Types of 1031 Exchanges-Personal Property

THE PERSONAL PROPERTY EXCHANGE

Internal Revenue Code Section 1031 allows investors to exchange either like-kind real or personal property for other like-kind real or personal property. Although the rules for like-kind real estate are fairly broad, the rules to exchange personal property for like-kind or like-class specify that an Exchanger can only receive tax deferral if the sale of personal property is exchanged for the purchase of personal property that falls within the same Product Class or General Asset Class. Product and General Asset Classes, as described in the Standard Industrial Classification (SIC) Manual, were developed for use in the classification of establishments and products by the type of activity for which they are engaged. Depreciable tangible personal property is exchanged for property of like-kind if it is exchanged for property of like-class.

GENERAL ASSET CLASSES

(1) Office furniture, fixtures, and equipment;

(2) Information systems (computers);

(3) Data handling equipment, except computers;

(4) Airplanes and helicopters;

(5) Automobiles and taxis;

(6) Buses;

(7) Light general-purpose trucks;

(8) Heavy general-purpose trucks;

(9) Railroad cars and locomotives;

(10) Tractor units for use over-the-road;

(11) Trailers and trailer-mounted containers;

(12) Vessels, barges, tugs, and similar water transportation equipment;

(13) Industrial steam and electric generation and distribution systems.

UNEXCHANGEABLE ITEMS
Another aspect of personal property exchanges that differs from real property exchanges is that certain items of the sale transaction, such as goodwill "covenants not to compete” and “inventory” do not qualify for tax deferral under IRC Section 1031. Thus, these items may not be attributed to the value of the sale for the exchange and the capital gain or loss must be recognized by the Exchanger.

MIXED EXCHANGES
There are also many transactions that involve the sale of both real property and personal property, such as the sale of hotels, restaurants, and gas stations, wherein the Exchanger owns both the land and the personal property. In this case, the Exchanger can allocate the proceeds specifically for real property and personal property and purchase like-kind property with the respective funds. In a complex combined real and personal property exchange, it is important to maximize potential tax deferral benefits in advance. Asset Preservation, Inc. encourages Exchangers to always work closely with an accountant or attorney to ensure that the transaction is structured properly.

Many thanks to: Asset Preservation, Inc.
National Headquarters: 800-282-1031Eastern Regional Office: 866-394-1031info@apiexchange.com
© Copyright 2005 Stewart Title Guaranty Company.

1031 Exchange, Type, the improvement exchange

THE IMPROVEMENT EXCHANGE

Improvement (build-to-suit or construction) exchanges allow an investor to use exchange proceeds to either (1) make improvements to an existing property or (2) build a new replacement property. This variation is extremely popular because it provides the opportunity to purchase properties needing renovation or to acquire bare land and build to an investor's exact specifications. The Qualified Intermediary makes improvements to the replacement property during the exchange period and transfers the improved property back to the Exchanger by the 180th day. Advance planning is essential; normal construction delays, inclement weather and obtaining government permits can make it a challenge to complete the needed improvements within the 180-day exchange period.

PARKING ARRANGEMENTS

The Power of Strategy™ - "Parking Arrangement"Brochure in a PDF File

Click Here to view the full text of Revenue Procedure 2000-37 in a PDF File

"PARKING ARRANGEMENT" EXCHANGES:
SAFE HARBOR FINALIZED ON SEPTEMBER 15, 2000
Revenue Procedure 2000-37 (finalized on September 15, 2000) provides the framework to safely perform a reverse exchange (purchasing a replacement property before selling the relinquished property) or an improvement exchange (making improvements or building a new replacement property).

Basic Points of Concern:
· Issued on September 15, 2000 and also referred to as a Rev. Proc.
· Effective September 15, 2000
· Provides a safe harbor if transaction is within it's parameters
· IRS may amend the Rev. Proc. If necessary
· "Reverse" exchanges may still be structured outside the Rev. Proc.
· Transactions already completed or in progress are not affected

REV. PROC. 2000-37 KEY TERMS:
1. Qualified Exchange Accommodation Arrangements = QEAA
2. Exchange Accommodation Titleholder = EAT

QEAA SUMMARY:
1. Qualified indicia of ownership. The EAT must not be the taxpayer or a disqualified person and must be subject to federal income tax. Indicia of ownership must be maintained at all times until the property is transferred as described in section 4.02(5) of the Rev. Proc. Qualified indicia of ownership means legal title or other applicable principals of ownership under commercial law such as contract for deed.

2. The taxpayer must have bonafide intent that the property held by the EAT must represent either the replacement or the relinquished property in an exchange that is intended to qualify for nonrecognition of gain (whole or in part) under section 1031.

3. The taxpayer and the EAT must enter into an agreement (the qualified exchange accommodation agreement) no later than 5 days after the transfer of qualified indicia of ownership to the EAT. The agreement must state that the EAT is holding title for the benefit of the taxpayer in order to complete an IRC section 1031 and this Rev. Proc. And that the taxpayer and EAT agree to report the acquisition, holding and disposition of the property. In addition, the agreement must state that both parties will be treated as the beneficial owner for tax purposes and report it as such on it's tax returns.

4. In the event that the EAT holds the replacement property, the taxpayer must identify within 45 days, the relinquished property. This must be done in accordance with the multiple property identification rules in section 1.1031(k)-1(c)(4).

5. The EAT must transfer the property held within 180 days from the date of acquisition to either the taxpayer (in the event EAT held the replacement property) or the buyer (in the event the EAT held the relinquished property).

6. The combined time period that the relinquished property and the replacement property cannot exceed 180 days.

PERMISSABLE AGREEMENTS:

The following agreements are permissible regardless of whether or not they contain terms, which may typically destroy an arms length relationship between the EAT and the taxpayer.

1. The EAT may act as both the qualified intermediary and the EAT provided that they satisfy the qualified intermediary safe harbor provisions in section 1.1031(k)-1(g)(4).

2. The taxpayer may guarantee all or part of the obligations of the EAT including debt and incurred expenses.

3. Taxpayer may loan or advance funds to the EAT.

4. The EAT may lease the property to the taxpayer.

5. The EAT may enter into a management agreement with the taxpayer.

6. The taxpayer may act as contractor and/or supervisor with respect to the property.

7. EAT and taxpayer may enter into agreements using puts and calls at fixed or formula prices for subsequent dispositions.

REPLACEMENT PROPERTY PARKED

STEP 1 - EAT PURCHASE OF REPLACEMENT PROPERTY
A. Exchanger advances/loans funds to the EAT.B. EAT purchases the replacement property.C. Seller deeds the replacement property to the EAT.D. EAT leases the replacement property to the Exchanger.

STEP 2 - SALE OF RELINQUISHED PROPERTY AND EXCHANGE OF THE REPLACEMENT PROPERTY TO THE EXCHANGER
A. Relinquished property is deeded to the EAT in exchange for the replacement property to the Exchanger.B. Payoff of the original advance/loan from the Exchanger from sale proceeds.

RELINQUISHED PROPERTY PARKED

STEP 1 - EXCHANGE OF RELINQUISHED PROPERTY FOR THE REPLACEMENT PROPERTY
A. Exchanger deeds the relinquished property to the EAT according to the QEAA.B. Simultaneously, the Exchanger and the EAT enter into an Exchange Agreement.C. Exchanger advances/loans funds to the EAT for the acquisition of the replacement property.D. The replacement property is deeded directly to the Exchanger in compliance with the Exchange Agreement.E. EAT leases the relinquished property to the Exchanger.

STEP 2 - SALE OF RELINQUISHED PROPERTY
A. Exchanger locates purchaser for replacement property and enters into a contract.B. Exchanger assigns contract to EAT and EAT sells relinquished property to Buyer.C. EAT receives proceeds from sale and pays off advance/loan from Exchanger.

Thanks to Asset Preservation, Inc.
National Headquarters: 800-282-1031Eastern Regional Office: 866-394-1031info@apiexchange.com
© Copyright 2005 Stewart Title Guaranty Company.

1031, Types of Exchanges, The Reverse Exchange

THE REVERSE EXCHANGE

A reverse exchange is the purchase of the replacement property prior to closing on the relinquished property. An investor may need to consider a reverse exchange in a seller's market, where properties are selling quickly and inventory is scarce. The most common variation (often called "parking the replacement property") involves the Qualified Intermediary first purchasing the replacement property. When the relinquished property is sold at a later date, the Qualified Intermediary completes the exchange by deeding the replacement property back to the Exchanger. It is especially crucial that the Qualified Intermediary has in-depth knowledge of the steps and precautions necessary in these complex transactions. Working with an investor's tax advisors and attorneys, API draws upon substantial experience with reverse exchanges to help lead the investor safely through a minefield of potential hazards.

PARKING ARRANGEMENTS

The Power of Strategy™ - "Parking Arrangement"Brochure in a PDF File

Click Here to view the full text of Revenue Procedure 2000-37 in a PDF File

PARKING ARRANGEMENT EXCHANGES:
SAFE HARBOR FINALIZED ON SEPTEMBER 15, 2000
Revenue Procedure 2000-37 (finalized on September 15, 2000) provides the framework to safely perform a reverse exchange (purchasing a replacement property before selling the relinquished property) or an improvement exchange (making improvements or building a new replacement property).

Basic Points of Concern:
Issued on September 15, 2000 and also referred to as a Rev. Proc.
Effective September 15, 2000
Provides a "safe harbor" if transaction is within it's parameters
IRS may amend the Rev. Proc. If necessary
Reverse" exchanges may still be structured outside the Rev. Proc.
Transactions already completed or in progress are not affected

REV. PROC. 2000-37 KEY TERMS:
Qualified Exchange Accommodation Arrangements = QEAA
Exchange Accommodation Titleholder = EAT

QEAA SUMMARY:
Qualified indicia of ownership. The EAT must not be the taxpayer or a disqualified person and must be subject to federal income tax. Indicia of ownership must be maintained at all times until the property is transferred as described in section 4.02(5) of the Rev. Proc. Qualified indicia of ownership means legal title or other applicable principals of ownership under commercial law such as contract for deed.

The taxpayer must have bonafide intent that the property held by the EAT must represent either the replacement or the relinquished property in an exchange that is intended to qualify for nonrecognition of gain (whole or in part) under section 1031.

The taxpayer and the EAT must enter into an agreement (the qualified exchange accommodation agreement) no later than 5 days after the transfer of qualified indicia of ownership to the EAT. The agreement must state that the EAT is holding title for the benefit of the taxpayer in order to complete an IRC section 1031 and this Rev. Proc. And that the taxpayer and EAT agree to report the acquisition, holding and disposition of the property. In addition, the agreement must state that both parties will be treated as the beneficial owner for tax purposes and report it as such on it's tax returns.
In the event that the EAT holds the replacement property, the taxpayer must identify within 45 days, the relinquished property. This must be done in accordance with the multiple property identification rules in section 1.1031(k)-1(c)(4).

The EAT must transfer the property held within 180 days from the date of acquisition to either the taxpayer (in the event EAT held the replacement property) or the buyer (in the event the EAT held the relinquished property).

The combined time period that the relinquished property and the replacement property cannot exceed 180 days.

PERMISSABLE AGREEMENTS:
The following agreements are permissible regardless of whether or not they contain terms, which may typically destroy an arms length relationship between the EAT and the taxpayer.

The EAT may act as both the qualified intermediary and the EAT provided that they satisfy the qualified intermediary safe harbor provisions in section 1.1031(k)-1(g)(4).

The taxpayer may guarantee all or part of the obligations of the EAT including debt and incurred expenses.

Taxpayer may loan or advance funds to the EAT.

The EAT may lease the property to the taxpayer.

The EAT may enter into a management agreement with the taxpayer.

The taxpayer may act as contractor and/or supervisor with respect to the property.

EAT and taxpayer may enter into agreements using puts and calls at fixed or formula prices for subsequent dispositions.

REPLACEMENT PROPERTY PARKED

STEP 1 - EAT PURCHASE OF REPLACEMENT PROPERTY
Exchanger advances/loans funds to the EAT.
EAT purchases the replacement property.
Seller deeds the replacement property to the EAT.
EAT leases the replacement property to the Exchanger.

STEP 2 - SALE OF RELINQUISHED PROPERTY AND EXCHANGE OF THE REPLACEMENT PROPERTY TO THE EXCHANGER
Relinquished property is deeded to the EAT in exchange for the replacement property to the Exchanger.
Payoff of the original advance/loan from the Exchanger from sale proceeds.

RELINQUISHED PROPERTY PARKED

STEP 1 - EXCHANGE OF RELINQUISHED PROPERTY FOR THE REPLACEMENT PROPERTY
Exchanger deeds the relinquished property to the EAT according to the QEAA.
Simultaneously, the Exchanger and the EAT enter into an Exchange Agreement.
Exchanger advances/loans funds to the EAT for the acquisition of the replacement property.
The replacement property is deeded directly to the Exchanger in compliance with the Exchange Agreement. / EAT leases the relinquished property to the Exchanger.

STEP 2 - SALE OF RELINQUISHED PROPERTY
Exchanger locates purchaser for replacement property and enters into a contract.
Exchanger assigns contract to EAT and EAT sells relinquished property to Buyer.
EAT receives proceeds from sale and pays off advance/loan from Exchanger.

Thanks to: Asset Preservation, Inc.
National Headquarters: 800-282-1031Eastern Regional Office: 866-394-1031info@apiexchange.com
© Copyright 2005 Stewart Title Guaranty Company.

Types of 1031 Exchanges-The delayed Exchange

THE DELAYED EXCHANGE

A delayed exchange is the most common exchange format, providing investors the flexibility of up to a maximum of 180 days to purchase a replacement property. The use of a Qualified Intermediary is required to complete a valid delayed exchange. The Qualified Intermediary prepares the necessary exchange documents to assist the Exchanger with meeting the many detailed requirements of the Code, as well as avoiding numerous destructive pitfalls.
SALE OF THE RELINQUISHED PROPERTY
Prior to closing the sale of the relinquished property, the Exchanger enters into the Exchange Agreement with API. Pursuant to the Exchange Agreement, an Assignment is executed prior to closing, and API assumes the Exchanger's Purchase and Sale agreement. API instructs the closing/escrow officer or closing attorney to directly deed the property from the Exchanger to the buyer. Proceeds are transferred directly to the Qualified Intermediary, thereby protecting the Exchanger from actual or constructive receipt of funds.
IDENTIFICATION OF REPLACEMENT PROPERTY
The Exchanger must properly identify potential replacement properties within 45 calendar days. API provides the Exchanger with the specific identification requirements, one of which is that the identification must be made in writing and the property must be unambiguously described. The three rules of identification are:
Three Property Rule: An Exchanger may identify a maximum of three (3) replacement properties, without regard to the fair market value of the properties.
Two-Hundred Percent Rule: The Exchanger may identify any number of properties as long as the aggregate fair market value does not exceed two-hundred percent (200%) of the aggregate fair market value of the relinquished property.
Ninety-Five Percent Exception: The Exchanger may identify any number of properties without regard to the combined fair market value, as long as the properties acquired amount to at least ninety-five percent (95%) of the fair market value of all identified properties.
PURCHASE OF THE REPLACEMENT PROPERTY
The Exchanger has a total of 180 calendar days from closing of the relinquished property, or their tax filing date, whichever is earlier, to acquire "like-kind" replacement properties. Prior to closing on the replacement property, the Exchanger assigns the Purchase and Sale Agreement to the Qualified Intermediary. After the Assignment is executed, the exchange is completed when the Qualified Intermediary purchases the replacement property with the exchange proceeds and transfers it back to the Exchanger by a direct deed from the seller.

1031 Exchange, what is the first step

WHAT'S THE FIRST STEP?

Always discuss a §1031 tax deferred exchange with your tax and/or legal advisors.
Call API for a free consultation at any time and definitely before closing on the relinquished property. The following information is needed to begin preparing the exchange documents: A) The name, address and telephone number of the Exchanger; and B) The closer/escrow holder's name, address, telephone number and file number. We will prepare all necessary exchange documentation and will coordinate with the closer/escrow holder, the Exchanger's real estate agent/broker and his or her tax and/or legal advisors.
Include language establishing the intent to affect a §1031 tax deferred exchange in the Purchase and Sale Agreement. The following are examples:

SALE OF RELINQUISHED PROPERTY"Buyer is aware that Seller intends to perform an IRC §1031 tax deferred exchange. Seller requests Buyer's cooperation in such an exchange and agrees to hold Buyer harmless from any and all claims, liabilities, costs, or delays in time resulting from such an exchange. Buyer agrees to an assignment of this contract to Asset Preservation, Inc. by the Seller."

PURCHASE OF REPLACEMENT PROPERTY"Seller is aware that Buyer intends to perform an IRC §1031 tax deferred exchange. Buyer requests Seller's cooperation in such an exchange, and agrees to hold Seller harmless from any and all claims, liabilities, costs, or delays in time resulting from such an exchange.

1031 Exchange REQUIREMENTS FOR FULL TAX DEFERRAL

REQUIREMENTS FOR FULL TAX DEFERRAL

A properly structured exchange is the transfer of property for property, thus deferring capital gain taxes. Any cash received, any reduction in mortgage or any other non-like-kind property received is considered "boot" and is taxable to the extent of the capital gain. To fully defer all capital gain taxes, an Exchanger must meet two requirements:
REINVEST ALL EXCHANGE PROCEEDS - If an Exchanger does not reinvest all exchange proceeds from the sale of the relinquished property, the balance received is considered "cash boot," and gain may be recognized on that amount.
ACQUIRE PROPERTY WITH THE SAME OR GREATER DEBT - If an Exchanger does not acquire a replacement property with an equal or greater amount of debt, he or she is relieved of a debt obligation, which is considered "mortgage boot." The IRS considers this reduction in debt a benefit to the Exchanger; therefore, it is taxable, unless it is offset by adding equivalent cash to the replacement property purchase.

1031 Exchange, What is "Like-Kind Property"?

WHAT IS LIKE-KIND PROPERTY?

Pursuant to IRC §1031, capital gain tax deferment requires the exchange of like-kind relinquished property for other like-kind replacement property. Contrary to the commonly held misconception that exchanged properties must be of the exact same type - for example, that bare land be exchanged for bare land or an income property be exchanged for another income property - the actual definition of like-kind is far more empowering in its flexibility. Any real property held for investment or real property used in a trade or business can be exchanged for any other real property held for investment or real property used in a trade or business.

Asset Preservation, Inc.
National Headquarters: 800-282-1031Eastern Regional Office: 866-394-1031info@apiexchange.com
© Copyright 2005 Stewart Title Guaranty Company.All rights reserved. Privacy policy. Terms of use.

What is a 1031 exchange?

Thanks to IRC §1031, a properly structured exchange allows an investor to sell a property, to reinvest the proceeds in a new property and to defer all capital gain taxes. IRC §1031 (a)(1) states:

"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 either for productive use in a trade or business or for investment."

To understand the powerful protection an exchange offers, consider the following example:
An investor has a $200,000 capital gain and incurs a tax liability of approximately $70,000 in combined taxes (depreciation recapture, federal and state capital gain taxes) when the property is sold. Only $130,000 remains to reinvest in another property.
Assuming a 25% down payment and a 75% loan-to-value ratio, the seller would only be able to purchase a $520,000 new property.

If the same investor chose to exchange, however, he or she would be able to reinvest the entire $200,000 of equity in the purchase of $800,000 in real estate, assuming the same down payment and loan-to-value ratios.

As the above example demonstrates, exchanges protect investors from capital gain taxes as well as facilitating significant portfolio growth and increased return on investment. In order to access the full potential of these benefits, it is crucial to have a comprehensive knowledge of the exchange process and the IRC. For instance, an accurate understanding of the key term like-kind - often mistakenly thought to mean the same exact types of property - can reveal possibilities that might have been dismissed or overlooked. API is your resource to obtain accurate and thorough information about the entire exchange process.

Tomorrow... "What is like property?"

I would like to thank Asset Preservation, Inc for this information

What makes the Keys special

1. Marlin, sailfish, yellow tail, grouper, snapper, dolphin, manatees, spiny lobster, stone crabs and MORE!
2. Diving, snorkeling, fishing, boating, sailing and more
3. Dining, shopping, driving, cocktails and more
4. Friendly people
5. THE WEATHER
6. Easy to travel to
7. Low real estate taxes

What type of housing is available in the upper keys

The upper keys offers various types of housing. I will enumerate from most expensive to least expensive.

1. Direct ocean or bay front single family homes with or without dockage 3 Million and up
2. Single family home on a large lot on a creek or similar $1.5 million and up
3. Larger upscale Condos with a view and slip. $1 million and up
4. Single family home on a large lot on a canal, such as Venetian Shores $900,000 and up
5. Larger upscale Condo with view, no slip $750,000.
6. Single family home on a smaller lot (50 x 70) on a canal. $750,000 and up
7. Water front mobile home $700,000 and up
8. Condo/Hotel... a new breed in the market $600,000 and up (Ocanos starts at $1.2 million)
9. Smaller Condo on oceanfront property, little or no view $450,000.
10. Larger dry lot home $400,000.
11. Dry lot mobile $300,000.
12. Smaller dry condo. $275,000.
13. Small dry lot mobile. $250,000.

A rainy day in Florida Keys Real Estate

Finally, some rain! Hey, you have to fill the swimming pool some how. Why not leave it up to God.

What is there to do in the Keys in the rain? Dine out, for one. We have great home cook food and upscale dining too.

Or, you can look at Real Estate! Thinking of a second home or investment home in the Keys? Call me! We can sit in front of a computer and sip a cup of tea while pondering location, price and amenities.

Don't want to change out of your jammies? No problem, call me and tell me what might interest you and I will send you a custom link of properties to consider. When the sun comes back out, we can look at them.

You can go to my website, www.KathyDenworth.com for reports and additional information, and reach me at 800-541-5019 Office, or my direct cell 305-519-5209.

National Association of Realtors begins Ad campain

Finally the NAR is beginning an ad campaign with the "FACTS". There has been so much bad press about the real estate market in South Florida that some people believe it.

Let's set the record straight.

1. Interest rates are still LOW
2. God is not creating any more land in the Keys, what we have is it!
3. Keys prices are still well below any other water front area like Key Biscayne.
4. You do not have to have a passport to get here unless you are from another country.
5. The people are still nice.
6. You can still get lunch for two with tip for under $20.00.
7. There are always things to do. This weekend we have the Chili cook off in Key Largo, Waylon working on his wall, Shakespeare in the Park and Arlo Guthrie.

Intrigued? Call me about Florida Keys property!

Do you have a question about the Florida Keys? Ask me!

Ocanos in Islamorada-Bye Bye Holiday Isle

Wow! Last night was the unveiling of the plans to turn Holiday Isle into Ocanos! A good time was had by all.

We are all trying to remember how to pronounce it. Is it Ocanos which rhymes with Poconos, or is it a soft c as in ocean? Is the accent on the first, second or third syllable?

I am sure that repeated advertisement will clear up the question.

All the on site Realtors and help were from Miami. I guess the local folk are not their style. I wonder how they will answer the question "How far to Anne's Beach?".

The unit was beautiful. I have to hand them that. The furnishings are tasteful and the atmosphere they have created is near about perfect. I hope they ensure all the units have the candles. They made it a feast for the nose as well as the eyes. Aromatherapy is one of my favorites. I also liked the fact you did not have to see the kitchen appliances. Sometimes you don't want a kitchen while on vacation. It certainly was a step up from the usual mini bar!

Want more info? Contact me. I have an extra brochure.