THE POWER OF EXCHANGE™ Discover the Value of §1031 Tax Deferred Exchanges Presentation by Kennen Cohen

1. THE POWER OF EXCHANGE™ Discover the Value of §1031 Tax Deferred Exchanges Presentation by Kennen Cohen

2. §1031 Exchange Terminology • Boot • Cash Boot • Constructive Receipt • Direct Deeding • Exchanger • Exchange Agreement • Exchange Period

3. §1031 Exchange Terminology • Identification Period • Like-Kind Property • Mortgage Boot • Qualified Intermediary • Relinquished Property • Replacement Property

4. Poll question 01. Sec. 1031 is part of the? Constitution A B State Statue C Internal Revenue Code D Real estate commission rules

5. Internal Revenue Code §1031 Non-Recognition of Gain or Loss from Exchange Solely of Kind “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.”

6. §1031: Exceptions • Stock in trade or other property held primarily for sale • Stocks, bonds, or notes • Other securities or evidences of indebtedness or interest • Interests in a partnership • Certificates of trust or beneficial interest • Choses in action

7. History of IRC §1031 / Capital Gain Tax 1989 Revenue Reconciliation Act of 1989 1984 Deficit Reduction Act of 1984 1921 Revenue Act of 1921 1921 1989 1979 1984 1986 1986 Tax Reform Act of 1986 1979 Starker Tax Court Cases

8. History of IRC §1031 / Capital Gain Tax September 15, 2000 Rev. Proc. 2000-37 1991 Final Treasury Regulations 1991 2003 1997 2000 May 6, 2003 Jobs & Growth Reconciliation Act 1979 Tax Relief Act

9. Poll question 02. Congress first allowed the exchange of properties in: 1969 A B 1984 C 2001 D 1921

10. Relevant Issues Tax Deferral 15% Federal + 0- 13% State 15 – 28% Tax Deferral Plus 25% Depreciation Recapture • Investors can potentially defer 100% of their capital gain taxes, both state and federal • Liability • Increase your income • Competition • Client Benefits

11. Investor Motives Investors increase their rateofreturn by using: • Leverage • Diversification • Consolidation • Cash Flow • Management Relief • Increase Depreciation • Estate Planning

12. Definition of Like-Kind Property Real Property for Real Property

13. Feedback question 03. What would not be considered like-kind property to an office building? Apartment building A B Vacation rental properties C Retail center D Primary Residence

14. Feedback question 03. What would not be considered like-kind property to an office building? A B C Apartment building Vacation rental properties D Retail center Primary Residence

15. Like-Kind Issues: Holding Period Time is only one factor The Taxpayer’s “intent” is the key issue

16. Like-Kind Issues: Holding Period Time is only one factor The Taxpayer’s “intent” is the key issue One Perspective • 24 months or more • In PLR 8429039, the IRS stated that a minimum holding period of two years would be sufficient.

17. Like-Kind Issues: Holding Period Time is only one factor The Taxpayer’s “intent” is the key issue One Perspective Second Perspective • Minimum of 12 months • Straddles two tax filing years. • Over 12 months qualifies for long-term capital gain treatment. • Attempt by Congress in 1989 to impose one year holding period (which didn’t pass). • 24 months or more • In PLR 8429039, the IRS stated that a minimum holding period of two years would be sufficient.

18. Like-Kind Property Issues • Interests in a partnership • Property within the United States • FRPTA and SRPTA • Personal Property • Fee for Leasehold (30+ years) • Vacation/Second Homes • Property Held for Resale • Related Party Exchanges

19. Like-Kind Property Issues- Vacation Homes • Revenue Procedure 2008-16 • Creates safe harbor for vacation home exchanges. • IRS will consider a dwelling unit held for investment if certain requirements are met.

20. Like-Kind Property Issues- Vacation Homes • Barry E. Moore v. Comm., T.C. Memo. 2007-134: • The taxpayers never rented or attempted to rent the property. • The taxpayers deducted mortgage interest as a “home mortgage interest” expense rather than investment interest expense. • The taxpayers did not take (and possibly did not qualify for) depreciation or other tax benefits associated with investment property, including deductions or maintenance expenses. • Planning Strategies: • Substantiate investment intent. • Report rental income, attempts to rent property or conversion from a second home to a rental property held for investment. • Treat property as held for investment on the tax return.

21. Conservative (“Safer”) 1 2 3 Safe Harbor Revenue Procedure 2008-16 4 5 6 Range of possible vacation home exchanges. 7 8 9 10 Non-Safe Harbor Moore vs. Comm. 2007-134 Aggressive (“Riskier”) Like-Kind Property Issues- Vacation Homes Exchanges of vacation homes held for investment are possible, provided the primary reason is holding for investment and not for personal use.

22. Related Party Rules Who is a Related Party?

23. Related Party Rules • Four Different Scenarios: • Simultaneous Exchange 2. Delayed – Selling to a Related Party 3. Delayed – Purchasing from a Related Party (See Rev. Ruling 2002-83, PLR 9748006) 4. Delayed – Purchasing from a Related Party who is Exchanging (See PLR 2004-40002)

24. Internal Revenue Code §121 • Married Taxpayers, filing a joint return, can exclude up to $500,000 • Single filers can exclude up to $250,000 • Home must be primary residence of both spouses for 2 of the last 5 years • §121 exclusion available once every two years • Vacation/second homes do not qualify

25. Jobs & Growth - Reconciliation Act-2003 Federal Capital Gain Tax Changes • Rate reduced to 15% (from 20%) for Taxpayers in the top tax bracket • Rate reduced to 5% for Taxpayers in the 10% and 15% tax brackets • Retroactive to May 6, 2003

26. Treasury Decisions 9152 • Taxpayers may exclude gain from principal residence even though they have owned it for less than two years. • Maximum exclusion applies only if the sale is by reason of: • Change in place of employment (50 miles) • Health of certain qualified individuals • Unforeseen circumstances (death, divorce, multiple births from same pregnancy, unemployment or change in employment, etc.)

27. American Jobs Creation Act-2004 “Recognition of gain from the sale of a principle residence acquired in a like-kind exchange within 5 years of sale. (10) PROPERTY ACQUIRED IN LIKE-KIND EXCHANGE -- If a taxpayer acquired property in an exchange to which section 1031 applied, subsection (a) shall not apply to the sale or exchange of such property if it occurs during the 5-year period beginning with the date of the acquisition of such property.”

28. Revenue Procedure 2005-14 • Take advantage of §121 (tax exclusion on a primary residence) and §1031 (tax deferred exchange treatment) when a property was a primary residence for 2 of the last 5 years, but most recently held for investment purposes. • Allows both capital gain tax exclusion – and deferral – which benefits homeowners with gain over the $500,000 and $250,000 limits.

29. Feedback question 04. In order for an exchange to qualify for 100% tax deferral, the taxpayer must? Purchase greater square footage A B Payoff all debt C Reinvest all net exchange proceeds D Use a real estate broker

30. Feedback question 04. In order for an exchange to qualify for 100% tax deferral, the taxpayer must? D A B Purchase greater square footage Payoff all debt C Reinvest all net exchange proceeds Use a real estate broker

31. The Exchange Equation For full tax deferral, an Taxpayer must meet two requirements: • Reinvest all net exchange proceeds • Acquire property with the same or greater debt. The Taxpayer acquired property of greater value, reinvesting all net equity and increasing the debt on the replacement property. Analysis:There is no boot.

32. The Exchange Equation The Taxpayer acquired property of a lower value, keeps $100,000 of the net equity and acquired a replacement property with $40,000 less debt. Analysis:This results in a total of $140,000 in boot. ($40,000 mortgage boot and $100,000 in cash boot = $140,000)

33. The Exchange Equation The Taxpayer acquired property of a lower value, reinvesting all net equity, but has less debt on the replacement property. Analysis:This results in $40,000 in mortgage boot.

34. §1031 Exchange - Formats & Variations §1031 Exchange

35. §1031 Exchange - Formats & Variations The Two-Party Trade (Swap) §1031 Exchange

36. §1031 Exchange - Formats & Variations The Two-Party Trade (Swap) §1031 Exchange The Three-Party Exchange (Alderson Format)

37. §1031 Exchange - Formats & Variations The Two-Party Trade (Swap) §1031 Exchange The Delayed Exchange with a QI The Three-Party Exchange (Alderson Format)

38. §1031 Exchange - Formats & Variations The Two-Party Trade (Swap) Multiple Sales and Acquisitions §1031 Exchange The Delayed Exchange with a QI The Three-Party Exchange (Alderson Format)

39. §1031 Exchange - Formats & Variations Parking Arrangements (Reverse and Improvement) The Two-Party Trade (Swap) Multiple Sales and Acquisitions §1031 Exchange The Delayed Exchange with a QI The Three-Party Exchange (Alderson Format)

40. The Two-Party Trade (Swap) Party A Party B SINGLE FAMILY HOME SINGLE FAMILY HOME Trade of Deeds

41. Poll question 05. A two party trade or sway could be done without a(n) Agreement A B Like-kind property C Qualified intermediary D Deeded interest

42. The Three-Party Exchange - Alderson ALDERSON SELLER BUYER

43. The Three-Party Exchange - Alderson ALDERSON Rel. Prop. Deed SELLER BUYER

44. The Three-Party Exchange - Alderson ALDERSON Rel. Prop. Deed Rep. Prop. Deed SELLER BUYER

45. The Three-Party Exchange - Alderson ALDERSON Rel. Prop. Deed Rep. Prop. Deed SELLER BUYER Rep. Prop. Deed

46. The Three-Party Exchange - Alderson ALDERSON Rel. Prop. Deed Rep. Prop. Deed SELLER BUYER Rep. Prop. Deed $

47. Feedback question 06. Which of the following exchange formats is most widely used today? The delayed exchange A B Two-party swap C Alderson format D Reverse exchange

48. Feedback question 06. Which of the following exchange formats is most widely used today? C D B The delayed exchange Two-party swap A Alderson format Reverse exchange

49. The Delayed Exchange with a QI SALE TAXPAYER Direct Deed BUYER 0 45 180 Identification Period Total Exchange Period

50. The Delayed Exchange with a QI SALE TAXPAYER Direct Deed BUYER QUALIFIED INTERMEDIARY $ 0 45 180 Identification Period Total Exchange Period