Lisa's Blog

1031 Exchanges - Say What? Terminology Part #2

Lisa Lambert, Esq. (1031 Exchange Expert) (Asset Preservation) — Fri, 11 Apr 2008 00:56:40 -0500

1031 Exchange Terminology Part #2

MORTGAGE BOOT: This occurs when the Exchanger does not acquire debt that is equal to or greater than the debt that was paid off on the relinquished property sale; Referred to as "debt relief". This creates a taxable event.

QUALIFIED INTERMEDIARY: The entity who facilitates the exchange; Defined as follows: (1) Not a related party (i.e. agent, attorney, broker, etc.) (2) Receives a fee (3) Receives the relinquished property from the Exchanger and sells to the buyer (4) Purchases the replacement property from the seller and transfers it to the Exchanger; Asset Preservation, Inc. (API) is a "Qualified Intermediary."

RELINQUISHED PROPERTY: Property given up by the Exchanger; Also referred to as the sale, exchange, ‘downleg' or ‘Phase I' property.

REPLACEMENT PROPERTY: Property received by the Exchanger: Also referred to as the purchase, target, ‘upleg' or ‘Phase II' property.

1031 Exchanges - Say What? Terminology Part #1

Lisa Lambert, Esq. (1031 Exchange Expert) (Asset Preservation) — Fri, 11 Apr 2008 00:53:31 -0500

EXCHANGE TERMINOLOGY

"UNDERSTANDING COMMON EXCHANGE TERMINOLOGY"

To many real estate investors, the buzz words often used to describe different aspects of a tax deferred exchange can be confusing. For example, doesn't something with two ‘downlegs' and three ‘uplegs' sound a lot more like a lopsided creature than an exchange transaction? Reflected below are brief descriptions of commonly used exchange terminology:

ACTUAL RECEIPT: Physical possession of proceeds.

BOOT: "Non like-kind" property received; "Boot" is taxable to the extent there is a capital gain.

CASH BOOT: Any proceeds actually or constructively received by the Exchanger.

CONSTRUCTIVE RECEIPT: Although an investor does not have actual possession of the proceeds, they are legally entitled to the proceeds in some manner such as having the money held by an entity considered as their agent or by someone having a fiduciary relationship with them. This creates a taxable event.

DIRECT DEEDING: Transfer of title directly from the Exchanger to Buyer and from the Seller to Exchanger after all necessary exchange documents have been executed.

EXCHANGER: Entity or taxpayer performing an exchange.

EXCHANGE AGREEMENT: The written agreement defining the transfer of the relinquished property, the subsequent receipt of the replacement property, and the restrictions on the exchange proceeds during the exchange period.

EXCHANGE PERIOD: The period of time in which replacement property must be received by the Exchanger; Ends on the earlier of 180 calendar days after the relinquished property closing or the due date for the Exchanger's tax return (If the 180th day falls after the due date of the Exchanger's tax return, an extension may be filed to receive the full 180 day exchange period.)

IDENTIFICATION PERIOD: A maximum of 45 calendar days from the relinquished property closing to properly identify potential replacement property(s).

LIKE-KIND PROPERTY: Any property used for productive use in trade or business or held for investment; Both the relinquished and replacement properties must be considered "like-kind" to qualify for tax deferral.

1031 Exchanges - Intro to Delayed Exchanges

Lisa Lambert, Esq. (1031 Exchange Expert) (Asset Preservation) — Fri, 11 Apr 2008 00:43:59 -0500

INTRO TO DELAYED EXCHANGES

"THE BENEFITS OF §1031 TAX DEFERRED EXCHANGES "

EXCHANGES ARE A POWERFUL TAX STRATEGY

Tax deferred exchanges have been a part of the tax code since 1921 and are one of the last significant tax advantages remaining for real estate investors. One of the key advantages of a §1031 exchange is the ability to dispose of a property without incurring a capital gain tax liability, thereby allowing the earning power of the deferred taxes to work for the benefit of the investor (called an "Exchanger") instead of the government. In essence, it can be considered an interest-free loan from the IRS.

BASIC TAX EXCHANGE REQUIREMENTS

The IRS allows up to a maximum of 180 calendar days between the sale of the relinquished property and the purchase of the replacement property. Within the 180 day "exchange period," the investor must also properly identify suitable replacement properties within 45 calendar days of closing on the sale of the relinquished property. There are a number of requirements which need to be met to qualify for tax deferral under the tax code:

Requirement #1: Both the "relinquished" and "replacement" properties must be held for investment or used in a business. The IRS uses the term "like-kind" to describe the type of properties that qualify. Any property held for investment can be exchanged for any other "like-kind" property held for investment. This definition covers a vast variety of developed and undeveloped real estate. Properties which are clearly not like-kind are an investor's primary residence or property "held for sale."

The relinquished and replacement properties need not have identical functions (i.e. both be residential rentals or commercial strip centers). The key issue is that the Exchanger can substantiate that both properties were "held for investment."

Requirement #2: The IRS requires an investor to identify the replacement property(s) within 45 days from closing on the sale of a relinquished property. The 45 day Identification Period begins on the closing date, and the replacement property(s) must be properly identified in a letter signed by the Exchanger. Exchangers have a number of ways to properly identify properties. They may identify up to three replacement properties without regard to their total fair market value (Three Property Rule). Alternatively, they can identify an unlimited number of replacement properties, if the total fair market value of all properties is not more than twice the value of the property sold (200% Rule). An Exchanger can not meet either of these rules if they acquire 95%of the aggregate fair market value of all identified replacement properties.

Requirement #3: Close on the replacement property by the earliest of either: 180 calendar days after closing on the sale of the relinquished property or the due date for filing the tax return for the year in which the relinquished property was sold (unless an automatic filing-extension has been obtained). Example: If an Exchanger closes on the relinquished property on December 27, the exchange period will end on April 15 (assuming this is the due date for their tax return). In this case, they would have to close on the replacement property (or file the appropriate extension) by April 15. Exchangers may choose to close both transactions within a shorter period of time, thereby avoiding the potential hardship of the 45/180 day time limits.

Requirement #4: The most common exchange format, the delayed exchange, requires investors to work with an IRS-approved middleman called a "Qualified Intermediary." The Qualified Intermediary documents the exchange by preparing the necessary paperwork (Exchange Agreement and other documents), holding proceeds on behalf of the Exchanger, and structuring the sale of the relinquished property and purchase of the replacement property.

Note: To defer all capital gain taxes, an Exchanger must buy a property or properties of equal or greater value (net of closing costs), reinvesting all net proceeds from the sale of the relinquished property. Any funds not reinvested, or any reduction in debt liabilities not made up for with additional cash from the Exchanger, is considered "boot" and is taxable. Example: Stewart sells his duplex, which he held for investment, for $160,000. A hundred calendar days later he closes on a different duplex, which he will hold for investment, for $110,000. Stewart receives the $50,000 in excess funds for his child's education. Stewart must pay capital gain taxes on $50,000. (In this example, Stewart chose to take some money out of his exchange and pay the capital gain taxes.)

WHEN ARE CAPITAL GAIN TAXES PAID?

Maybe never. Many investors mistakenly believe they will "have to pay the taxes sometime" so they might as well just sell. Quite often, this is a bad investment decision. The tax on an exchange is deferred into the future and is only recognized when an investor actually sells the property for cash instead of performing an exchange. Investors can continue to exchange properties as often and for as long as they wish, thus moving up to better investments and putting off the taxes for many years.

To learn more:

Call Asset Preservation toll-free at 800-282-1031
Visit API's website at http://www.apiexchange.com/.

1031 Exchanges - Calculating Capital Gain

Lisa Lambert, Esq. (1031 Exchange Expert) (Asset Preservation) — Fri, 11 Apr 2008 00:40:30 -0500

CALCULATING CAPITAL GAIN
"ANALYZE THE BENEFITS OF AN EXCHANGE BEFORE YOUR SELL" This is a highly simplified way of figuring capital gain and capital gain tax liability. In 2007-2008 there have been changes that make calculating capital gain more complex. The model below is a simplified form for getting a ballpark figure on capital gain and the tax liability. The taxpayer's accountant/CPA is critical in determining the ACTUAL tax liability.

1. CALCULATE NET ADJUSTED BASIS	Original Purchase Price	__________
+ Improvements	__________
- Depreciation	__________
= NET ADJUSTED BASIS	__________

2. CALCULATE CAPITAL GAIN	Sales Price	__________
- Net Adjusted Basis	__________
- Cost of Sale	__________
= CAPITAL GAIN	__________

3. CALCULATE CAPITAL GAIN TAX DUE	Recaptured Depreciation (25% )	__________
+ Federal Capital Gain (15%)	__________
+ State Tax (when applicable)	__________
= TOTAL TAX DUE	__________

4. ANALYZE PURCHASE-NO EXCHANGE	Sales Price	__________
- Cost of Sale	__________
- Loan Balances	__________
= GROSS EQUITY	__________
- Capital Gain Taxes Due	__________
= NET EQUITY	__________

Net Equity X 4 =	__________

5. ANALYZE PURCHASE-EXCHANGE	Capital Gain Taxes Due	_____0____
Gross Equity = Net Equity	__________
Capital Gain Tax Calculator	Gross Equity x 4 =	__________

1031 Exchanges -1031 Basics

Lisa Lambert, Esq. (1031 Exchange Expert) (Asset Preservation) — Fri, 11 Apr 2008 00:20:53 -0500

EXCHANGE BASICS

"AN OVERVIEW OF SEVERAL REQUIREMENTS
FOR TAX DEFERRAL"

WHAT IS IRC SECTION 1031?

Section 1031 of the Internal Revenue Code allows an owner of investment property to exchange property and defer paying federal and state capital gain taxes (15%+ applicable state taxes) if they purchase a like-kind property following the rules and regulations of the Internal Revenue Code. This allows investors to use all of their proceeds from their sale to leverage into more valuable real estate, increase cash flow, diversify into other properties, reduce management or consolidate into one property.

WHAT IS LIKE-KIND PROPERTY?

There is some confusion regarding what type of property qualifies for a §1031 tax deferred exchange. The Internal Revenue Code Section 1031 states that "no gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like kind which is to be held either for productive use in a trade or business or for investment." Like-Kind property can include, but is not limited to, any of the following, provided it is held for investment:

- Single Family Rental
- Duplex
- Apartment
- Commercial Property
- Raw Land

For example, a single family rental can be exchanged for raw land, or apartments or a commercial building. In addition, properties can be exchanged anywhere within the United States.

DOES AN EXCHANGE NEED TO BE SIMULTANEOUS?

No, contrary to what most owners envision, a §1031 tax deferred exchange is rarely a two-party swap. Most exchanges are delayed exchanges, whereby the Exchanger has 180 days between the sale of the relinquished property and the closing of their replacement property. They must identify the potential replacement property(s) within 45 days from closing on their relinquished property.

WHEN IS A §1031 EXCHANGE APPLICABLE?

It is applicable whenever a property owner intends to SELL any property that is not their primary residence (and falls under the definition of like-kind) and plans to BUY another like-kind property within 180 calendar days following the closing of their relinquished property. Paramount to any exchange is a competent and experienced Intermediary. Asset Preservation is the entity which structures, consults, guides and documents the exchange transaction from beginning to end.

THIS INFORMATION IS PROVIDED FOR EDUCATIONAL AND INFORMATIONAL PURPOSES ONLY. TAXPAYERS ARE STRONGLY RECOMMENDED TO SEEK THE ADVICE OF THEIR INDIVIDUAL TAX/LEGAL ADVISORS REGARDING THEIR SPECIFIC CIRCUMSTANCES.

1031 Exchanges - Reasons to Exchange

Lisa Lambert, Esq. (1031 Exchange Expert) (Asset Preservation) — Fri, 11 Apr 2008 00:15:38 -0500

FIVE REASONS TO EXCHANGE

"INVESTORS CAN MEET MANY
OBJECTIVES UNDER IRC §1031"

Section 1031 tax deferred exchanges continue to increase in popularity as more investors nationwide discover the wide range of investment objectives that can be easily met through exchanging.

I. PRESERVATION OF EQUITY

A properly structured exchange provides real estate investors with the opportunity to defer 100% of both Federal and State capital gain taxes. This essentially equals an interest-free, no-term loan on taxes due until the property is sold for cash! Most often, the capital gain taxes are deferred indefinitely because many investors continue to exchange from one property to the next, dramatically increasing the value of their real estate investments with each exchange!

II. LEVERAGE

Many investors exchange from a property where they have a high equity position or one that is "free and clear" into a much more valuable property. A larger property produces more cash flow and provides greater depreciation benefits, which therefore increase an investor's return on their investment.

III. DIVERSIFICATION

Exchangers have a number of opportunities for diversification through exchanges. One option is to diversify into another geographic region such as exchanging of one apartment building in Denver, Colorado for two additional apartments - one in Los Angeles, California and the other in Dallas, Texas. Another diversification alternative is acquiring a different property type such as exchanging from several residential units to a small retail strip center.

IV. MANAGEMENT RELIEF

Many investors accumulate several single family rentals over the years. The on-going maintenance and management of what can be a far-reaching group of properties can be lessened by exchanging these properties for one property better suited to on-site maintenance and management. Exchanging into a single apartment complex with a resident manager is a good example of this strategy.

V. ESTATE PLANNING

Often a number of family members inherit one large property and disagree about what they want to do with it. Some want to continue holding the investment and some desire to sell it immediately for cash. By exchanging from one large property into several smaller properties, an investor can designate that, after their death, each heir will receive a different property which they can either hold or sell. Call the knowledgeable exchange professionals at Asset Preservation for a complimentary consultation regarding your specific investment objectives.

THIS INFORMATION IS PROVIDED FOR EDUCATIONAL AND INFORMATIONAL PURPOSES ONLY. IT IS NOT TAX/LEGAL ADVICE. TAXPAYERS ARE STRONGLY RECOMMENDED TO SEEK THE GUIDANCE OF THEIR INDIVIDUAL TAX/LEGAL ADVISORS REGARDING THE SPECIFIC CIRCUMSTANCES OF THEIR TRANSACTION.

1031 Exchange -Sale v. Exchange

Lisa Lambert, Esq. (1031 Exchange Expert) (Asset Preservation) — Fri, 11 Apr 2008 00:04:34 -0500

A SALE VS. AN EXCHANGE

"ANALYZE THE BENEFITS BEFORE SELLING"

The benefits of IRC Section 1031 exchanges can be tremendous! Investors are often able to defer thousands of dollars in capital gain taxes, both at federal and state levels. If the requirements of a valid §1031 exchange are met, capital gain recognition will be deferred until the taxpayer chooses to recognize it. This essentially results in a long-term, interest-free loan from the IRS.

AN EXAMPLE

An investment property owner sells a rental property for $400,000. The owner originally purchased the property for $200,000. There is $200,000 of debt and the property has been fully depreciated. The capital gain is approximately $350,000 (assuming 75% of the property is depreciable). If the investor does not do an exchange, federal capital gain taxes would be:

$150,000 (depreciation recapture) x 25%	= $37,500
$200,000 (capital gain balance) x 15%	= $30,000
$350,000 Capital Gain Taxes Owed	= $67,500

The state taxes owed (where applicable) would need to be added to the federal taxes due. Assuming the property owner sold in California, the following additional taxes would need to be paid:

State Level (CA) 9.3%, $350,000 x 9.3%	= $32,550
Total Capital Gain Taxes (Federal and State)	= $99,050

The next comparison analyzes the value of the new property that could be acquired in a sale versus an exchange. The comparison assumes an investor makes a 25% down payment and finances 75% of the property (75% loan-to-value ratio).

SALE VS. AN EXCHANGE

	Sale	Exchange
Equity	$200,000	$200,000
Capital Gain Tax	$ 99,050	$0
Cash to Reinvest	$100,950	$200,000

ASSUMING A 75% LOAN-TO-VALUE

New Property

$403,800

$800,000

This example illustrates that the real power of a tax deferred exchange is not just the tax savings - it is the increase in purchasing power generated by this tax savings!

ADVANTAGES OF AN EXCHANGE

Preservation of equity
Maximize return on investment
Increased cash flow from larger properties

1031 Exchanges - What Agents Need to Know

Lisa Lambert, Esq. (1031 Exchange Expert) (Asset Preservation) — Thu, 10 Apr 2008 23:57:57 -0500

WHAT AGENTS NEED TO KNOW

"WHAT RESIDENTIAL REAL ESTATE AGENTS
NEED TO KNOW"

§1031 tax deferred exchanges provide real estate agents a tremendous opportunity to increase commissions! Conversely, by not understanding a few key exchange concepts, real estate agents often can unknowingly incur increased liability. We have provided answers to questions frequently asked by residential real estate agents.

Q: WHEN SHOULD THE INTERMEDIARY BE CONTACTED?

A: As soon as the contract is signed. Asset Preservation, a leading national Qualified Intermediary, does not charge a cancellation fee if the transaction does not close.

Q: WHAT LANGUAGE SHOULD BE ADDED TO THE PURCHASE AND SALE AGREEMENT?

A: The language below is satisfactory in establishing the Exchanger's intent to perform a tax deferred exchange and releases the other parties from costs or liabilities as a result the exchange:

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

Q: WHO SHOULD I CONTACT TO SET UP AN EXCHANGE?

A: You can call either National Headquarters toll-free (800) 282-1031 or your local Division Manager.

Q: WHAT SHOULD BE DONE SO I DO NOT INCUR A POTENTIAL ADDITIONAL LIABILITY?

A: Every time you list any property that may have been held for investment (i.e. rental house, second or vacation home, duplex, land, etc.), recommend that your client talk to their legal and/or tax advisors about the benefits of a §1031 exchange. You can also suggest that your client call an experienced Qualified Intermediary. Exchanges have been a part of the tax code since 1921. As a licensed professional, a real estate agent can't afford to say "I don't know anything about exchanges because I specialize in residential."

Q: CAN EXCHANGES BE SET UP AT THE LAST MINUTE?

A: Yes, as long as the transaction has not closed. Asset Preservation can successfully convert a sale into an exchange. Documents can be prepared and faxed to the title company within a matter of hours.

Q: IF MY CLIENTS HAVE MORE QUESTIONS, WHERE CAN THEY GO FOR MORE INFORMATION?

A: Call Asset Preservation's toll-free number or visit our Internet site: http://www.apiexchange.com/.

1031 Exchanges - Vacation Homes Prior 2008 Guidance

Lisa Lambert, Esq. (1031 Exchange Expert) (Asset Preservation) — Thu, 10 Apr 2008 23:50:15 -0500

VACATION HOME EXCHANGES
"BARRY E. MOORE V. COMM., T.C. MEMO. 2007-134"

Many sellers who own vacation homes want to explore the potential of performing an Internal Revenue Code (IRC) Section 1031 tax deferred exchange. See Asset Preservation's handout entitled, "Vacation Home Exchanges - Basics", for an introduction to issues involved in these types of exchanges. One Tax Court decision, Barry E. Moore v. Commissioner, T.C. Memo. 2007-134, provides a significant case concerning whether a vacation home would be considered "held for investment." The court's analysis also indicates certain tax planning strategies investors may wish to use when considering exchanging a vacation home held for investment.

LAKEFRONT PROPERTY EXCHANGED FOR LAKEFRONT PROPERTY

In Moore v. Comm., the taxpayers exchanged a lakefront vacation property with a mobile home in Lincoln County, Georgia (the Clark Hill property) for a lakefront property with a larger five bedroom and 4.5 bath house on 1.2 acres in Forsyth County, Georgia (the Lake Lanier property). The taxpayers in this case argued that both of these properties were held for investment, specifically for long-term appreciation purposes, and thus qualified for tax deferral under IRC §1031. However, based upon the taxpayer's significant personal use of the property, the court concluded that both the relinquished Clark Hill property and the replacement Lake Lanier property should be viewed as held primarily for the taxpayer's personal use and enjoyment. In reaching this conclusion, the court considered the following: (i) the taxpayers never rented or attempted to rent the property to others; (ii) the taxpayers deducted mortgage interest as a "home mortgage interest" expense rather than investment interest expense; (iii) the taxpayers did not take (and probably did not qualify for) depreciation or other tax benefits associated with an investment property under the Internal Revenue Code, including deductions for maintenance expenses.

The court accepted the taxpayer's argument that both the relinquished and replacement properties were held for appreciation but concluded that "...the mere hope or expectation that the property may be sold at a gain cannot establish investment intent if the taxpayer uses the property as a residence. The proposition that holding a primary or secondary (e.g. vacation) residence motivated in part by an expectation that the property will appreciate in value is insufficient to justify the classification of that property as property ‘held for investment' under Section 212(2) and, by analogy, Section 1031. There is no convincing evidence that the properties were held for the production of income, and there is convincing evidence that petitioners and their families used the properties as vacation retreats. The evidence overwhelmingly demonstrates that petitioners' primary purpose in acquiring both the Clark Hill and Lake Lanier properties was to enjoy the use of those properties as vacation homes, i.e. as secondary personal residences."

ISSUES TO CONSIDER WHEN CONTEMPLATING
A VACATION HOME EXCHANGE

Has the property been shown on one or more tax returns as an investment property or property used in a trade or business, including the characterization of mortgage interest as deductible investment interest expense or business expense? Is the improved property eligible for depreciation? Is the property used substantially as a personal vacation or second home? The characterization of residential property as held primarily for investment or for use in a trade or business is often unclear and must be made with reference to the taxpayer's use of the potential exchange property. Based on recent IRS announcements, we expect to see greater scrutiny of reported tax deferred exchanges under Section 1031. Accordingly, consult your legal or tax advisor before engaging in a tax deferred exchange.

THIS INFORMATION IS PROVIDED FOR EDUCATIONAL AND INFORMATIONAL PURPOSES ONLY. THIS DOES NOT CONSTITUTE TAX/LEGAL ADVICE. TAXPAYERS ARE STRONGLY RECOMMENDED TO SEEK ADVICE FROM THEIR INDIVIDUAL TAX/LEGAL ADVISORS REGARDING THE SPECIFIC CIRCUMSTANCES OF THEIR EXCHANGE.

1031 Exchanges - Vacation Homes New Safe Harbor

Lisa Lambert, Esq. (1031 Exchange Expert) (Asset Preservation) — Thu, 10 Apr 2008 23:46:36 -0500

VACATION HOME GUIDANCE
"REVENUE PROCEDURE 2008-16 CREATES SAFE HARBOR"

Revenue Procedure 2008-16 (the "Procedure") creates a safe harbor definition of investment property applicable to exchange transactions closing after March 10, 2008 that involve the transfer of property consisting of a dwelling unit (defined below) and/or the acquisition of a dwelling unit as replacement property. In short, the IRS will not challenge whether a residential property or vacation home property is held for productive use in a trade or business or for investment if certain specified ownership and use requirements are met. This safe harbor Procedure provides useful guidance on the characterization of vacation property and may also be useful for planning purposes such as the conversion of a principal residence into a qualifying relinquished property.

REQUIREMENTS OF REVENUE PROCEDURE 2008-16

A dwelling unit is defined as any real property improved with a house, apartment, condominium, or similar improvement that provides basic living accommodations including a sleeping space, bathroom and cooking facilities (e.g., a residential property).

The IRS will not challenge whether a dwelling unit qualifies as §1031 exchange property held for productive use in a trade or business or for investment if: (1) the relinquished property is owned by the taxpayer for at least 24 months immediately prior to the exchange and a replacement property is owned for at least 24 months immediately after the exchange (the "qualifying use period") and (2) within each of the two 12 month periods constituting the qualifying use period, the taxpayer must:

(a) Rent the property to another person or persons at a fair rental for 14 or more days; and
(b) The taxpayer's personal use of the dwelling unit cannot exceed the greater of 14 days or 10 percent of the number of days during the 12 month period the dwelling unit is rented at a fair rental.

Under the Procedure, personal use of a dwelling unit occurs on any day in which the taxpayer is deemed to use the property for personal purposes under §280A(d)(2) (taking into account §280A(d)(3) but not §280A(d)(4)). Thus, personal use includes:

(1) use by the taxpayer or any other person who has an interest in the property or by a family member; (2) use by any individual who uses the unit under an arrangement which enables the taxpayer to use some other dwelling unit (whether or not a rental is charged for the use of such other unit) ; or (3) use by any other individual if rented for less than fair market value. A taxpayer can rent the property to a family member if the family member uses the property as a primary residence and the family member pays fair market rent. Whether a dwelling unit is rented at a fair rental is determined based on all the facts and circumstances that exist when the rental agreement is entered into. All rights and obligations of the parties to the rental agreement are taken into account.

SAFE HARBOR BUT NOT A "BRIGHTLINE" TEST

The Procedure provides a safe harbor for purposes of characterizing investment property for purposes of Internal Revenue Code §1031. Property that does not meet the terms of the safe harbor may nevertheless constitute qualifying relinquished or replacement property under current law. Of course, any exchange must meet all other applicable legal requirements. Every taxpayer should consult with their legal and tax advisor before engaging in any §1031 exchange.

1031 Exchanges - Free DRE Accredited Investment Analysis Seminar

Lisa Lambert, Esq. (1031 Exchange Expert) (Asset Preservation) — Thu, 10 Apr 2008 22:46:26 -0500

LEARN HOW TO ANALYZE SMALL INVESTMENT PROPERTIES

Falling prices encourage investors TO BUY!!!! This is the first step in developing your investor niche. Learn how to analyze small investment properties from a before tax and after tax cash flow basis. You will learn how to evaluate the investment value of an investment property using Gross Rent Multiplier (GRM), Cap Rate, Cash on Cash Return. It is critical that you understand these elements if you plan on working investors. Sign up today for this free seminar. I've been told that this seminar is better than seminars for which realtors have paid $1500 - 2000.

1031 Exchanges - Balancing the Exchange for Full Deferral

Lisa Lambert, Esq. (1031 Exchange Expert) (Asset Preservation) — Tue, 19 Feb 2008 23:57:27 -0600

EXCHANGE EQUATION

"BALANCING THE EXCHANGE"

Whenever property is sold, it is important to make the distinction between realized gain and recognized gain. Realized gain is defined as the net sale price minus the adjusted tax basis. Recognized gain is the taxable portion of the realized gain. The common objective in a tax deferred exchange is disposing of a property containing significant realized gain and acquiring a like-kind replacement property so there is no recognized gain. In order to defer all capital gain taxes, an Exchanger must "balance the exchange" by acquiring replacement property that is the same or greater value as the relinquished property, reinvest all net equity and replace any debt on the relinquished property with debt on the replacement property (although a reduction in debt can be offset with additional cash.)

THE EXCHANGE EQUATION

The Exchanger can quickly calculate whether there will be recognized gain based on the following principals:

Taxable boot is defined as non like-kind property the Exchanger may receive as part of an exchange. Cash boot is the receipt of cash and mortgage boot (also referred to as debt relief) is a reduction in the Exchanger's mortgage liabilities on a replacement property. Generally, capital gain income is recognized (and therefore taxable) to the extent there is boot.
For a fully deferred exchange, an Exchanger must reinvest all net equity and acquire property with the same or greater debt. Compare the relinquished property with the replacement property in terms of:

1) Value	2) Net Equity (after deducting cost of sale)	3) Debt
	Relinquished Property	Replacement Property
VALUE	$450,000	$600,000
NET EQUITY	$200,000	$200,000
DEBT	$250,000	$400,000

The Exchanger is acquiring property of greater value, reinvesting the entire net equity and increasing the mortgage on the replacement property. Analysis: There is no boot and no recognized gain. Relinquished Property Replacement Property

	Relinquished Property	Replacement Property
VALUE	$450,000	$600,000
NET EQUITY	$200,000	$150,000
DEBT	$250,000	$450,000

The Exchanger keeps $50,000 of the exchange proceeds, reinvesting only $150,000 as a down payment on the replacement property. Analysis: There is $50,000 of cash boot which results in recognized (taxable) gain. Relinquished Property Replacement Property

	Relinquished Property	Replacement Property
VALUE	$450,000	$350,000
NET EQUITY	$200,000	$200,000
DEBT	$250,000	$150,000

The Exchanger acquires property of a lower value and while reinvesting all equity in the replacement property, acquires less debt in the process. Analysis: The Exchanger has reduced the debt by $100,000 (mortgage boot) which results in a recognized (taxable) gain.

The information provided is for educational purposes only. It is not legal or tax advice. Accordingly, the taxpayer should review the details of the specific transaction with taxpayer's own legal or tax advisor.

1031 Exchanges -- FREE WEBINAR - Learn About 1031 Exchanges Today

Lisa Lambert, Esq. (1031 Exchange Expert) (Asset Preservation) — Tue, 12 Feb 2008 18:15:57 -0600

Have you heard about 1031 exchanges but you don't know exactly what is involved?

If you're a real estate agent, understanding 1031 exchanges can increase your income.

Section 1031 of the Internal Revenue Code permits sellers of appreciated investment property (as defined by the code) to defer recognition of the capital gain tax they would pay on the sale if they buy another investment property within the 180 Exchange Period. There are a number of rules involved and the exchanger's tax advisors ought to be involved from the beginning.

In the Webinar You Will Learn:

The Basic Requirements of 1031 Exchanges.

What is Like-Kind property?

How long does the exchanger have to replace his property?

What is Boot?

Is there a holding period?

If you have questions after the seminar, please feel free to call me at 877.646.1031 or our National Headquarters at 800.282.1031.

http://apiexchange.com/index_main.php?id=25

1031 Exchanges - Security of Funds - KNOW YOUR QI

Lisa Lambert, Esq. (1031 Exchange Expert) (Asset Preservation) — Tue, 12 Feb 2008 17:16:40 -0600

THE API ADVANTAGE^TM

As a leading national qualified intermediary, Asset Preservation, Inc. (API) is committed to providing its exchange clients with unmatched customer service and the highest level of security available in the §1031 exchange industry. From the client's first contact with an API representative, API's professional exchange counselors, attorneys and accountants work together to meet the client's service needs in order to ensure a smooth transaction with no surprises. In the background, API management maintains tight financial controls and multi-layered security systems necessary to provide a level of comfort and the quality of performance relied on by sophisticated investors and Corporate America; we call it the "The API Advantage^TM."

EXPERIENCE

Established in 1990, API has successfully facilitated over 130,000 tax deferred exchanges.

EXPERTISE

API's Exchange Counselors, attorneys and accountants provide personal attention to each exchange.
API's specialized Commercial Division staff handles complex exchange transactions where sophistication, speed and institutional flexibility are needed to get the job done.
API is a member in good standing of the Federation of Exchange Accommodators, the tax deferred exchange industry's only national trade organization.
API's staff is available for free consultation regarding all §1031 exchange matters.
API's website includes the ability to initiate a tax deferred exchange 24/7.

SECURITY

API maintains a fidelity bond with coverage in the aggregate amount of $25,000,000 and has Errors & Omissions coverage in the amount of $2,000,000. API has implemented other protections for its clients that go beyond the typical protections offered by other qualified intermediaries.
API is a member of the Stewart Family of companies under the umbrella of Stewart Information Services, Inc. (Stewart), a NYSE publicly traded company. Stewart Title Company, Inc. (STC) issues a Letter of Assurance (LOA) to each of API's exchange clients upon request. Under the terms of this LOA, STC assures API's performance of its obligations under its Exchange Agreement. The coverage provided by the LOA is not limited to a specific dollar amount like a bond or Errors & Omissions coverage.
As a member of the Stewart family of companies, API is audited twice each year, once by Stewart's internal audit group and a second time by Stewart's outside auditor, KPMG. The internal and external audits involve complete audits of the books and policies and procedures of API.
A separate Exchange Account is established for each client. Exchange funds are not commingled with API's operating accounts. The client may require a notarized signature for the movements of funds - a security feature that assures exchange funds are moved only at the direction of the client.

1031 Exchanges -- Security of Funds -- CRITICAL!!!!

Lisa Lambert, Esq. (1031 Exchange Expert) (Asset Preservation) — Tue, 12 Feb 2008 17:15:34 -0600

HOW SECURE ARE THE EXCHANGE FUNDS?

"IT'S THE MOST IMPORTANT
QUESTION TO ASK AN INTERMEDIARY"

BEWARE

Security of the exchange funds is paramount to all other aspects of an exchange. Many property owners are not aware that, with the exception of minimal regulations in the state of Nevada, Qualified Intermediary companies are not overseen by the federal government or any national regulatory entities! [In the past year we have seen a number of states initiate regulation legislation] The bottom line is that you have to determine whether the company selected can provide sufficient protection and financial security, in writing, before proceeding with any §1031 exchange.

INVESTIGATE THE SECURITY PROVIDED

It is critical to examine the differences between Qualified Intermediary companies. Most investors are not aware that exchange companies can often hold millions, and sometimes hundreds of millions of dollars, at any point in time. It is important to compare the true security that can be provided in writing when comparing many companies versus a subsidiary of a large parent company. Does a bond, even one for $10 million or more, really provide a great degree of additional security? The answer is no. Any loss above the bond amount is not covered by the bond and can leave investors unprotected.

BETTER THAN BONDED

Asset Preservation, Inc. is proud to offer all four of the safe harbors provided in the Treasury Regulations. Our many levels of security, backed by a written Letter of Assurance from Stewart Title Company, provide Exchangers with the highest degree of exchange proceed security.

QUESTIONS TO ASK AN INTERMEDIARY

Where will the exchange funds be held? (If held in a bank, are you aware that FDIC coverage is only for $100,000 per account?
In what type of account are the funds invested?
Are separate accounts set up for each client?
What are the requirements for the withdrawal of any exchange proceeds? (Is the Intermediary authorized to move funds without the Exchanger's written approval?)
Is the notarized signature of the Exchanger required for moving funds at all times? (What written documents specify this requirement?)
Can a written 3rd Party Guaranty be provided to all Exchangers? (Is this backed by a recognizable entity with an established track record and sufficient assets to cover a potential loss of exchange proceeds?)

Call the professionals at Asset Preservation. We are confident you will find our security to be unparalleled!

1031 Exchanges -- How Closing Costs Are handled

Lisa Lambert, Esq. (1031 Exchange Expert) (Asset Preservation) — Mon, 11 Feb 2008 20:37:10 -0600

CLOSING COSTS

"WHAT COSTS CAN BE CONSIDERED
ACCEPTABLE EXCHANGE EXPENSES?"

A frequently asked question is "What expenses can be deducted from the exchange proceeds without resulting in a tax consequence?" Although the IRS has not published a complete list of qualifying expenses, there are some rulings that provide general parameters. Brokerage commissions can be deducted from the exchange proceeds (Revenue Ruling 72-456). Other transactional costs may also be able to be deducted if they are paid in connection with the exchange. (Letter Ruling 8328011).

WHAT ARE EXCHANGE EXPENSES?

Transactional costs that are referred to as exchange expenses on Form 8824 are not specifically listed but should generally include costs that are:

A. A direct cost of selling real property, which typically include:

Real estate commissions
Title insurance premiums
Closing or escrow fees
Legal fees
Transfer taxes and Notary fees
Recording fees

- or -

B. Costs specifically related to the fact the transaction is an exchange such as the Qualified Intermediary fees.

ITEMS THAT ARE NOT EXCHANGE EXPENSES

Although not a complete list, the costs related to obtaining the loan should not be deducted from the proceeds. These and other non-exchange expenses include:

Mortgage points and assumption fees
Credit reports
Lender's title insurance
Prorated mortgage insurance
Loan fees and loan application fees
Property taxes
Utility charges
Association fees
Hazard insurance
Credits for lease deposits
Prepaid rents and security deposits

Watch for my next blog post for more details regarding Closing Costs!!!

1031 Exchanges -- Basics and Choosing a Qualified Intermediary

Lisa Lambert, Esq. (1031 Exchange Expert) (Asset Preservation) — Mon, 04 Feb 2008 18:08:18 -0600

The Internal Revenue Code's section 1031 permits owners of appreciated investment property to defer the capital gain tax due on the sale of the relinquished property (conceptually the "old property") by completing the purchase of replacement property (conceptually the "new property") within 180 days of the sale of the relinquished property. In legal and accounting parlance this is called "non-recognition treatment" because the code states that "no gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like kind which is to be held for productive use in a trade or business or for investment."

The first step in evaluating whether a 1031 Exchange is appropriate in a given situation is to analyze whether the property qualifies as investment property under IRC section 1031. In order for a particular property to qualify for non-recognition treatment, the taxpayer must have intended to use the property for productive use (income) or hold it for investment purposes.

One of the primary requirements for non-recognition treatment is that the taxpayer cannot actually or constructively receive the sale proceeds from the sale of the relinquished property. Therefore, the taxpayer needs to use one of the safe harbors under the tax code, a qualified intermediary, to hold the funds during the exchange period.

Choosing a qualified intermediary ("QI") (facilitator, accommodator) is one of the most critical choices a taxpayer will make in the 1031 exchange process. It is essential that the taxpayer carefully interview the QI and ask the following questions:

1. Are exchange funds segregated from the QI's operating funds?

2. Does the QI create separate accounts for each exchanger?

3. Does the QI have a larger parent company willing to guarantee its performances?

4. Does the QI carry a fidelity bond?

5. Does the QI carry E & O insurance?

6. What is the QI's policy regarding paying interest during the exchange period.

7. During the QI interview, does the QI ask qualifying questions regarding your particular exchange (this is a good thing because it tells you that you are working with a competent QI)?

The decision to engage in a 1031 exchange is one that should be made with the taxpayer's tax and legal advisors.

Asset Preservation, Inc., leading national 1031 qualified intermediary www.apiexchange.com 1.800.282.1031

1031 Exchanges v. 1033 Exchanges -- Involuntary Conversions

Lisa Lambert, Esq. (1031 Exchange Expert) (Asset Preservation) — Mon, 04 Feb 2008 09:34:07 -0600

INVOLUNTARY CONVERSIONS

"HANDLING INSURANCE PAYOUTS"

WHAT IS AN INVOLUNTARY CONVERSION?

Certain involuntary dispositions of appreciated property are eligible for income tax deferral under Internal Revenue Code §1033. Events that result in an involuntary conversion include theft, damage resulting from an "act of God" (such as a casualty), or the government's taking of a taxpayer's property for public use. The essential elements of an involuntary conversion are a property loss caused by destruction (either complete or partial), theft, seizure or condemnation.

If the taxpayer replaces the involuntarily converted property with property that is of equal or greater value and is similar or related in use within a specified time, the taxpayer can defer recognition of the gain (and the tax on it). To qualify for deferral, the replacement property must be purchased within two years of the close of the tax year in which the gain was realized. A larger three year replacement period applies for condemned property. Taxpayers can apply to the IRS for extensions of these replacement periods. .

The gain that would result on the receipt of insurance proceeds or compensation paid by the government on a taking for public use, is automatically deferred if the property is replaced with other property which is similar or related in use.

The foregoing rules apply to property used in a taxpayer's trade or business or held for investment purposes and personal use property. The deferral rules do not apply to losses. In most cases, however, losses are deductible as casualty losses.

An Example: Jennifer had a basis of $150,000 in a vacation home she owned in Breckenridge, Colorado which appreciated in value since she purchased it. The vacation home was completely destroyed by fire and she subsequently received an insurance payment of $300,000. She purchased a new vacation home for $290,000 in Sarasota, Florida, within two years of the end of the year in which she received the insurance payment.

Jennifer's realized gain on the involuntary conversion is $150,000 ($300,000 insurance payment minus the $150,000 basis). If Jennifer elects gain deferral, she will only recognize $10,000 of gain. Because she received an insurance payment of $300,000, but only spent $290,000 on the replacement property (vacation home she purchased in Florida), the $10,000 is the excess of the amount she received from the insurance payment. Her basis on the new property will be $150,000. This is the cost of the replacement property in Florida ($290,000) minus the deferred gain ($140,000). If Jennifer purchased a replacement property for $300,000 or more, she would not have to report any gain.

In a 1033 exchange a qualified intermediary is not required.

In contrast, a 1031 exchange is a deferral of capital gain tax on appreciated investment property. A qualified intermediary is required in most cases to hold the sale proceeds during the exchange period. There are strict timelines in a 1031 exchange: from the close of escrow on the relinquished property, the taxpayer has 180 days to close escrow on the replacement property. In addition, the taxpayer must identify replacement property within 45 days of closing escrow on the relinquished property. For more information on 1031 exchanges check out Asset Preservation's website http://apiexchange.com/index_main.php?id=1 and our WEBINAR at http://apiexchange.com/index_main.php?id=25.

1031 Exchanges - Options for Selling Appreciated Property

Lisa Lambert, Esq. (1031 Exchange Expert) (Asset Preservation) — Mon, 04 Feb 2008 09:27:58 -0600

SELLING APPRECIATED PROPERTY

"A SUMMARY OF TAX ADVANTAGED STRATEGIES"

The Federal Tax Code provides ways a property owner can dispose of, exchange or sell an appreciated property and receive tax benefits. Some alternatives are described below.

IRC Section 121 enables a homeowner to exclude capital gain taxes (up to $250,000 if filing as a single, and $500,000 if married and filing jointly) if living in the house as a primary residence for two of the last five years. Partial exemption is also available in certain unforeseen circumstances such as a move of more than 50 miles in employment, health or medical reasons, divorce or death. Revenue Procedure 2005-14 also allows a property owner to convert a primary residence to a rental property, and later take advantage of both capital gain tax exclusion under §121 and tax deferral under §1031 by exchanging into a replacement property held for investment or for use in trade or business.

IRC Section 453 (Installment Sale) allows a property owner who sells a property on an installment basis to defer paying capital gain taxes to future tax years when installment payments are actually received. Essentially, the property owner provides "seller carryback financing" for the buyer and only pays capital gain taxes as the payments are received over time. A variation on this strategy is sometimes called the structured sale. In a structured sale, the seller carryback note that is held by the seller is assigned over to a high quality alternate obligor (often a financial services company or life insurance company with high insurance ratings) who then makes payments to the seller over time under the terms of the note.

IRC Section 721 provides tax deferral to investors who contribute their property into a partnership entity to the extent that the contributor receives an interest in the partnership. Certain investment strategies are designed to take advantage of §721 including an operating partnership (OP) created by a Real Estate Investment Trust (REIT) sometimes referred to as an "Umbrella Partnership" or UPREIT. In exchange for the property contributed to the UPREIT under §721, the investor receives units in the operating partnership (OP Units). The capital gain taxes remain deferred as long as the UPREIT holds the property and the investor holds the OP Units.

IRC Section 1031 allows a property owner to defer capital gain taxes on the sale of any property held for investment or use in a trade or business when exchanged for like-kind property to be held for investment or use in a trade or business.

IRC Section 1033 provides tax deferral on the conversion of property destroyed in a casualty event or taken by a governmental entity through condemnation. To the extent that the property owner reinvests the compensatory proceeds for the loss in property that is similar or related in purpose or use, §1033 permits the property owner to defer recognition of gain.

A Charitable Remainder Trust permits a property owner to contribute appreciated property to a Charitable Remainder Trust (CRT) for the benefit of a designated charity. The contributor (called a donor) receives a charitable tax deduction on the transfer of the property to the CRT. Having acquired the donated property, the trustee of the CRT can sell the property (at no gain to the trust) and reinvests the proceeds in income producing investments. A CRT is usually designed to pay an annuity to the donor over the donor's life or over the joint life of the donor and the donor's spouse. Any value remaining in the CRT at the donor's death passes to the charitable remainder beneficiary.

There are many types of CRTS, a few of which include; A) charitable remainder annuity trust (CRAT) which pays a fixed dollar amount annually; B) charitable remainder unitrust which pays a fixed percentage of the trust's assets annually; C) charitable pooled income fund which is set up by the charity allowing many donors to contribute. Consult with your tax and/or legal advisor for more information on CRTs or any tax strategy.

1031 Exchanges -- Partnerships

Lisa Lambert, Esq. (1031 Exchange Expert) (Asset Preservation) — Mon, 04 Feb 2008 09:26:06 -0600

PARTNERSHIPS AND 1031 EXCHANGES
"WHAT HAPPENS WHEN ONLY ONE PARTNER WANTS TO EXCHANGE?"

A partnership may exchange property for other property of like-kind. However, IRC section 1031(a)(2)(D) specifically prohibits exchanges of partnership interests. This means that an Exchanger cannot buy into or sell interests in a partnership and qualify for a §1031 exchange. The rationale is that a partnership interest [along with a real estate investment trust (REIT) share] itself is personal property and thus is not "like-kind" with real property. Given these facts, what alternatives are available to Exchangers? (Note: The term "partnership" also refers to LLCs, which are treated as partnerships for 1031 exchange purposes.) IS IT A 'TRUE' PARTNERSHIP? First, investors owning a property together must determine if they really own the property in a true partnership. Often, investors who own property with others may consider the other individuals their partners even though they hold title as an undivided interest and don't file a partnership tax return, thus they are merely co-owners. The test is generally, "do the owners hold title as tenants-in-common?" POTENTIAL ALTERNATIVES One option is that the entire partnership stays intact and exchanges the relinquished property for a replacement property. After the partnership closes on the replacement property, the property can be refinanced and the proceeds are distributed to the partner who wants to cash out. Another alternative is that the partnership has a valid election out of subchapter K under IRC §761. The partner seeking to cash out sells their undivided interest and the other partner exchanges their tenancy-in-common interest for a replacement property. (Note: There are risks associated with partnership issues that must be discussed with a legal and/or tax advisor.)

ADDITIONAL CONSIDERATIONS

Advance planning is important, as the greater the period of time between the election out of the partnership and the exchange, the better. The election out of the partnership to the individuals as an undivided interest shortly before closing on the relinquished property leaves open the possibility that the exchange would be invalidated because the property was not held as an undivided interest long enough to be considered "held for investment." [Note: In several instances, however, the Tax Court has extended §1031 tax deferral to former partners who changed their ownership structure prior to closing on a relinquished property.]
If the entire partnership will be exchanging, it is preferable that the Partnership Agreement mention that they are holding the property "for investment or use in a trade or business."
Every Exchanger should always consult with their legal and/or tax advisors to review the many issues and risks involved with partnership situations. Contact Asset Preservation toll-free to discuss partnership issues in greater detail.

1031 Exchanges -- Seller Financing/Structured Sales

Lisa Lambert, Esq. (1031 Exchange Expert) (Asset Preservation) — Mon, 04 Feb 2008 09:24:20 -0600

SELLER FINANCING (#48)

"NUMEROUS OPTIONS ARE AVAILABLE
IN §1031 EXCHANGES"

When an Exchanger elects to carry back a Note on the relinquished property (the sale or Phase I Property), there are basically two options for treatment of the Note:

DO NOT include the Note in the exchange and pay any taxes that may be due. The Exchanger would receive the Note as the Beneficiary at the closing and pay taxes on this portion of the capital gain under the Installment method (§453).
Include the Note in the exchange by initially showing the "Qualified Intermediary" (API) as the Beneficiary and possibly defer the capital gain taxes.

In option number (1), the Exchanger is electing to take the Installment method per Code Section 453. The Note is made payable to the Exchanger and is received by the Exchanger at the closing of the relinquished property. The drawback to this method is the capital gain tax could become due in one lump sum if the Note allows for prepayments or if a balloon payment is required. In option number (2), the Exchanger has four different alternatives for attempting to use the Note as part of the tax deferred exchange. In order to avoid "constructive or actual receipt" by the Exchanger, API is named as the Beneficiary on the Note.

USE THE NOTE TOWARDS THE DOWN PAYMENT
ON THE REPLACEMENT PROPERTY

The Seller of the replacement property accepts the Note as partial payment towards the purchase price. In this scenario, the Note is assigned to the Seller by API and delivered to the Seller at closing.

EXCHANGER PURCHASES NOTE FROM THE EXCHANGE

Essentially, the Note is to be replaced with cash. To avoid constructive receipt of funds at the relinquished property closing, the Exchanger deposits cash equal to the face value of the Note directly to the closing officer. API assigns the Note to the Exchanger for delivery immediately after closing on the replacement property.

THE PAYER ON THE NOTE PAYS OFF THE NOTE
PRIOR TO CLOSING ON THE REPLACEMENT PROPERTY

The Note is actually paid off during the exchange. This works only on short-term Notes due within the 180 day exchange period. The Payer pays off the Note directly to API, the holder of the Note. API adds the payoff proceeds to the existing proceeds in the Qualified Exchange Account. When the replacement property is ready to close, all proceeds are delivered to the closing officer.

SELLING THE NOTE ON THE SECONDARY MARKET

The Exchanger finds an investor willing to purchase the Note, thereby replacing the Note with cash. The cash proceeds are added to the existing cash in the Qualified Exchange Account for purchasing the replacement property. Typically the Note will need to be sold at a discount, often anywhere from 15% - 30%. If the Note is discounted, the discounted amount MAY be considered a selling expense. If the Exchanger chooses option (2) and then is unsuccessful with any of the four alternatives shown above, API will assign the Note back to the Exchanger. The Exchanger has all the tax benefits of the installment method in Code §453 as shown under option (1) available. Many Exchangers choose option (2) because it allows for several alternatives of tax deferral, without penalizing the Exchanger.

1031 Exchanges -- Seller Financing/Structured Sales

Lisa Lambert, Esq. (1031 Exchange Expert) (Asset Preservation) — Mon, 04 Feb 2008 08:23:52 -0600

SELLER FINANCING (#48)

"NUMEROUS OPTIONS ARE AVAILABLE
IN §1031 EXCHANGES"

When an Exchanger elects to carry back a Note on the relinquished property (the sale or Phase I Property), there are basically two options for treatment of the Note:

DO NOT include the Note in the exchange and pay any taxes that may be due. The Exchanger would receive the Note as the Beneficiary at the closing and pay taxes on this portion of the capital gain under the Installment method (§453).
Include the Note in the exchange by initially showing the "Qualified Intermediary" (API) as the Beneficiary and possibly defer the capital gain taxes.

USE THE NOTE TOWARDS THE DOWN PAYMENT
ON THE REPLACEMENT PROPERTY

EXCHANGER PURCHASES NOTE FROM THE EXCHANGE

THE PAYER ON THE NOTE PAYS OFF THE NOTE
PRIOR TO CLOSING ON THE REPLACEMENT PROPERTY

SELLING THE NOTE ON THE SECONDARY MARKET

1031 Exchanges -- What is a Section 721 UPREIT?

Lisa Lambert, Esq. (1031 Exchange Expert) (Asset Preservation) — Mon, 04 Feb 2008 08:21:26 -0600

WHAT IS AN IRC SECTION 721 UPREIT?

"AN EXCHANGE ALTERNATIVE FOR
COMMERCIAL INVESTORS"

A Real Estate Investment Trust (REIT) is similar to a mutual fund for real estate investors and offers the benefits of a diversified portfolio that is professionally managed along with distributing almost all of the net income to investors. Although a REIT can do an exchange at the entity level, individual REIT shares are considered personal property and do not qualify for an IRC Section 1031 exchange. For tax deferral under §1031, an investor must exchange real property for other "like-kind" real property. There are many resources available on the internet to learn more about REITs, including the REIT industry trade organization, the National Association of Real Estate Investment Trusts at http://www.nareit.com/.

WHAT IS AN UPREIT?

An Umbrella Partnership REIT (UPREIT), under IRC §721, provides tax deferral benefits to commercial property owners who contribute their property into a new tiered ownership structure that includes an operating partnership (OP) and the REIT who is a partner in the OP. In exchange for the commercial property contributed to the UPREIT, the investor receives units in the operating partnerships (OP Units). The capital gain taxes remain deferred as long as the UPREIT holds the property and the investor holds the OP Units. The advantage is this structure provides a viable exit strategy to commercial property owners who otherwise might have significant capital gain tax liabilities on the sale of appreciated property. In addition, the investor benefits from additional diversification because they have an interest in a portfolio of commercial properties instead of just one property. This structure is not appropriate for every investor as they must have property that the REIT wants to add to their portfolio and typically this will be a larger commercial property.

A hybrid of the above scenario has been developed for investors who perform a §1031 exchange into a tenant-in-common (TIC) ownership property that a REIT may acquire later. The TIC property can later be contributed into an UPREIT structure, allowing the §1031 investor to ultimately acquire OP Units that are essentially the equivalent to an interest in the REIT itself.

HOW ARE OP UNITS VALUED?

OP Units are generally convertible into REIT common stock. The Board of Directors typically establishes the price of the common stock in a private REIT while the market value prices the OP Units with the stock of a public REIT. OP Units in a public REIT are more liquid than those issued by a private REIT. An UPREIT's Preferred OP Units are generally redeemable at par. The terms and redemption options are negotiated on a case-by-case basis. The Common OP Units in an UPREIT can often be sold the following ways:

Free Convertibility: Common OP Units can usually be converted into shares of common stock at the investor's option.

Annual Repurchase Option: Some REITs provide a repurchase option for investors up to a fixed percentage of the investor's initial common OP Unit holdings.

100% Repurchase Option on Death: Upon an investor's death, an UPEIT can, at the election of the estate, repurchase Common OP Units at fair market value.

1031 Exchanges -- Reverse Exchanges

Lisa Lambert, Esq. (1031 Exchange Expert) (Asset Preservation) — Sun, 03 Feb 2008 16:31:07 -0600

REVERSE EXCHANGE BENEFITS

Revenue Procedure 2000-37 ("Rev. Proc. 2000-37"), provides guidelines for the taxpayer to acquire the replacement property before the sale of the relinquished property is completed. The reverse exchange can be the ideal solution if the taxpayer cannot delay the closing of the replacement property. The reverse exchange helps investors meet a number of objectives:

Seize the Moment: Don't miss out on the buy of a lifetime! Immediately acquire a desirable replacement property prior to selling the relinquished property.

Protect Your Exchange: Eliminate the pressure-filled problems presented by the 45-day identification period.

Improve the Replacement Property: Use the parking arrangement to increase the value of the replacement property by making capital improvements.

Investors can take advantage of the current real estate market and still defer their capital gain by following Rev. Proc. 2000-37 safe harbor guidelines for a reverse exchange.

REVERSE EXCHANGE STRUCTURES

Rev. Proc. 2000-37 makes it clear that the Exchanger cannot own both properties at the same time. It describes the ownership process as a "parking arrangement" because either ownership of the relinquished property or the replacement property is "parked" with an Exchange Accommodation Titleholder ("EAT"). To "park" the ownership actually means that a deed is recorded to transfer the ownership to the EAT so that the Exchanger owns one property and the EAT owns the other property.

Additional Issues

Parking the Replacement Property: The EAT acquires title to the replacement property with funds the Exchanger causes to be loaned to the EAT. Within 180 days, the Exchanger sells the relinquished property through the "delayed exchange" format and the EAT transfers the replacement property to the Exchanger.

Parking the Relinquished Property: The Exchanger conveys the relinquished property to the EAT and then the Exchanger acquires the replacement property under a "simultaneous exchange" format. During the 180 days, the EAT remains on title to the relinquished property until it is sold to a purchaser.

Reverse/Improvement Exchange: The EAT acquires the replacement property and makes improvements to this property. The improved property is later exchanged for the relinquished property within 180 days to complete the exchange.

All investors should thoroughly review any contemplated reverse exchange transactions with their legal and/or tax advisors.

1031 Exchange WEBINAR - Get your questions answered NOW!!

Lisa Lambert, Esq. (1031 Exchange Expert) (Asset Preservation) — Sat, 02 Feb 2008 20:57:52 -0600

The link below will take you to a webinar that covers all of the basics in a 1031 exchange. It answers all of your critical questions.

In addition, you can call 1-800-282-1031 for an in-person consultation with an experienced 1031 exchange counselor.

Or, contact me at (559) 433-5399

http://apiexchange.com/index_main.php?id=25