I have to admit that I am jumping on the bio-diesel eco-wagon much later than most. My wife and I have taken steps around the house to make sure that we are doing our part in saving what we can. We have changed our light bulbs, filter our own water instead of buying bottled, decreased our water usage and buy from our local farmers market. I don't think we are on the cutting-edge, but everyone needs to start somewhere, right?
So, my biggest question was how do I begin to go eco with the most time consuming aspect of my life...WORK? I stumbled across the answer with one phone call a few months ago. For those who don't know me...basically everyone...I am a Qualified Intermediary that handles 1031 Like-Kind Exchanges. This tax code consumes most every hour of the six days I spend working. I have had the ability to help thousands of taxpayers in deferring tax of the sale of antique cars, cattle, rental properties, high-rise buildings, jets, beach homes, and most recently, conservation easements.
I am from a fairly rural area of NC and grew up raising cattle, tobacco and gardens. Most of the summer was spent priming tobacco for several families in the area as paying help (more than $3 dollars an hour and all the Pepsi's and raisin cakes one would need) was mostly out of the question. Times were tight for many farmers, large and small, and loans were often taken to make sure that ends were met before the crops came in. I believe that this pattern is still in place, though labor costs have certainly skyrocketed as have all other forms of overhead. The short of it being that incomes were not made to save, but to spend to make the next year possible.
As many farmers are experiencing such an increase in land value and have many developers and realtors at the ready to pull the sales-switch, the decision to sell and have a nice bankroll to supply retirement funds becomes quite easy. But, can a family's tradition and community culture be so easily lost? I hope not, thought it seems the case as I drive around many of my surrounding communities. So, let's talk about conservation easements. As you know there is the ability to donate a conservation easement which allows the taxpayer to take a first- year tax deduction based on a percentage of their Adjusted Gross Income along with a carryover period of up to 15 years. That is fantastic, but what if, for various reasons, the farmer does not want to donate the easement but would sell the easement for cash?
Let me split a fine hair and provide an example of how I was able to help my client. Mr. and Mrs. Smith (original, huh?) owned a farm with many acres. They were approached by an entity and asked if they could purchase a conservation easement on the farmland. The Smith's had no issue with this as they wanted the land to stay farmland. The big question was could they afford the taxes they would have to pay on the income from the purchase of the easement. As I was able to talk with them about options, we discussed the 1031 Like-Kind exchange. The exchange would enable them to sell the easement, defer their income tax and place the proceeds into income-producing property which would supply them a way of life after farming. After this, they are still able to sell the property in the future...with the easement still in tow.
What will be the value of this property since it has such a distinct restriction? Probably less monetarily than it might have received without the attached easement, but what value are we ascribing? This land will stay in tact with the proven and needed ecological helps to encroaching urban development.
There are many who could have written this article much better than I.
I am always humbled by the vast amount of knowledge of my peers. As I continue to learn how my career can better help in our eco-friendly desire for our local areas, I will share. Please continue to share with me as well!
Is there a downturn in our real estate market? Okay, next question. So, how do we continue to prosper in these times...only by adapting to new ideas that help our customers buy and sell in a market which is less than ideal.
I have no cure-all nor am I selling Colonel Harvey's Elixer (For you Andy Griffith/Mayberry Fans), but I do firmly believe that a Reverse 1031 Like-Kind Exchange can open a door of opportunity for both you and your client.
First, what is a reverse exchange? In basics, a reverse allows a taxpayer to purchase a piece of property BEFORE they are able to sell their own property and still maintain a qualified 1031 exchange. Your client would still work with somone like myself, a Qualified Intermediary (QI), to complete this transaction.
Second, what type of situation would this fit? Well, let's say a taxpayer owns a rental property in Florida and has had it on the market for way too long. In this time, you list the tract of land they have always wanted to purchase in South Carolina. The taxpayer would love to buy the land, but hasn't sold their FL property and is afraid someone will step in a buy the land before they can sell their own. They contact you and your client is not willing to delay the closing or accept a contingency. What is the taxpayer to do?
Third, how does it work. Before signing any contract, the taxpayer would consult with a QI to establish a reverse exchange. The QI would act as an Exchange Accomodation Titleholder (EAT) to establish a LLC (single member) which is created to purchase the property from your client. A contract to purchase would be signed between taxpayer and/or assigns and your client. The taxpayer would acquire a loan, in the name of the LLC, with the EAT signing both the Note and the Deed of Trust. This is usually secured by the new property and the bank can also require the taxpayer guarantee the loan. The real esate closing is coordinated with the closing attorney, closing takes place and the deed in recorded in the name of the EAT. Now, the taxpayer has begun their exchange, but most important, your client has sold their property.
Lastly, how does it end for the taxpayer. From the time the property was purchased from your client by the LLC, the taxpayer has 180 days to sell their property in Florida, begin a forward like-kind exchange and use the proceeds from sale to purchase the land from the LLC as their replacment property.
This process can work for your client who needs to buy property or for the potential buyer of your client's property. In either case, it will be in your hands to share this information. Will you be willing to take a few more minutes of time...to learn, to share and to inform? As I have said in previous postings, we are not unteachable but by choice.
This is a question that I am asked quite often. And like most questions I receive, I will ask the client a few questions:
#1. How do you own the slip?
I have a great interest in how they own it. Do they have a lease for a determined period of time or do they own it fee simple?
This is also going to let us know, with an advisors help, wether or not the slip is considered real or personal property. It is important to know how the state judges the property as it is a state-by-state issue.
#2 How long have you owned the slip?
This is a VERY important aspect of any exchange. Thought there is not stated holding period for a property, the longer you hold it the better. Typically a two-year holding period is thought the be okay. If a client owns the property for a year or more, then you have now qualified it as for long-term capital gains, however, any time less than a year and you are entering the "GRAY AREA". The overall concern over time held is to be able to show investment or business use...which leads to the next question.
#3 What has been your use of the slip?
Again, a very important question as you are to have used the slip for business or investment. Since you may typically rent the slip, this would certainly show investment intent. But what if you were not able to rent the slip? There seems to be no difference between the actual renting of the slip or the attempt to rent the slip. You would want to make sure that you advertised it for rent personally or hired someone to do so (typically the marina) and you offered a fair-market rent. Make sure that your true intent shows through here.
# 4 What are you planning to purchase for replacement?
This questions will be more focused once we have discovered how your slip in treated as far as real or personal property. If you are found to own in fee simple as real estate, then your options are many. In a 1031 Like-Kind Exchange, real property is always like-kind for other real property, as long as it is held for investment or business purposes. This means you could sell the slip and purchase land, rental property, a warehouse, hotel, etc.
If the slip is considered to be owned as personal property, then you will be quite limited in a qualifying property in that personal property is only like-kind to property in the same class. Which in this case would mean slip for slip, rack for rack, etc.
Please do not think this would be the limit of questions asked in such an exchange, but this is what I would first like to know. After we have determined the answer to these questions, hopefully with help from the client's tax advisor, we would proceed.
Boat slips and racks are quite the popular investment these days. Many I have talked with had no idea that they could be exchanged. Please use this as a talking point with your cients...you never know...you just might pick up additional business!
TIRED, but feeling great. It is always an experience for me to discuss 1031 like kind exchanges with so many Realtors with different personalities, varying knowledge levels and backgrounds. Though I do talk with many Realtors able to discuss the finer points of the 1031 exchange, the common response seems to be, "Oh yeah, that tax thing...ugh!".
Now, I do realize that matters of taxation may not be discussed at dinner parties or be brought up to "lighten the mood" in conversation (unless you are me). But this is an exciting topic! Each one of us, if we had a chance, would do anything it took to NOT pay Uncle Sam taxes we did not have to. I am talking legally, here! I am sure if I asked for comments, many of you reading this blog would testify to the fact that a 1031 is a great tool for your personal financial growth. So those of you, who are Realtors, I am sure take every opportunity to share this with your clients selling business or investment property. You would never say to them, "Oh yeah, that tax thing...ugh!". After all, you are truly there to assist your clients the best you know how.
Let's get to my point. If you are truly striving to be the best representative for your client, just as I try to do for mine, we realize we need to learn each and every day. We are not unteachable, but by choice. When I meet someone unwilling to learn or who closes themselves to the idea of 1031 Like Kind Exchanges, I feel bad for both that person and their clients. Please realize I do not take it personally, this has nothing to do with me, but I would hope my real estate agent is as learned as could be.
Can the agent who capitalizes on the ideas and advantages of 1031 exchanges benefit? Absolutely!!!!!!
Not only will they help their client, but through the client, help themselves. Let us give an example:
CLIENT NOT DOING AN EXCHANGE
Client sells property and nets $750,000...
Client pays capital gains tax of 15%...$750,000 - $112,500
Client is left with...$637,500 cash to invest
If they leverage this amount at 25%....Proposed acquisition of $2,550,000
CLIENT DOING AN EXCHANGE
Client sells property and nets $750,000...
Client pays NO capital gains tax because of the exchange...
Client is left with...$750,000 cash to invest
If they leverage this amount at 25%...Proposed acquisition of $3,000,000
This mean they have purchased $450,000 more property WITH A 1031!
Is this good for the client? YES
Is this good for you? YES
Why? How much more would your commission be on the $3,000,000 sale?
This does not take into account the fact that a 1031 Exchange also defers:
State Tax
Depreciation Recapture (Huge Plus here!!)
Meaning even more money becomes available to the taxpayer to purchase property. With one side-note, if your client had more cash equity to place into the deal, do you think this may make financing easier for the client? I realize that financing is never an issue with real estate and certainly financing, or the lack there of, has never broken an deal!
Not only this, but let's talk about one more advantage and I will digress. As many of you know, your client faces time-lines in their exchange. There is the 45 days they have to identify potential replacement property and the 180 days to close on any or all of the identified property. If you are helping the client sell their property, and knowing all along the time-frames they are facing, would it benefit you to immediately help that client find replacement property? Sure it would. Not only would you then benefit from the sale of their relinquished property, but now you may be able to sell them one, two, three...replacement properties! Your commission just multiplied because you were aware of the 1031 Exchange and how to help your client through.
Okay, I could go on, but I think you get the picture. For those of you who are taking advantage of the 1031, keep going! Like you need me to say that. But for those of you who have been shunned this wonderful tax-savings tool, give it a chance! I never make empty promises, so this promise I make, your real estate career could turn that corner your always wanted if you would put into practice the simple process of a 1031 Like Kind Exchange.
If I can be of any help as in writing about specific topics or giving a general overview, please let me know. I want to blog only those things which will help our wonderful community here grow!
I am happiest when I am helping others find their perfect home...
I am sure the above statement would describe most of us to a tee. When we are in sales and our incomes depend on our ability to work with the public, as they would have us to work with them. We are special people indeed. Our energy seems endless...our smiles never crack...we are intent on staying one step and thought ahead of their need. We are flawless in our desire to help.
So what happens when we do not feel like that dynamic person in the morning? You know, when we have to meet with THAT couple again...the ones who are never happy? How do you handle it when someone objects to something that we have done in good faith? How do you handle it and keep your smile?
After working with the public for the past 15 years in banking, personal trust and as a Qualified Intermediary, I have my own tricks.
I must remember who I am. Noone can define me, but I define who I am by what I believe and hold dear, my very actions and deeds.
Today is your new day. Yesterday is gone, today is here and tomorrow is not promised.
I have posted a few blogs that cover several topics on 1031 Like-Kind Exchanges. I hope they have provided help and up to date information to those kind enough to stop by and read. I truly believe that I could write several blogs a day on exchanges and never get across all the information that many may need. So, here is my question and request:
•· What is your 1031 experience...good and bad?
•· What information did you have that helped you?
•· What do you wish you would have know?
•· What is one piece of advice you would offer your fellow realtor?
And last, but not least, the request...
•· Will you share this information with us here?
I will do my best to answer your questions and write blogs tailored to your requests. It would be my pleasure to do so.
I truly believe that each of us have great information and experiences to share with each other (that is an original thought, huh?). I want to share mine with you as best I can as it keeps me sharp and continually studying as well.
I had written an earlier blog on the proposed 1031 Like Kind exchange affects of the new Farm Bill currently under consideration. There were two issues that I discussed specifically, one was the change to make the exchange of collectibles no longer qualify for tax deferment. The other, a change to the like-kind definition of certain farmland under subsidy which would severely strict qualifying replacement property to only other subsidized farmland.
The update will bring good news to those taxpayers who exchange collectibles. The proposed change to their qualifying nature has been dropped from the bill. So, exchange those collectibles as normal!
As to what may affect many of us even further, there is a continued effort by the Federation of Exchange Accomodators to continue the momentum and have the proposed regulations on subsidized land excluded from the bill as well. That would be quite the accomplishment. It seems that this one change in the code would account for some $250 million in newly generated tax income. The difficulty lies in them finding other tax "adjustments" which would make up for the loss of this potential income should it be excluded from the Farm Bill.
I will continue to keep you up to date as things happen!
It seems with our recent mortgage issues helping to further apply the breaks on our real estate market, seller financing is a tool many are using to "help" their buyer. Many who thought they would never want to get involved with seller financing are finding it almost necessary to accomplish their sale. So, if now they are going to offer seller financing, how would this affect the 1031 Like-Kind exchange they planned on doing?
Great question. Seller financing is usually counted as "boot" in the deal which would require the payments received the be taxed in the year(s) in which it is received. Well, that is totally opposite of what the seller is trying to accomplished. How do we make it work?
Seller financing can be included in a tax-free exchange. Please, do not get too excited, as it is not the easiest thing to do.
As the seller goes to closing, the note they would have taken back would be assigned to the Qualified Intermediary(QI) they were using to handle their exchange. The note and any cash proceeds from closing would then be held by the QI. As the note is assigned, the QI would receive any payments and interest due on the note during the exchange period. This is accomplished easily enough if you would notify the QI ahead of time and the assignment can be planned. The attorney would usually draft the assignment and the QI would want time to review the assignment to obtain an acceptable comfort level with it.
Now, the deal has closed and the QI is holding your cash and note. The catch is this, the IRS considers the note as cash in the exchange. So, when you purchase the replacement property, that seller would need to be willing to accept an assignment of a 3rd party note. Hmmmm...that might complicate things a bit, huh? Not saying that it would be impossible, but not too many sellers may find this a desirable situation.
One solution is this, the taxpayer may buy out their own note. Mr. Brown closed on his relinquished property and had a $50,000 note assigned to the QI. At some point during the exchange, Mr. Brown purchases the note from the QI for $50,000 cash and takes re-assignment of the note. Now their is pure cash in the exchange which may make his replacement property purchase much more likely.
What if Mr. Brown cannot purchase the note himself? He can sell the note, but probably will do so for a discount. So, Mr. Brown sells the $50,000 note to Mr. Smith for $40,000. Now the QI would take in the cash and re-assign the note to Mr. Smith. The problem...Mr. Smith is now taxable on the $10,000 discount he allowed on the note. The upside...he now has all cash in the deal.
We see three solutions:
Find a seller of replacement property willing to accept a 3rd party note
Mr. Brown purchases the note from the QI substituting cash
Mr. Brown sells the note at a discount to a 3rd party realizing boot on the amount of the discount
As with any 1031 Like-Kind Exchange, it is very important to have a tax adviser helping to guide on just such a situation. It is very important to look at not only the exchange rules, but also recent court cases to help see just how the IRS has ruled in the past.
Again, it is possible to exchange with seller financing in place, but it will take care and expertise on part of your tax adviser and Qualified Intermediary!
This is a question that I am asked quite often. And like most questions I receive, I will ask the client a few questions:
#1. How do you own the slip?
I have a great interest in how they own it. Do they have a lease for a determined period of time or do they own it fee simple?
This is also going to let us know, with an advisors help, wether or not the slip is considered real or personal property. It is important to know how the state judges the property as it is a state-by-state issue.
#2 How long have you owned the slip?
This is a VERY important aspect of any exchange. Thought there is not stated holding period for a property, the longer you hold it the better. Typically a two-year holding period is thought the be okay. If a client owns the property for a year or more, then you have now qualified it as for long-term capital gains, however, any time less than a year and you are entering the "GRAY AREA". The overall concern over time held is to be able to show investment or business use...which leads to the next question.
#3 What has been your use of the slip?
Again, a very important question as you are to have used the slip for business or investment. Since you may typically rent the slip, this would certainly show investment intent. But what if you were not able to rent the slip? There seems to be no difference between the actual renting of the slip or the attempt to rent the slip. You would want to make sure that you advertised it for rent personally or hired someone to do so (typically the marina) and you offered a fair-market rent. Make sure that your true intent shows through here.
# 4 What are you planning to purchase for replacement?
This questions will be more focused once we have discovered how your slip in treated as far as real or personal property. If you are found to own in fee simple as real estate, then your options are many. In a 1031 Like-Kind Exchange, real property is always like-kind for other real property, as long as it is held for investment or business purposes. This means you could sell the slip and purchase land, rental property, a warehouse, hotel, etc.
If the slip is considered to be owned as personal property, then you will be quited limited in a qualifying property in that personal property is only like-kind to property in the same class. Which in this case would mean slip for slip, rack for rack, etc.
Please do not think this would be the limit of questions asked in such an exchange, but this is what I would first like to know. After we have determined the answer to these questions, hopefully with help from the client's tax advisor, we would proceed.
Boat slips and racks are quite the popular investment these days. Many I have talked with had no idea that they could be exchanged. Please use this as a talking point with your cients...you never know...you just might pick up additional business!
No matter how much pressure we may feel from a client to give an answer...
No matter how easy the question seems at the time...
We need to default to a profession tax adviser!
And, guess what...it is okay! Every day I deal with very tax-heavy transactions as a Qualified Intermediary handling 1031 Like-Kind exchanges. I have been in the business for several years now and feel as though there are not too many things I have not seen. As a Certified Exchange Specialist and member of the FEA (Federation of Exchange Accommodators), I stand among many professionals in the Qualified Intermediary field who pride themselves on continually educating and expanding our knowledge. But, does all this qualify me to give tax or legal advice? Absolutely not!
I never fail in asking at least once in my day, "Are you working with a tax-adviser?". I need to know. If they are not, I ALWAYS suggest they consult one. My job, as their Qualified Intermediary, is to BE an intermediary. The unbiased, third-party who does not, and by the IRS, cannot, give tax or legal advice. But, do I ever get pressured to be an adviser! Due to competition, it is very tempting to answer the questions you are asked as you do not want to seem incompetent or unwilling to assist your client.
But the very opposite shows when the temptation is avoided. There is no better service you can provide a client than making sure they have sound, beneficial tax advice which plays to their unique situation. We should never let pride, fear or bad decisions get in the way of our cient's best interest, no matter how easy the question might seem!
I believe in teams. As a necessary entity to help facilitate an exchange for my client, I want to make sure they are able to form a knowledgeable, caring team of advisers who, together with myself, look after their best interest.
As you may find ever-growing pressure to be an all-in-one service stop for your clients, do not let this driving desire push you over the ethical threshold. Do not feel weak or think you will loose a client by telling them you do not know, or that they need a tax adviser. The sure way to lose a client, and possibly gain a lawsuit, is to misinform!
Form yourself a team of advisers, both tax and legal, and serve your clients like no one else can!
From 1031 basics to complicated scenarios, it is my goal to make it "old hat" for you. Please ask any questions you might have and I will do my best to cover them in my "Have a 1031-derful Day" blogs.
Disclaimer: ActiveRain Corp. does not necessarily endorse the real estate agents, loan officers and brokers listed on this site. These real estate profiles, blogs and blog entries are provided here as a courtesy to our visitors to help them make an informed decision when buying or selling a house. ActiveRain Corp. takes no responsibility for the content in these profiles, that are written by the members of this community.
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