • Allen admitted he initially intended to develop the property on his own, and then searched for partners to help develop the property;
  • From 1995 to 1999 Allen brought in partners who contributed capital for development;
  • In 1999, Allen sold the property to a developer;
  • Allen made significant and extensive efforts to develop the property over many years and failed to substantiate when his actions changed with regard to the property;
  • Ultimately, Allen failed to provide any evidence to prove that his intent changed during the time of his ownership of the property.

Although the intent with respect to a property can change over time, the intent during the period prior to the sale is critical.  See Tibbals v. United States, 362 F.2d 266, 273 (1966). The Court determined in Allen that the taxpayer failed to show when, how, or why his intent changed.

The Allen case demonstrates the need for solid evidence, documentation and establishing clear facts and circumstances whenever a taxpayer asserts that their intent with regard to an exchange property changed from “intent to sell” to “intent to hold for investment.” In the event of an audit, the IRS and state tax authorities will require objective evidence supporting the taxpayer’s assertion of their change of intent to one compatible with Section 1031. Every taxpayer should make significant and meaningful efforts to document and collect evidence to establish such change in intent.


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.


1031 Basics: Where Like-Kind Property Is Located

1031 Exchange Basics

Real property held for investment in the United States must be exchanged for other real property held for investment in the United States. Taxpayers cannot exchange United States property for foreign property or visa versa. Read More…


Court Determines Tax Memo Not Protected By Attorney-Client Privilege
And Work Product Doctrine

The Southern District of New York, in Schaeffler v. United States, recently denied a petition to quash an IRS summons for a tax memorandum prepared by the petitioner’s accounting firm in connection with a complex refinancing and corporate restructuring on the part of the Schaeffler Group, determining that the tax memorandum was not protected by the work product doctrine. Read More…


IRS Social Media Tools

IRS Social Media Tools

Social media has become a top method of keeping up with friends, families, breaking news, celebrity lives…and now tax changes. Connect with the IRS through YouTube, Twitter, Tumblr, Facebook, Podcasts, Widgets, eNews subscriptions or the IRS2Go Mobile App. Read More…


The Effect Of Proposed Carried Interest Legislation On Development Projects

Under existing law, no tax is imposed on the receipt of a partnership interest unless the receiving partner obtains an interest in the partnership that includes a share in the value of its assets, as well as, its income from operations. Then, when partnership assets are sold, the income is taxed to such partners as capital gain at a rate that does not exceed 20 percent under existing law rather than the higher rates imposed on income from services that can reach 39.6 percent. This has enabled smart tax lawyers to structure partnerships that enable all of the partners, including the managers, to acquire, own, operate and sell assets where the income is generated is taxed at the more favorable rates imposed on long term capital gains. Read More…


America’s Fastest-Growing Small Cities

America's Fastest-Growing Small Cities

Since 2000 small cities with between 100,000 and 250,000 residents have enjoyed a 13.6% population growth rate, more than twice that of New York, Los Angeles and Chicago, and roughly 10% faster than the national growth rate. There has been a shift of migration and economic growth to smaller cities. Find out the fastest growing small cities in America. Read More…


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