Qualified Intermediary, Section 1031 Exchanges, Iowa, Midwest, and across the US

Section 1031 Exchanges and Conservation Easements

Ken Tharp - Section 1031 Exchanges, Iowa/U.S. (Iowa Equity Exchange) — Mon, 26 Oct 2009 15:14:37 -0500

Did you know that if you own land and sell an easement to that land to a government agency, it is likely that your transaction is eligible for Section 1031 exchange treatment?

Emergency Watershed Protection Program (EWPP) and Wetlands Reserve Program (WRP) easements are being purchased by the Iowa Department of Natural Resources and similar agencies in other states. While the owners of the land retain title to the residual value of their land after the easement is recorded, the sale of the rights to this easement can be exchanged for other real property. This is an excellent means to acquire additional acreage or investment real estate.

For a time, WRP easements were not eligible for Section 1031 exchange treatment. This was due to the fact that the assignment of the purchase agreements was not permitted in the written agreements. Purchase agreements must be assigned to the qualified intermediary for an exchange to proceed, so this prohibition effectively disallowed WRP easements from Section 1031 exchange treatment. In an effort to correct this injustice based upon a misunderstanding, this author contacted all of the Iowa congressmen, including both Senators from Iowa. On October 23rd, 2009, I received an email from Representative Leonard Boswell, a portion of which said the following:

"On October 2nd the Chief Financial Officer at USDA came out with a decision paper regarding obligations and payments for IRS 1031 exchanges. There was concern that USDA could not legally "move" an existing obligation for an easement to a new party.

"Based on discussions with the Office of General Council, the obligation was originally with the landowner, who had the legal ability to assign their rights to a second party. Once NRCS approves this assignment, it would also include the right to the payment for the easement. However, the underlying obligation remains with the landowner and they are making an adjustment in the financial system as an "alternate payee". You will be pleased to know that USDA has resumed 1031 exchanges."

The essence of these comments indicates that the USDA originally thought that by assigning the agreements to an intermediary for a Section 1031 exchange, the obligation of the easement would also be transferred. Although that was never true, it took some time for the USDA to satisfy itself on the fact. Now that they are comfortable with the situation, Section 1031 exchanges are again allowable for WRP easement sales.

If you would like additional information about this subject, please contact us. We are handling a number of Section 1031 exchanges right now for other easement sellers.

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Please consider IOWA EQUITY EXCHANGE as your trusted source for answers to your questions about Section 1031 like-kind tax-deferred exchanges. Contact us at your convenience for prompt, accurate information. Please think of us for your next exchange.

Ken Tharp

800-805-1031 toll free

Providing Qualified Intermediary services for Section 1031 tax deferred exchanges all over the United States. Headquartered in Iowa, our services are available in Missouri, Kansas, Nebraska, Colorado, North Dakota, South Dakota, Minnesota, Wisconsin, Illinois, and all other states.

INTEGRITY. PRECISION. SECURITY.

Copyright © 2009 By Ken Tharp, All Rights Reserved. * Section 1031 Exchanges and Conservation Easements * Contact Ken Tharp for information on Section 1031 tax-deferred exchanges anywhere in the United States.

The Requirements for Maximum Tax Deferral

Ken Tharp - Section 1031 Exchanges, Iowa/U.S. (Iowa Equity Exchange) — Mon, 26 Oct 2009 12:04:14 -0500

You'd think it would be fairly simple to list the requirements to defer the maximum amount of capital gain taxes through the use of a Section 1031 exchange. As I set out to write this article, though, I realize that like a lot of other aspects of exchanges, it takes a little thought and effort to describe things accurately.

One-hundred percent deferral of all capital gain taxes is pretty difficult to achieve, but we can all get close to 100% if we watch things closely. The two primary requirements for maximum deferral are these:

1. Buy property with value equal to or greater than the value of the property you sold in the exchange. (In exchange lingo, we say "Trade up or equal.")

2. If you had debt on the property you sold, you should have debt equal to or greater than that amount on the new property. (In exchange parlance, it's "Mortgage up or equal.")

Already, there's a exception to point out. In item #2 above, mortgage debt can be offset by cash contributions. In other words, if you want to have less debt on the new property than the old one, you can accomplish that and preserve your tax deferral by putting up more equity (cash) out of your pocket. Example: Old property value = $100,000; debt on old property = $50,000. New property value = $100,000; debt on new property = $30,000. Obviously, there's $20,000 that has to come from somewhere, probably your pocket. Assuming the $20,000 comes from you, your cash offsets your old debt and you have preserved the deferral of taxes on that amount. You haven't "mortgaged up or equal," but you've offset your mortgage with cash.

Some people think that the next requirement for maximum tax deferral is pretty obvious, and I suppose they're right. I still like to say it when I'm talking about maximizing your deferral, though. It is this:

3. Allow all of the proceeds from the sale of your old property to go into your exchange account, and use all of those proceeds in the new property.

In other words, if you don't use all of your sale proceeds in the new property, you're going to create a tax liability on anything you accept and don't use in that manner.

The last requirement is also pretty evident, but still is worthy of mention:

4. Conduct your exchange within the Safe Harbor of Section 1031 law.

Use an intermediary for your exchange. Have your exchange paperwork in place prior to the closing on the property you're selling. Identify your replacement property in the proper manner within the 45-day window allowed. Wrap up the closing of your replacement property before the end of the 180-day exchange period. And so forth.

Going one step further... you may have noticed that I have not ever referred to "full tax deferral" above. There are some items that appear on most closing statements that are not possible to avoid. If you are using a loan for part of the purchase price of the new property, there will likely be some expenses that relate to that loan that are not considered "exchange expenses." Among those expenses are such things as:

Points or assumption fees
Charges for credit reports
Title insurance or opinion
Loan fees/application fees

We advise our clients and their closing agents to settle tax prorations, security deposit tranfers, and any rent prorations outside of closing. Sometimes they do and sometimes they don't. When they don't, again, those are costs that are not considered exchange expenses.

And lastly, keep in mind that no one forces you to maximize your tax deferral. If you wish to receive some of the proceeds of the sale and are willing to accept the tax liability for doing so, you are certainly entitled to doing so.

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Ken Tharp

800-805-1031 toll free

INTEGRITY. PRECISION. SECURITY.

Copyright © 2009 By Ken Tharp, All Rights Reserved. * The Requirements for Maximum Tax Deferral * Contact Ken Tharp for information on Section 1031 tax-deferred exchanges anywhere in the United States.

Defining the Exchange Term "Like-Kind"

Ken Tharp - Section 1031 Exchanges, Iowa/U.S. (Iowa Equity Exchange) — Tue, 18 Aug 2009 16:12:13 -0500

Many people hear the term "like-kind" when they're talking about Section 1031 exchanges and they start to panic. Please, relax! I've got an easy way for you to figure out whether two properties are like-kind to each other for purposes of exchanging.

First of all, a caveat... the easy way only applies to real estate exchanges. I'll talk more about other types of exchanges later, but suffice it to say that it is more difficult to determine like-kind status in those exchanges. With real estate, however, it's pretty simple. I've heard other exchange people say, "All real estate is like-kind to all real estate." In my opinion, that simplifies things a little too much, and I'll give you an example why later.

For the meantime, here is the secret to determining whether a piece of real estate is like-kind to another piece of real estate within the exchange context: Ask yourself (or your client, if you are a real estate, tax, or legal professional) these questions:

(Regarding the property being sold) Did own this property with the intention of holding it as an investment or using it in the pursuit of my business or trade?
(Regarding the property being purchased) Do I intend to hold this property as an investment or use it in the pursuit of my business or trade?

If you (or your client) can answer, "Yes" to both of those questions and can substantiate his or her answer, the two properties are like-kind for purposes of exchanging.

Is a farm like-kind to an apartment building? In the vast majority of cases, the answer is yes. Is a rental house like-kind to a small-town office building? In the vast majority of cases, the answer is yes. Is a single-family home that was purchased with the intention of fixing up and reselling like-kind to a duplex? AHA! Here's an example of why all real estate is NOT like-kind to all real estate. Clearly the single-family home being rehabbed is real estate, but the IRS considers this property to be inventory in a business and not something that was purchased with the intention of being held for investment. I can hear you arguing "This was an investment!! I invested my hard-earned dollars to buy the house and now I'm investing my hard-earned dollars to fix up the place. Why doesn't that make it an investment??!?" A solid argument, I will admit, but one which you will lose when you face the IRS examiner.

It all comes down to the intent. Did you buy the property you are now selling with the intention of holding it as an investment? No, your intention was to fix it up and sell it. So it does not qualify for a Section 1031 exchange.

I promised to talk about non-real-estate exchanges, but this has already gotten a little lengthy. Let me bring this to a close by saying that the exchanges of business assets, etc. require a much higher standard when determining like-kind status. The IRS uses Asset Classes and Product Classes to determine whether two items are like-kind. The items must fall within the same class to qualify. I will write an article on busines asset exchanges in the future and address this issue more thoroughly. For now, just remember the two questions and you will be set!

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Ken Tharp

800-805-1031 toll free

INTEGRITY. PRECISION. SECURITY.

Copyright © 2009 By Ken Tharp, All Rights Reserved. * Defining the Exchange Term "Like-Kind" * Contact Ken Tharp for information on Section 1031 tax-deferred exchanges anywhere in the United States.

Can I Use a Section 1031 Exchange to Build or Improve a Property?

Ken Tharp - Section 1031 Exchanges, Iowa/U.S. (Iowa Equity Exchange) — Thu, 28 May 2009 10:43:06 -0500

Occasionally a client will ask that question, and we can usually answer, "YES!" It does depend upon exactly what the client's plans and intentions are, but in general, the replacement property in a Section 1031 exchange can be newly constructed during the exchange or substantially improved during the exchange. Here are the details:

Let's assume that an exchanger has sold his relinquished property and plans to construct a new duplex on a lot that he intends to purchase through his 1031 exchange. A key thing to remember is that once the exchanger takes title to the replacement property, any funds remaining in the exchange account will be transferred to the exchanger and will be taxable! Therefore, the improvements must be structured within the exchange in some way. The process to do this is by using an Exchange Accommodation Titleholder ("EAT") to hold title to the land until the exchange is complete. There is some similarity, then, to a Reverse Exchange in that the exchanger cannot hold title to both the relinquished property and the replacement property at the same time and must use an EAT.

In practice, how does this work? Consider this typical sequence of events:

Exchanger and buyer agree on a purchase agreement for the sale of exchanger's relinquished property.
Exchanger enters into an exchange agreement with a Iowa Equity Exchange.
Exchanger assigns the purchase agreement to Iowa Equity Exchange.
Closing occurs on the relinquished property.
Exchanger informs us of his intention to construct a duplex as his replacement property.
Exchanger and seller agree on a purchase agreement for the purchase of the lot for the duplex.
Exchanger assigns the purchase agreement to the EAT, which is a single-purpose LLC formed by Iowa Equity Exchange for the express purpose of holding title to this property.
Closing occurs and title for the lot is transferred to the EAT.
The exchanger directs the construction of the duplex (or works with a contractor to do so). Funds for construction are drawn from the exchange account at the direction of the exchanger and are paid by the EAT.
Upon completion of the construction or completion of the exchange period (see below), title can be transferred from the EAT to the exchanger and the exchange is finished.

The process is identical if the exchanger wishes to purchase a property and add substantial improvements within his exchange.

The primary hurdle to the construction/improvement exchange is that of timing, which can be a concern in this type of exchange. Both the 45-day Identification Period and the 180-day Exchange Period still apply. The property to be purchased must be unambiguously identified during the 45-day ID period. This means that construction must either be completed during the 180-day exchange period, meaning the identification will be that of a fully-completed building OR the exchanger must be able to see into the future and accurately describe how far along the construction process will be by the end of the 180-day period. By using the 3-Property Rule for identification, it is possible to identify the property in three different stages of completion to somewhat circumvent this obstacle.

Construction/improvement exchanges carry a significantly higher fee than standard exchanges. This is due to the need to create and administer an LLC, plus the additional time requirements of handling payments to contractors during the construction phase. Contact us for details on fees.

Just as every other Section 1031 exchange has its unique qualities, so does every construction/improvement exchange. Construction and improvement exchanges are an extremely valuable tool that can allow the exchanger to end up with just the property that he or she desires. If you have general or specific questions about the process, please feel welcome to get in touch.

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Ken Tharp

800-805-1031 toll free

INTEGRITY. PRECISION. SECURITY.

Copyright © 2009 By Ken Tharp, All Rights Reserved. * Can I Use a Section 1031 Exchange to Build or Improve a Property? * Contact Ken Tharp for information on Section 1031 tax-deferred exchanges anywhere in the United States.

Government 101 - Boring Title, Not Boring Information

Ken Tharp - Section 1031 Exchanges, Iowa/U.S. (Iowa Equity Exchange) — Wed, 13 May 2009 15:31:28 -0500

Granted, a title of "Government 101" likely doesn't draw in many readers. I hope that the subtext indicating that the information isn't boring will encourage a few folks to take a look at this fantastic video.

Have you ever wondered about the origins of our republic? Why it is such an incredible structure? What it is that we will lose if we are not vigilant? I stumbled onto a blog yesterday by Jeff Williams of Four Legacies Mortgage in West Des Moines, Iowa. His blog is called The Money Clip. There's lots of great information there, but this video caught my attention. The video is called The American Form of Government. It's about ten and a half minutes long. Invest the time to be reminded of what you learned back in government class (if you as old as I am, that is; I'm not sure what they teach these days). You will not regret it!!

CLICK HERE FOR THE VIDEO: The American Form of Government

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Ken Tharp

800-805-1031 toll free

INTEGRITY. PRECISION. SECURITY.

Copyright © 2009 By Ken Tharp, All Rights Reserved. * Iowa Landlord Association Spring Educational Seminar & Trade Show * Contact Ken Tharp for information on Section 1031 tax-deferred exchanges anywhere in the United States.

Iowa Landlord Association Spring Educational Seminar & Trade Show

Ken Tharp - Section 1031 Exchanges, Iowa/U.S. (Iowa Equity Exchange) — Tue, 28 Apr 2009 10:00:52 -0500

Short notice, but I wanted to announce the Spring Educational Seminar and Trade Show of the Iowa Landlord Association. It will take place on Thursday, April 30, at the downtown Holiday Inn. There will be a succession of speakers on relevant topics to landlords. During breaks, please stop in at the vendor trade show and be sure to stop at the Iowa Equity Exchange booth to say hello. We will be there with our display and information to help Iowa investors with their Section 1031 exchanges.

You can find out more about the Iowa Landlord Association at http://www.iowalandlord.org/public/home.asp, including contact information for the group to register for the seminar.

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Ken Tharp

800-805-1031 toll free

INTEGRITY. PRECISION. SECURITY.

Two Rivers REIA First Annual Convention - May 9th, 2009

Ken Tharp - Section 1031 Exchanges, Iowa/U.S. (Iowa Equity Exchange) — Tue, 28 Apr 2009 09:46:29 -0500

Announcing the first annual convention of the Two Rivers Real Estate Investors Association, to be held on May 9, 2009, at the Des Moines Holiday Inn Airport Conference Center. Two nationally-recognized speakers will be making presentations to the group: Larry Goins, of South Carolina, and Pete Youngs, of Georgia. Larry's talk on wholesaling is titled "The Ultimate Buying/Selling Machine." Pete will present a detailed description of rehabbing for profits. Details and registration information is available at http://www.tworiversreia.org /Convention_Registration.html

This event promises to be a fantastic opportunity to network with fellow investors and hear a couple of the top national speakers on investing. I know I'm looking forward to it! Don't miss it if you are going to be in town or near town! There will be a vendor's trade show in conjunction with the event and Iowa Equity Exchange will be present as usual. We will be there with our display and information to help Iowa investors with their Section 1031 exchanges. Please stop by and say hello.

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Ken Tharp

800-805-1031 toll free

INTEGRITY. PRECISION. SECURITY.

Copyright © 2009 By Ken Tharp, All Rights Reserved. * Two Rivers REIA First Annual Convention - May 9th, 2009 * Contact Ken Tharp for information on Section 1031 tax-deferred exchanges anywhere in the United States.

What Do I Put in My Purchase Agreement if I Want to Do a Section 1031 Exchange?

Ken Tharp - Section 1031 Exchanges, Iowa/U.S. (Iowa Equity Exchange) — Fri, 10 Apr 2009 15:57:30 -0500

One of the most common questions we receive is something along the lines of "What do I put in my Purchase Agreement if I want to do a Section 1031 exchange?" The answer can sometimes be, "Nothing," although we do suggest that you use what is known as a cooperation clause. By law, there is no requirement for the cooperation clause. What is required, however, is that the contract be assignable, or in most states, that there be no restriction on the contract's assignability. In other words, your purchase agreement should not have language that says "This contract may not be assigned to another party by the buyer or the seller."

The reason for this is simple - in an exchange, the exchanger must assign the purchase agreement to the intermediary for the exchange to proceed. If a prohibition to assigning is present and it is not stricken from the contract, an exchange is not possible. What if you have already signed a contract that is so-restricted? As long as both sides agree, an exchange is still possible by using an addendum where the parties agree to allow assignments.

A more common approach is for the seller to lay his cards on the table and disclose to the buyer that he intends to perform a Section 1031 exchange by including a cooperation clause in the purchase agreement. There is really no downside to doing so when selling. By doing so, the exchanger establishes his intent and elicits the cooperation of the buyer. There is no loss of negotiating power when acting as the seller.

On the contrary, when a client has already sold his relinquished property and entered into an exchange, there can be a loss of negotiating power when offering to buy a replacement property. Let's assume that the exchanger has already formally identified three properties that could serve as his replacement property. For whatever reason, two of them are no longer available. (Perhaps they were sold to another party, or the seller took them off of the market, or one had a fire, etc.) Now the exchanger has but one property he can purchase to complete his exchange. If the purchase agreement contains language requesting the seller's cooperation for an exchange and the seller is savvy about exchanges, that seller may justifiably believe that he has the upper hand in any negotiations. That is why we often suggest that the exchanger leave out the cooperation language until after negotiations have concluded, instead having them make sure that the agreement does not restrict assignments. Then after the fact we can have an addendum added to the agreement that contains the cooperation language.

Now, what is this "cooperation language" that I've referred to so many times? Here is our version for when you are selling:

“It is the intention of Seller to transfer the above-listed property pursuant to Internal Revenue Code Section 1031, which sets forth the requirements for tax-deferred real estate exchanges. Seller’s rights and obligations under this and future agreements will be assigned to Iowa Equity Exchange, qualified intermediary, for the purpose of completing an exchange. Buyer of the above-listed property agrees to cooperate with Seller and Iowa Equity Exchange in a manner necessary to enable Seller to complete said exchange. Such cooperation shall be at no additional cost or liability to Buyer.”

Feel free to copy and paste this into your purchase agreements and get in touch with us whenever you are considering an exchange!

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Please consider IOWA EQUITY EXCHANGE as your trusted source for answers to your questions about Section 1031 like-kind tax-deferred exchanges. Contact us at your convenience for prompt, accurate information. Please think of us for your next exchange.

Ken Tharp

800-805-1031 toll free

INTEGRITY. PRECISION. SECURITY.

Copyright © 2009 By Ken Tharp, All Rights Reserved. * What Do I Put in My Purchase Agreement if I Want to Do a Section 1031 Exchange? * Contact Ken Tharp for information on Section 1031 tax-deferred exchanges anywhere in the United States.

Selling, Serving and Being Serious

Ken Tharp - Section 1031 Exchanges, Iowa/U.S. (Iowa Equity Exchange) — Mon, 30 Mar 2009 10:42:20 -0500

This will be a first... I'm going to give you an inside look at what it is we are trying to do here at Iowa Equity Exchange. First of all, props to Jeffrey Gitomer for a column on this topic that prompted me to devote detailed thought to these things. Let's start out with a definition.

When you think of someone who is "serious," does that conjure up the image of a staid, stoic individual, boring and stiff? In business, that's just not the case. The actions that are taken by a business build its image. If your business shows a desire to serve that is accompanied by the ability to serve, the public (your customers/clients) may perceive you as serious. Isn't that what you want, to be taken seriously by your customers and clients?

As a businessman, I certainly want my business to be taken seriously by its clients. Here's a list of some of the things I want our clients to know about us:

I want them to know that we are serious about helping them. Most of our clients have a lot of questions both before they enter into an exchange and during their exchange. We are available for them to talk to by calling our office number pretty much anytime during normal waking hours, seven days a week. On the chance that we do not answer their call in person, it's rare that the call does not get returned within an hour.
I want our clients to know that we are serious about knowing what we're doing. Handling Section 1031 exchanges is all we do. This is our full-time business, and we take the actions necessary to stay on top of changes that affect exchanges. We are one of a very small percentage of qualified intermediary companies that belong to the Federation of Exchange Accommodators, the national association for the exchange industry.
I want our clients to know that we are serious about being an online leader. We invest in our future by maintaining an online presence. regularly updating our website. We post blog articles periodically. We maintain and update our LinkedIn profile, including linking this blog to our profile and uploading presentations to our profile. You can follow us on twitter (@kentharp), and we're on facebook.
I want our clients to know that we are serious about being friendly and creating a pleasant atmosphere. Being friendly doesn't cost any more than not being friendly, and it sure makes life more pleasant.
I want our clients to know that we are serious that now is the time. Our heads are not in the sand; we recognize that times have changed. Regardless of conditions, though, we will strive to maximize the opportunities that exist now, not wait for things to change.
I want our clients to know that we are serious about striving for perfection in everything we do. We're not there yet and we may never get there, but we'll keep trying. Our clients also discover that we recover from any imperfections in extremely short order.
I want our clients to know that we are serious about doing the right thing. Our clients' best interests are always the inspiration for our actions. Sometimes this means telling our clients that an exchange may not be the best course of action for them, meaning we lose potential business. If it's best for the client, it will serve us best in the long run.

How does all of this relate to selling? It is my belief that a business cannot really attempt to sell its services until its clients are comfortable that the business is serous about itself. The only real way to show your clients that you are serious about your business is to serve them properly. After you provide quality service to your client and establish that you can be taken seriously, making the sale is almost a foregone conclusion.

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Ken Tharp

800-805-1031 toll free

INTEGRITY. PRECISION. SECURITY.

Iowa Farmland Value Report

Ken Tharp - Section 1031 Exchanges, Iowa/U.S. (Iowa Equity Exchange) — Thu, 12 Mar 2009 16:50:41 -0500

In a further confirmation that values have peaked at least for now, the REALTORS® Land Institute semi-annual survey shows a 7.6% drop in the price for farmland over the six months ending February 28 of this year. This survey is conducted every six months and consists of input from the state's farmland real estate community. The previous survey indicated an increase of 6.6%. The previous twelve months, therefore, show approximately a 1% drop in values.

No one is necessarily panicking about this drop or leveling off, however. According to Troy Louwagie, REALTOR® with Hertz Farm Management and also the spokesman for the Iowa Farm Land Chapter No. 2 REALTORS® Land Institute, the people behind the survey, "Land went up about 70 percent in the past five years. We probably were due for a correction." He also points out that prices are still at roughly the level they were a year ago, meaning that values remain strong.

Sam Kain of Farmers National Company projects the future values of land to remain relatively stable. He's not expecting a precipitous drop, but wouldn't be surprised by small decreases. Mr. Kain points out two factors that could help support land values: 1) investors with cash may look at land as one of the safest places to put that cash in the midst of the general market uncertainties we are facing, and 2) current farmers and land owners may believe that their equity is best used by staying put and not selling in the immediate future, meaning that available land may be somewhat more scarce than in previous years.

Here is a graphic of the breakdown statewide, courtesy of The Des Moines Register:

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Ken Tharp

800-805-1031 toll free

INTEGRITY. PRECISION. SECURITY.

Have Iowa Farm Land Values Peaked?

Ken Tharp - Section 1031 Exchanges, Iowa/U.S. (Iowa Equity Exchange) — Fri, 06 Mar 2009 16:28:11 -0600

In what could hardly be termed a surprise, the Des Moines Register reported on February 21, 2009 that farm land values in Iowa declined 6% during the final quarter of 2008 according to the Federal Reserve Board of Chicago. This is the first such drop in a decade. The primary contrbuting factor is the sharp decline in commodity values since the summer, in many cases as much as a 50% drop.

The 6% drop in Iowa was discovered during a survey of 209 banks in the upper Midwest, including not only Iowa, but Indiana, Illinois, Wisconsin and Michigan as well. Iowa's decline was the sharpest of the five states surveyed.

Mike Duffy, the often-quoted economist at Iowa State University, pointed out that approximately 80% of farm sales in the past year or so have been to neighboring farmers. He said "Up to now, farmers have probably kept farmland prices up simply because when a good piece of land they've had their eyes on for a long time comes up for sale, they'll bid for it even if the price is high. They may start backing off and maybe we'll see some more outside investors come in, particularly since farmland did better than just about anything else as an investment last year."

Randy Hertz of Hertz Real Estate Services, offered this on farm land values: "What has happened is that we're probably about even with a year ago in farm values," indicating that the decline comes after an increase during the previous nine months, leaving values about flat during 2008. "We had a big boost in midyear when commodity prices shot up and then we've probably seen about a 10 percent decrease since then," Hertz said.

Mr. Hertz also noted that there are still some farmland that commands high prices. Specifically, Hertz cited two parcels near Prairie City that sold in the previous week for $7,050 and $6,850 per acre for top-quality land.

Most longtime observers of Iowa agriculture doubt that what is to come will be anything like the farm crisis of the 1980s, when land prices dropped over 60% over a seven-year period. Most believe that the high leverage many farmers used back in those times was the cause of many of the problems, and for the most part that leverage does not exist today. Hertz said. "Today they're in a much better cash position compared to 25 years ago. They have more equity in the land, and their loans are less likely to go upside-down on them."

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Ken Tharp

800-805-1031 toll free

INTEGRITY. PRECISION. SECURITY.

Is the Term "Like-Kind" Confusing to You? Here's a Simple Explanation

Ken Tharp - Section 1031 Exchanges, Iowa/U.S. (Iowa Equity Exchange) — Mon, 02 Mar 2009 16:35:55 -0600

Does it confuse you when you hear that property in an exchange must be exchanged for "like-kind" property? In the talks that I give to real estate agents, investors, attorneys and accountants, I think I've hit on an easy way to determine whether or not the property being sold is like-kind to the property being purchased.

Before getting into the details, let's first establish that virtually all real estate is like-kind to virtually all other real estate. That makes it pretty simple, doesn't it? But there is one major qualifier. Property in an exchange must have been "held as an investment or used in the pursuit of a business or trade." Those words come directly out of Section 1031 of the code.

That qualifier is the basis for my easy way to determine whether or not properties are like-kind. Here's the "secret:" Regarding the property you intend to sell, ask yourself this question:

Did I hold this property as an investment or use it in the pursuit of my business or trade?

If you can honestly answer, "Yes" to that question, then the property will qualify for the exchange. However, that is only half of the battle; the property you intend to purchase must also qualify. In order to determine whether it does, ask yourself this question:

Do I intend to hold this property as an investment or use it in the pursuit of my business or trade?

Again, if you can honestly answer that question, "Yes," then it also qualifies and you have identified like-kind property for your exchange.

EXAMPLE:

So, what kind of real estate doesn't qualify as like-kind? The easy answer is "property that hasn't been held as an investment or used in the pursuit of a business or a trade." What that means in English is that if you purchased a property without the intent to hold is as a long-term investment, it does not qualify for an exchange. Property purchased to flip would be an example. Can one's intent change? Yes, but it is up to the exchanger to establish that intent has changed through such things as holding the property out for rent, actually renting it, etc.

In conclusion, if you just remember to ask yourself (or have your client ask himself) those two questions, you will know whether or not your properties are like-kind to one another.

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Please consider IOWA EQUITY EXCHANGE as your source for answers to your questions about Section 1031 like-kind tax-deferred exchanges. Contact us at your convenience for prompt, accurate information. Please think of us for your next exchange.

Ken Tharp

800-805-1031 toll free

INTEGRITY. PRECISION. SECURITY.

Copyright © 2009 By Ken Tharp, All Rights Reserved. * Is the Term "Like-Kind" Confusing to You? Here's a Simple Explanation * Contact Ken Tharp for information on Section 1031 tax-deferred exchanges anywhere in the United States.

The Top Ten (Actually, Eleven) Reasons People Use Section 1031 Tax-Deferred Exchanges

Ken Tharp - Section 1031 Exchanges, Iowa/U.S. (Iowa Equity Exchange) — Thu, 12 Feb 2009 19:50:31 -0600

learly, the overriding reason is the ability to defer payment of capital gain taxes, including the recapture of depreciation. With depreciation recapture at 25% (or more, depending upon the type of depreciation taken and the period over which that depreciation was taken) and federal capital gain tax at 15%, plus state capital gain taxes (depending upon the state, of course), taxes can easily account for 30% or more of the gain recognized. But there are other reasons that taxpayers exchange. Most exchanges have secondary reasons for exchanging in addition to tax deferral. Among those reasons are:

Consolidation. Example - taxpayer owns several properties, perhaps in different states, and wishes to consolidate his holdings into one property.
Diversification. Example - taxpayer owns one large property and wishes to diversify her holdings over a wider group of properties.
Relocation. Example - taxpayer has moved to new location and wishes to move his investment to the same location.
Reduction of management headaches. Example - taxpayer has owned high-maintenance property and wishes to reduce management responsibilities by exchanging into triple-net leased property.
Solution to partnership problems. With proper advance planning, property owned by a partnership can be sold and the partners can go their own ways, some choosing to exchange and others cashing out.
Increase cash flow. Example - taxpayer owns raw land that produces little or no income and wishes to exchange into income-producing property.
Estate planning reasons. Example - taxpayer owns one property but has three heirs who do not agree on how to dispose of the property after the death of the taxpayer. Taxpayer can exchange out of one property into three similar properties and each heir can decide how to handle his or her own property.
Re-leveraging of equity. As each year of ownership passes, one's equity in a property typically increases. Generally, the return on equity that the property produces decreases annually. Exchanging allows a taxpayer to re-leverage her equity.
The increase of equity by buying at a discount. If you believe, as the old real estate adage goes, "You make your money when you buy," should you not buy more often? A rhetorical question, to be sure, but if you are able to buy at a discount, tax-deferred exchanges can create wealth more quickly than any other technique.
Debt issues. Example - taxpayer owns a fleet of vehicles for his business. His old practice was to sell 25% of them each year and replace them with new vehicles. By taking the maximum deductions, his accountant advised him that he came out ahead by borrowing the money to purchase the new vehicles. In today's world, where borrowing is more difficult, the savvy business owner recognizes that by structuring this transaction within a 1031 exchange, he can reduce or eliminate his need to borrow money and likely end up ahead in both cash flow and tax benefits.

****

Ken Tharp

800-805-1031 toll free

INTEGRITY. PRECISION. SECURITY.

Copyright © 2009 By Ken Tharp, All Rights Reserved. * The Top Ten (Actually, Eleven) Reasons People Use Section 1031 Tax-Deferred Exchanges * Contact Ken Tharp for information on Section 1031 tax-deferred exchanges anywhere in the United States.

To Combine or Not to Combine - That is the Question

Ken Tharp - Section 1031 Exchanges, Iowa/U.S. (Iowa Equity Exchange) — Wed, 04 Feb 2009 16:33:30 -0600

What the title of this blog refers to is whether or not it makes sense to sell or buy more than one property in a single Section 1031 tax-deferred exchange. First we must establish the fact that more than one property can be sold and/or purchased within one 1031 exchange. In other words, I can sell two or more properties and combine those sales into one exchange, out of which I can buy one replacement property. Likewise, I can sell one property and buy two or more properties as my replacement property in an exchange. Or I can sell two or more propertes and buy two or more properties as my replacement property in a single exchange.

Many times clients or potential clients contact us with questions about the benefits and the hurdles when considering whether to combine multiple properties into one 1031 exchange. Let's try to break it down. Here are some questions to consider when making such a decision:

Regarding multiple relinquished properties:

Will my relinquished properties all close at once, or within a short period of time? (If so, it will make combining them into one exchange much easier.)
If not, am I sure that they will all close with enough time remaining to complete the exchange within the 180 days allowed?

Regarding multiple replacement properties:

Will I be able to complete the purchase of all replacement properties within the 180 day exchange period?

Regarding multiple relinquished properties AND multiple replacement properties:

Will my relinquished properties close in a sequence that will allow me to close on the replacement properties in accordance with my purchase agreements and/or the sellers' requirements?

As I often say when discussing Section 1031 exchanges, sometimes an example or two is better than all of the explanation in the world.

For the first example, let's assume that I own two properties and each one is worth $150,000. I would like to sell both and purchase as my replacement property one larger property valued at $300,000. Doable, to be sure, but there are some potential pitfalls. Let's say my first sale closes on January 1. This establishes the beginning date of the exchange, which means it will end 180 days later on June 30 (assuming we're not in a leap year). The seller of the property I want to buy is willing to wait until April 1 to close. On March 15, the date the second sale was scheduled to close, the buyer of my second property runs into difficulty obtaining financing, or worse, backs out of the agreement. The seller of the property I want to buy may allow me an extension, but he may not. Even with an extension, if the second relinquished property doesn't close in time to allow me to close on the property I want to buy, my exchange is in serious jeopardy of failing.

For the second example, let's assume the reverse: I own one property that I am selling for $300,000 and I want to purchase two properties, each worth $150,000. This setup is usually less problematic than the first example, but there still can be issues. Let's again say that closing of the relinquished property occurs on January 1. My exchange account is opened with $300,000, and I identify only the two properties that I want to purchase as my potential replacement property. On March 15, I close on the first property. However, the second property has a cloud on the title, or there is an environmental issue that must be resolved. There could be any number of possible problems that could keep the second property from closing. (This is one reason to always identify a reasonable number of potential properties during the ID process, subject of course to the limitations that the rules impose, so that you have a fallback plan if something prohibits you from closing on your first choice.) If the issues preventing the purchase from being completed are not resolved prior to the end of the exchange period on June 30, my exchange will only be partially successful and I may have a sizable tax bill for the money I could not put into the second property I had planned to purchase.

The answer to the question of whether you should combine properties into one exchange or not is the favorite answer of all advisors: It depends. With proper advance planning and careful oversight, it is entirely possible to complete a successful exchange with multiple properties on either or both sides of the exchange; we do it on a regular basis for our clients. But do your homework and make sure your ducks are in a row before entering into what is typically an endeavor that carries a little more risk than a regular one-property-for-one-property Section 1031 exchange.

****

Ken Tharp

800-805-1031 toll free

INTEGRITY. PRECISION. SECURITY.

Copyright © 2009 By Ken Tharp, All Rights Reserved. * To Combine or Not to Combine - That is the Question * Contact Ken Tharp for information on Section 1031 tax-deferred exchanges anywhere in the United States.

The Power of the Section 1031 Tax-Deferred Exchange - Free Spreadsheet

Ken Tharp - Section 1031 Exchanges, Iowa/U.S. (Iowa Equity Exchange) — Thu, 29 Jan 2009 13:44:20 -0600

Here's another spreadsheet for your entertainment and enlightenment. If you've been following this blog for awhile, you may remember an earlier spreadsheet that compared buying and holding a property for ten years to buying the same property, holding it for five years, exchanging into another property, and holding the new property for another five years.

This new spreadsheet takes a little different approach. Its purpose is to compare the value of exchanging to simply selling and reinvesting without the benefit of an exchange.

Remember, there are four sources for income/profit from a real estate investment:

Cash flow before taxes
Tax benefits
Principal reduction
Appreciation

This spreadsheet ONLY addresses #4, Appreciation.

In the first section of the spreadsheet, you can enter the assumptions that you want to use. Here's a screen shot of that section, populated with some assumptions I made:

You can see that this sample investor is starting with $25,000 as a down payment. He's going to finance 90% of the purchase price of this new property.

When the property is sold, the assumption is that the sale expenses will be 7% of the total sale price, and that depreciation recapture, federal capital gain taxes and state capital gain taxes will total 30% on the gain recognized.

We go on to assume that properties will appreciate at 3% per year over the time frame of the comparison, and that each property will be held for five years.

All of these numbers are variable; you can use whatever you think is fair. The assumptions apply to each purchase and sale throughout the time frame of the comparison.

The next section of the spreadsheet calculates the net profits and available capital to move into the next property. It looks like this:

Comments: The Net Profits after the first period (which is five years, based upon the assumptions entered above) without the benefit of a 1031 exchange are $13,672. Adding the profits to the original $25,000 gives the Available Capital of $38,672 to use on the next property. In comparison, the exchanger would have $19,531 in profits and $44,531 as a down payment on the next property. Profits after the second period start to diverge between the exchanger and the non-exchanger even more: $21,149 for the non-exchanger, $34,790 for the exchanger. ($59,820 in Available Capital for the non-exchanger versus $79,321 for the exchanger.)

You can start to see the impact that deferral of taxes has on one's investment potential. Looking at the next section of the spreadsheet will drive the point home:

Comments: It is not uncommon to see the Net Profits double after only three periods based on reasonable assumptions. They don't quite double using my assumptions, but I'd still rather be moving into the fourth property with almost $62,000 in profits versus only $32,714. You can follow through the fourth period and see the Power of the Section 1031 Tax-Deferred Exchange!

I will be happy to email this spreadsheet to you for you to experiment with. If you'd prefer not to post your email address in the comments section, go to our website (Iowa Equity Exchange) and click on the "Contact Us" link. Send an email to the email address on that page and we will promptly send you the spreadsheet. I hope it's helpful to you and that you'll have some fun with it.

****

Ken Tharp

800-805-1031 toll free

INTEGRITY. PRECISION. SECURITY.

Copyright © 2009 By Ken Tharp, All Rights Reserved. * The Power of the Section 1031 Tax-Deferred Exchange - Free Spreadsheet * Contact Ken Tharp for information on Section 1031 tax-deferred exchanges anywhere in the United States.

Apartment Sales Report - Des Moines, Iowa

Ken Tharp - Section 1031 Exchanges, Iowa/U.S. (Iowa Equity Exchange) — Tue, 27 Jan 2009 16:30:38 -0600

I hate negative news. But facts is facts. When it comes to the sale of apartment properties in the Des Moines market, there's not a lot of positive news right now. If you only want positive news, skip to the last paragraph and I'll give you the best spin I can come up with.

According to Rick Krause, Senior Associate with CBRE Richard Ellis/Hubbell Commercial, sales transactions involving apartment buildings in Polk County were down 48% in 2008 compared to 2007. Dollar volume was down an even higher percentage: 62%. This information comes from Rick's self-published monthly newsletter, the Central Iowa Income Property Newsletter, which he has produced for over six years. It is a short, informative newsletter that reaches over 90% of apartment owners in nine central Iowa counties. (Email Rick if you would like to be added to his mailing list.)

Transactions considered include garden-style apartments, apartment conversions, and apartments with elevators. The raw numbers show that there were a total of 72 transactions in 2008 versus 139 in 2007. The overall sales volume for these properties in 2007 was $81 million; in 2008 it dropped to $31 million.

Comparing 2008 numbers to two years ago is even more bleak. Total transactions went from 146 in 2006 to the 72 mentioned above in 2008 (down 51%), while dollar volume plummeted from $145 million in 2006 to 2008's total of $31 million mentioned above (down 79%!).

Breaking things down another way, high dollar transactions were down, too. In 2008, the sale price of only five transactions exceeded $1 million, compared to 18 in 2007 and 19 in 2008. Averaging the transactions for the three years shows the following:

2008 average transaction = $431,000
2007 average transaction = $583,000
2006 average transaction = $986,000

The positive spin to all of this negativity is that things can't get much worse. Rick believes that commercial real estate transactions will increase in 2009. Reality is setting in for many investors who are considering the sale of their properties. Reality has already set in for some who, for one reason or another, must sell in the near future. Those who have the ability to purchase in this market stand to benefit from these newly-realistic sellers.

****

Ken Tharp

800-805-1031 toll free

INTEGRITY. PRECISION. SECURITY.

Copyright © 2009 By Ken Tharp, All Rights Reserved. * Apartment Sales Report - Des Moines, Iowa * Contact Ken Tharp for information on Section 1031 tax-deferred exchanges anywhere in the United States.

Liquidity of funds - doesn't sound exciting? Read on...

Ken Tharp - Section 1031 Exchanges, Iowa/U.S. (Iowa Equity Exchange) — Thu, 22 Jan 2009 12:41:32 -0600

What could be more exciting than a discussion of the liquidity of funds, right? Okay, so it sounds pretty dry. Let me try to explain why it's actually of critical importance.

In my opinion, the cornerstone responsibility that a Qualified Intermediary has to his client is to protect the client's money while it's in the QI's possession. If the QI does something that makes it so his client's money isn't available when it's needed, or isn't worth as much as it was when it was transferred to the QI, then it really doesn't matter how well the QI prepared the documents, or how in tune with the laws that affect Section 1031 exchanges he is, now does it? The QI who places his clients' funds and accounts at risk is on a track for disaster.

Unfortunately, there have been a few disasters in the QI industry. The numbers are very, very small number in comparison to the number of practitioners; a tiny fraction of one percent, thankfully. It's not beneficial to delve into any specific failures. Instead, I will point out that, in every case about which I am aware, the crux of the problem was that the QI had, knowingly or unknowingly, placed his clients' funds at risk.

What can be done to avoid these risks as an exchanger?

Ask your QI where he or she intends to hold your money. The answer, in my opinion, should be that it will be held in an account that is strictly segregated from all other exchange accounts of the QI. No pooling or aggregating of accounts should be allowed. Ask your QI if he or she pools funds with other exchangers.
In addition and equally as important, ask your QI in what type of account the funds will be held. Again, in my opinion, the best answer is an FDIC-insured money market account. Investing funds in just about any other type of account leaves those funds subject to the risks of the market. In some cases of QI failure, funds were invested in something called "auction rate securities," which gave the appearance of liquidity but failed that test as the overall market went south. The only risk that money market accounts carry is the risk of failure of the FDIC to honor its guarantee. Most investors would feel fairly confident of that not happening.

We sometimes have a client who simply signs the documents to start an exchange without paying any attention to what we intend to do with their money. We like to point out to them what our plans are so they can feel comfortable, even though it may not have occurred to them to feel otherwise. Do not just blindly turn your money over to your QI. Ask questions and satisfy yourself that ALL of your money will be available when you need it to close on your replacement property!

****

Ken Tharp

800-805-1031 toll free

INTEGRITY. PRECISION. SECURITY.

Copyright © 2009 By Ken Tharp, All Rights Reserved. * Liquidity of funds - doesn't sound exciting? Read on... * Contact Ken Tharp for information on Section 1031 tax-deferred exchanges anywhere in the United States.

I've Been MeMe'd

Ken Tharp - Section 1031 Exchanges, Iowa/U.S. (Iowa Equity Exchange) — Mon, 19 Jan 2009 14:44:57 -0600

Georgia Weaver has memed me: http://activerain.com/blogsview/888822/Ive-been-memed

Okay, I'm game... Seven things people may not know about me:

1. My degree is in music education and performance. (I've strayed a bit from there...)

2. I enjoy woodworking in my fairly messy garage shop. (My father was way more skilled than me with much less in the way of tools, but I still enjoy it.)

3. I teach eight-hour classes to attorneys and accountants on Section 1031 exchanges for their continuing education credits. (It's a little intimidating to someone who is neither, but I just remind myself that I had to stand in front of a group of fifth and sixth graders with musical instruments they couldn't control; that calms me somewhat.)

4. My wife and I sponsored a Vietnamese family by ourselves in 1979. (We're still friends with them; they've been very successful in spite of us.)

5. I made the communion boxes that our church uses to minister to those who cannot come to church.

6. In the late 1960's, I played drums in a band called The Fantabulous Trojans. (Named before I joined, so I do not claim nor do I desire any credit for the name.)

7. I have Jason Smith completely buffaloed.

The following rainers should hereby considered themselves tagged (in alphabetical order):

Jen Hudson http://activerain.com/jenhudson

Luke Landis http://activerain.com/lando0817

Andrew Lietzow http://activerain.com/alietzow

Sandi Lincoln http://activerain.com/blogs/sandilincoln

David Matney http://activerain.com/matney

Brian Wentz http://activerain.com/bwentz

Rod White http://activerain.com/landandgame

THE RULES: (as passed along to me...)

Create a blog post with a link to the person who so happily tagged you for a MEME. See above.
List all of these rules in your post. Feel free to cut and paste this.
Share 7 things that others may not know about you. Do you have or did you had a life outside of real estate?
Identify 7 other ActiveRain members to tag for a MEME, and provide links to their blogs in your own MEME post.
Contact each of the tagged members and let them know that you were indeed fast enough to catch them and that you did indeed tag them...no matter how much they say you missed them!
No schoolyard rules in this MEME, nope you gotta do it if you are tagged. (I hear the MEME police are out in force, rounding up folks who ignore this "invitation")
Post a link to your MEME in the comments of this post - the one in which you were publicly tagged!
Include your post in the MEME's Group. (Join the group first)

Section 1031 Exchanges and the Auction Industry (Part 3)

Ken Tharp - Section 1031 Exchanges, Iowa/U.S. (Iowa Equity Exchange) — Wed, 14 Jan 2009 13:57:28 -0600

In the summer of 2008, I was honored to be asked to author an article for The Auctioneer, the official publication of the National Auctioneers Association, on the subject of Section 1031 exchanges and their application within the auction industry. The article was published in the September 2008 issue. If you would like to access the article online, it can be found on pages 62-64 of this link: The Auctioneer. The article is reprinted in three blog entries; this is the third of the three. (Part 1 can be found here; Part 2 here.)

What is the difference between the exchange agent and the closing company? Can they be the same company or must they be different? The exchange company oversees the closing to ensure that it complies with the requirements of Section 1031. The closing company actually conducts the closing and cooperates with the exchange company to meet those requirements. Restrictions within Section 1031 prevent certain parties who are agents of the taxpayer from functioning as their Qualified Intermediary. This includes relatives, the exchanger’s attorney, accountant, employee, investment banker or real estate broker or agent. The code specifically excludes a title company from the list of disqualified parties. Often, title companies that also function as Qualified Intermediaries operate their exchange business under a different name. If you consider having your clients use a closing company as an intermediary, before you refer business to them you should be satisfied that they are knowledgeable about the intricacies of Section 1031 requirements. Working with a full-time exchange specialist generally is a safer course than employing a closing company that tries to accommodate exchanges on a part-time basis.

Why do I care which exchange agent my client uses? If all exchange companies were the same, it would not matter which one your client used. If you deal with more than one exchange company, you will find over time that one is easier to deal with than the others. One will have more knowledge about exchanges. The people at one company will go out of their way to assist you and your auction client. In addition to knowledge and service, you and your client also need to consider the security of your client’s funds. Some QIs promote a bond that they have purchased. Others believe that a dual-signature account requiring the exchanger’s approval plus the directions of the QI to move money is a safer solution. Discuss security of funds with your QI so that you know what actions are being taken to protect your client’s money.

Is there a way an exchange can assist prospective buyers? If you often work with prospective buyers prior to a sale, you should familiarize yourself with reverse exchanges. If you hear a prospect say something like, “I wish I could bid on that piece of ground, but I’d need to sell this piece to buy it,” you should think of a reverse exchange. The term “reverse exchange” is a misnomer, because technically nothing is done in reverse order. In a reverse exchange, the exchanger directs a new entity, such as a single-purpose LLC, (typically formed by the QI) to purchase a property and hold title to it while the exchanger sells one or more properties as the first leg of the exchange. Once those properties sell, the QI arranges a standard exchange between the new entity and the exchanger. The advantage to you in an auction setting is that a reverse exchange can allow you to accept a winning bid from someone who needs to sell another property to buy the one you are auctioning. In conclusion, Section 1031 exchanges can be a boost to your auction business and a service to your clients. The basic structure and rules are straightforward and easy to understand. Idiosyncrasies within nearly every exchange make the involvement of a knowledgeable exchange expert imperative. Awareness of the basics by the auctioneer and the assistance of a respected exchange professional can help set your business apart from the crowd.

The foregoing information is a basic overview of Section 1031 tax-deferred exchanges. In no way does it substitute for tax or legal advice in a particular situation. Please consult your tax and legal advisors before beginning an exchange. Ken Tharp is the owner of Iowa Equity Exchange, a Qualified Intermediary service located in West Des Moines, Iowa. He has been a real estate investor in central Iowa for thirty years. His background includes construction, property management, sales, property rehabilitation and development. Iowa Equity Exchange handles all types of exchanges: delayed, improvement, construction, and reverse structures. For more information about exchanges, go to www.iowaequityexchange.com or contact Ken by phone (515-224-5259 office) or by email at ktharp@iowaequityexchange.com.

****

Ken Tharp

800-805-1031 toll free

INTEGRITY. PRECISION. SECURITY.

Copyright © 2009 By Ken Tharp, All Rights Reserved. * Section 1031 Exchanges and the Auction Industry (Part 3) * Contact Ken Tharp for information on Section 1031 tax-deferred exchanges anywhere in the United States.

Section 1031 Exchanges and the Auction Industry (Part 2)

Ken Tharp - Section 1031 Exchanges, Iowa/U.S. (Iowa Equity Exchange) — Wed, 14 Jan 2009 13:34:39 -0600

Specific questions about exchanges and auctions:

When should I get in touch with a QI? The important thing to remember is that exchange documents must be signed and in place before closing and transfer of title occurs. Many QIs can do the paperwork for an exchange in a matter of twenty-four hours or less, but most prefer to be involved earlier in the process. Bringing the QI in early enables him to gain a thorough understanding of the circumstances, and allows plenty of time for review of all documents and the answering of any questions.

Does a 1031 exchange become a contingency in the contract? How does an exchange affect my “as-is, where-is” sale? If you affiliate yourself with a knowledgeable QI, he will thoroughly explain to your client the various rules and regulations that must be adhered to in order to achieve a successful exchange. With a clear understanding of the requirements of Section 1031, the client can decide whether to proceed with or without an exchange. Whether or not the client enters into an exchange agreement with the QI, the sale can take place without contingencies as to the exchange. In essence, the exchange is external to the auction.

Do I need to put “cooperation language” in the contract? Is there any harm in putting that language in the contract? “Cooperation language” refers to disclosing to the other party that one is involved in an exchange. There is no specific requirement to disclose in the contract that an exchange is in process. On the other hand, in an auction setting it does no harm in disclosing the existence of an exchange. Many commercial real estate companies have incorporated cooperation language into their standard purchase contracts today. If cooperation language is not included in the purchase contract, it is important that there be no prohibitions to assigning the purchase contract, because it must be assigned to the Qualified Intermediary for the exchange to proceed. If present, prohibition language in the contract can be overridden by the parties by using an addendum.

We provide the following language to our clients for their purchase agreements: “It is the intention of Seller to transfer the above-listed property pursuant to Internal Revenue Code Section 1031, which sets forth the requirements for tax-deferred real estate exchanges. Seller’s rights and obligations under this and future agreements will be assigned to Iowa Equity Exchange, qualified intermediary, for the purpose of completing an exchange. Buyer of the above-listed property agrees to cooperate with Seller and Iowa Equity Exchange in a manner necessary to enable Seller to complete said exchange. Such cooperation shall be at no additional cost or liability to Buyer.”

Should I add “1031 Exchanges Welcome” to my advertisements, or something similar? It certainly cannot hurt anything, and it demonstrates your awareness of the process.

As an agent of the seller, can I promote to the seller the use of a particular exchange agent? There are many opportunities for the auction company to refer business to any number of service providers. Termite inspections, title companies, attorneys, accountants, and more are part of the typical real estate transaction. If you refer business to those sorts of companies, you should feel comfortable establishing a relationship with an exchange company for referrals to them as well.

(Article is continued in Part 3.)

****

Ken Tharp

800-805-1031 toll free

INTEGRITY. PRECISION. SECURITY.

Copyright © 2009 By Ken Tharp, All Rights Reserved. * Section 1031 Exchanges and the Auction Industry (Part 2) * Contact Ken Tharp for information on Section 1031 tax-deferred exchanges anywhere in the United States.

Section 1031 Exchanges and the Auction Industry (Part 1)

Ken Tharp - Section 1031 Exchanges, Iowa/U.S. (Iowa Equity Exchange) — Wed, 14 Jan 2009 13:07:11 -0600

The purpose of this article is to provide basic information about Section 1031 exchanges and discuss some particular matters that apply to exchanges and the auction industry. Ultimately, the idea is to supply you with another arrow in your quiver to distinguish your company from your competitor who is not familiar with the benefits that Section 1031 exchanges offer.

What is a Section 1031 exchange? Section 1031 of the Internal Revenue Code was made a part of US tax code in the early 1920’s, shortly after our modern income tax code came into being through the ratification of the Sixteenth Amendment in 1913. Section 1031 allows the owner of property held for investment or used in a business to dispose of that property through a sale and reinvest the sale proceeds in new property that will be held for investment or used in a business and defer any taxes on capital gains. (A taxpayer can exchange either real estate or business personal property or both.) The net effect of this tax savings is that more money is available for the purchase of the new property; sometimes a lot more money. There are a number of factors that determine the taxes owed on a sale when an exchange is not utilized, but in some cases taxes can represent a very sizable portion of the client’s proceeds. In extreme cases, more taxes might be due than proceeds received!

Over the years since Section 1031 was added to the US tax code, the IRS has made many aspects of exchanges much clearer as to what is allowable and what is not. Today, while there are still areas of gray, in most cases a knowledgeable exchange expert can offer a quick assessment of the viability of an exchange in a given situation.

When you are involved in selling property that has been held as an investment or used in a business and your client is considering reinvesting the proceeds in new property, it will demonstrate your concern for your client’s best interests if you bring up the possibility of a Section 1031 tax-deferred exchange. You do not need to be an expert in exchanges; you merely need to know an expert whom you can call on for help. Back in 1991, Treasury Regulations established the use of an entity known as a Qualified Intermediary to handle exchanges. Qualified Intermediary companies come in a wide variety of sizes, much like auction companies. Find out who handles exchanges in your area. One way of doing that is to visit the web site of the national association for the industry, the Federation of Exchange Accommodators, at www.1031.org, and use the Member Locator for your area. Many QIs, including my company, work nationwide. Establish a relationship with a QI or two so you can call on them for assistance when one of your clients might benefit from an exchange.

The diagram below illustrates the basic structure and requirements of an exchange.

(Article is continued in Part 2.)

****

Ken Tharp

800-805-1031 toll free

INTEGRITY. PRECISION. SECURITY.

Copyright © 2009 By Ken Tharp, All Rights Reserved. * Section 1031 Exchanges and the Auction Industry (Part 1) * Contact Ken Tharp for information on Section 1031 tax-deferred exchanges anywhere in the United States.

Section 1031 Exchanges - The Basics (Article #3)

Ken Tharp - Section 1031 Exchanges, Iowa/U.S. (Iowa Equity Exchange) — Wed, 14 Jan 2009 12:19:16 -0600

This is the third of three blog entries about the basics of Section 1031 exchanges. The first entry can be found here, Article #1, and the second entry is here: Article #2.

Quick review... the first hurdle for the standard exchange is that the properties must qualify. Second, you must establish your intent to exchange in writing prior to closing of the property you are relinquishing. Third, you must identify the property you intend to purchase using the guidelines allowed. Moving on to the final requirement...

#4 - Acquire the replacement property. Again going back to the date of closing of the property you sold, you must acquire (close on) your replacement property within 180 days following that date. At closing, the funds in your exchange account are paid directly from the exchange company to the closing agent.

This summarizes the most common type of exchange, referred to as a delayed exchange. Other exchange structures are possible, such as reverse exchanges (buy the new property before selling the old one), construction and improvement exchanges (build or improve the new property with proceeds from the sale of the old one), and exchanges of business assets (non-real-estate exchanges),

It is critical that exchange rules be followed carefully; to do otherwise will cause the exchange to fail. You should align yourself with a qualified exchange company that understands the intricacies of Section 1031 requirements. Employing a company that demonstrates knowledge of exchange regulations, is engaged in the exchange industry on a full-time basis, and supports the industry and the protection of consumers through membership in the Federation of Exchange Accommodators is the best way to ensure a successful result with your exchange.

****

Ken Tharp

800-805-1031 toll free

INTEGRITY. PRECISION. SECURITY.

Copyright © 2009 By Ken Tharp, All Rights Reserved. * Section 1031 Exchanges - The Basics (Article #3) * Contact Ken Tharp for information on Section 1031 tax-deferred exchanges anywhere in the United States.

Section 1031 Exchanges - The Basics (Article #2)

Ken Tharp - Section 1031 Exchanges, Iowa/U.S. (Iowa Equity Exchange) — Wed, 14 Jan 2009 12:07:06 -0600

This is the second of three blog entries about the basics of Section 1031 exchanges. The first entry can be found here: Article #1

Quick review... the first hurdle for the standard exchange is that the properties must qualify. Moving on...

#2 - Establish your intent to exchange. Now that you have determined that the property you are selling and a property you can envision buying will qualify, you must enter into a written agreement with your exchange company to establish your intent to exchange. This must be done prior to the closing of the sale of your property. At closing, as required by Section 1031 regulations, the proceeds are delivered directly to your exchange company to be held in trust during the exchange.

#3 - Identify the property to be purchased. After closing, you have 45 calendar days to identify the property to be purchased. I prefer to explain this rule by saying that you have all of the time before your old property sells and closes plus 45 days after the closing to make the identifications. Generally, you may identify three properties as potential replacement property and you may acquire one, two or all three of those properties. There are no restrictions on the values of the properties, either individually or in the aggregate. There are alternate rules of identification, but most exchangers use the Three-Property Rule.

(Article continued in Part 3.)

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Please see the next blog for additional information on Section 1031 basics.

Ken Tharp

800-805-1031 toll free

INTEGRITY. PRECISION. SECURITY.

Copyright © 2009 By Ken Tharp, All Rights Reserved. * Section 1031 Exchanges - The Basics (Article #2) * Contact Ken Tharp for information on Section 1031 tax-deferred exchanges anywhere in the United States.

Section 1031 Exchanges - The Basics (Article #1)

Ken Tharp - Section 1031 Exchanges, Iowa/U.S. (Iowa Equity Exchange) — Wed, 14 Jan 2009 11:50:58 -0600

I was recently asked to write a short article for a local publication about the basics of Section 1031 exchanges. Over the time I've been here at activerain, my blog topics have covered a wide range of exchange-related topics, including the basics. However, it has been a long time since I've addressed that basic information. Writing the article caused me to realize that was the case, so this is an attempt to remedy that situation. With that in mind, here is the first of three blog entries having to do with the four basic hurdles for the standard 1031 exchange:

What if there were a way for a real estate investor or business owner to sell assets and reinvest the profits with absolutely no income tax liability whatsoever? A Section 1031 Exchange allows an investor or business owner to do just that. Believe it or not, this option has existed within the US tax code for well over 80 years,

Why exchange? There are many benefits, but the overriding one is the tax savings that allow more of your equity to be used in the new property, Example: You sell investment property and realize net proceeds of $100,000. Without an exchange, $30,000 of your proceeds could easily go to taxes, leaving only $70,000 for reinvestment. By employing an exchange, the entire $100,000 can be reinvested with no tax liability. Before you enter into an exchange, it is highly recommended that you consult with your tax or financial advisor to ensure that a 1031 exchange is right for you.

Between 1984 and 1991, many of the modern-day rules and regulations were written into the code. Let's examine the rules that apply to the common exchange.

#1 - The properties must quality. In IRS terms, they must be "like-kind." The easiest way to determine whether two pieces of real estate are like kind is to ask these two questions:

"Did I hold the property I am selling as an investment or use it in my business?" and "Do I intend to hold the property I will buy as an investment or use it in my business?" If you can answer, "Yes," to both of those questions, the properties qualify and they are like-kind. Yes, raw land can be exchanged for an apartment building. Rental houses can be exchanged for farmland. The possibilities are endless!

(Article continued in Part 2.)

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Please see the next two blogs for additional information on Section 1031 basics.

Ken Tharp

Ken Tharp, President

800-805-1031 toll free

INTEGRITY. PRECISION. SECURITY.

Copyright © 2009 By Ken Tharp, All Rights Reserved. * Section 1031 Exchanges - The Basics (Article #1) * Contact Ken Tharp for information on Section 1031 tax-deferred exchanges anywhere in the United States.

Farmland prices leveling off?

Ken Tharp - Section 1031 Exchanges, Iowa/U.S. (Iowa Equity Exchange) — Mon, 24 Nov 2008 10:01:23 -0600

In an article in the Des Moines Sunday Register, author Dan Piller investigates the value of farmland in Iowa based upon the results of a number of recent farm auctions. The conclusion? Farmland values are not rising at the rate they have over the past few years. Probably not a huge revelation to those of us who keep track of things, nor a huge surprise to those of you who don't. The current macro-economic conditions in this country and the world affect farm prices just as they touch virtually every other aspect of our lives.

However, the good news is that while prices may not be increasing at the breakneck speed they once did, they are not necessarily falling, either. The article quotes prominent Iowa State University economist and all-around farmland guru Michael Duffy as follows: "What we're probably seeing now is a plateauing, rather than a fallback in land prices. When people say prices are down, it probably is reliatve to what they expected two or three months ago" Another prominent farmland figure, Randy Hertz of Hertz Farm Management, puts it this way: "We're not seeing a pullback in land prices by any means, but the growth in land prices may have slowed."

While land owners feel the uncertainty that nearly all Americans feel right now, most are not concerned about a collapse such as the one that occurred in the 1980's. Land values rose at a hyper rate back then, too, but those purchases were oftenmade with bank loans. In a similar fashion to what is now occurring in the mortgage meltdown, farmers got upside-down on their farms when values dropped and were unable to generate the cash to make the payments. In today's farm economy, land owners are either purchasing new land with cash or with limited leverage, offering them a much greater probability of weathering future storms.

I welcome your comments on land values. Please let me know what you are thinking or wondering.

Please consider IOWA EQUITY EXCHANGE as your source for answers to your questions about Section 1031 like-kind tax-deferred exchanges. Contact us at your convenience for prompt, accurate information. Please think of us for your next exchange.

Ken Tharp

Ken Tharp, President

800-805-1031 toll free

INTEGRITY. PRECISION. SECURITY.