For Legal Professionals

Shhhhh.

Don’t tell
D ’t t ll anyone.

Your clients are eligible for
g
interest free loans from the US
and State Governments…

…for as long as they’d like.

…for as many times as they’d
f ti th ’d
like.

Of the approximately
$200 Billi i commercial real
Billion in i l l
estate transactions during 2008, it is
estimated that 20-25% could have
benefited from Section 1031
treatment.

Only 3% did.

What’s In It For You?
• Absolutely P t f Y
Ab l t l Part of Your Fiduciary Responsibility
Fid i R ibilit
– Legal Ramifications on the Sale of Investment/Trade or Business
Property are Key!!

• Clients Will Appreciate Your Resourcefulness & Knowledge
1031 Savvy Attorneys are HEROS!

• Section 1031 has Wide Applicability in Your Practice
– Help Your Clients strategize the sale and repurchase of their holdings.
– Property portfolios may be realigned tax free
free.
– An EXCELLENT Wealth Building Strategy Using Uncle Sam’s Money

What’s In it For Your Clients?

What’s In it For Your Clients?
• Section 1031 Is NOT Just for Commercial Investors and the
Wealthy: Many individuals have Exchangeable Assets…
– Raw Land
– E
Excess Land (What is customary?)
L d
– Second Homes (If planned correctly)
• Mixed Use Properties (B&B’s, Home Offices & Mixed Use)
• Personal Property
– Horses/Livestock
– Coin Collections
– Airplanes & Coin Collections
– Heavy Equipment Used For Business

About Our Firm
• Practice began in 1981; incorporated in 1987
• Exchanges are our exclusive line of business
– Thousands of Exchanges worth hundreds of millions
• Background of principal:
– 9 yrs engineering, 25 yrs of real estate & development and 30 years
facilitating Section 1031
• Dedicated & Knowledgeable Staff
• Member of Federation of Exchange Accommodators
• Nationwide practice; 48 states and counting
counting…

Today We Will Explore…
• What is Section 1031?
• Section 1031’s misconceptions
• How to recognize when to use Section 1031?
• Who qualifies for an Exchange?
• What Qualifies For an Exchange?
• How t report an E h
H to t Exchange
• How states handle an Exchange
• Exchanges and partnerships
• Real-life Examples of Our Exchanges
• Alternative Exchange Strategies

Primary Objectives of This Course
• Provide a Basic Section 1031 Education
P id B i S ti Ed ti

• Provide Tools & Information Enabling You to Better
Serve Your Clients
S Y Cli t

• Assist You In Recognizing the Strategic Applications
of S ti
f Section 1031 and t E l
d to Explore
Alternative Replacement Strategies

Primary Objectives of This Course
• Help You to Understand How Section
1031 Integrates Into Your Client’s
Overall Financial Goals & Objectives

• How to report an Exchange

• We will Demonstrate our Ability to
Become Your Section 1031 Resource
in the Future

Pop Quiz!!
• Section 1031 Basics

• 10 Minutes To Complete

• You Will Be Amazed at How
Much You Will
Learn!

What Is An Exchange?
• Method to sell Investment and/or Trade or Business Property
p y
and replace it with New Property that doesn’t trigger any tax.
• Its essential elements are: The Client must:
• Give a Deed (or a Bill of Sale);
• Get a Deed (or a Bill of Sale); and
• Don’t handle Cash

The Five Critical Elements

1. Intent
2.
2 Form and Documentation
3. Control of Funds
4. Like-Kind P
4 Lik Ki d Properties
ti
5. Time Limits

The Regulation - Section 1.1031(k)-1
“A deferred exchange is
defined as an exchange in
which, pursuant to an
agreement, the taxpayer
transfers property held for
productive use in a trade or
business or for investment
(the ‘relinquished property’)
and subsequently receives
QI property to be held either for
productive use in a trade or
business or for investment
(the ‘replacement
property’).”
t ’) ”

An Exchange at a Glance
Exchange Documents

Relinquished Property
• Agreement With QI
• Assignment of Contract
• Notification of Assignment
• Settlement Instructions
QI
Replacement Property
• Assignment
• Notification
• Settlement Instructions

Section 1031(a)(1)
“No gain or loss shall be recognized on the
exchange of property held for productive use in trade or
business or for investment if such property is exchanged
solely for property of like kind which is held either for
productive use in a trade or business or for investment.”

Section 1031 Works ONLY with
Investment/Trade or Business Property
YOU MUST PROVE INTENT!

Exceptions to Section 1031 (Sec.1031(a)-(2))

• Stock in trade or other property held primarily for sale
• Stocks, bonds or notes
• Other securities or evidences of indebtedness or
interest
• Interests in a partnership
• Certificates of trust or beneficial interest
• Choses in action (litigation rights)
( g g )

What is Investment Purpose?
• Investment is the passive holding of property for more than a
temporary period with the expectation of appreciation

• Real estate (even if unproductive) held by a non dealer for
future use or increment in value is held for investment and not
primarily for sale (Reg. 1.1031(a)-1(b))

• Thus property held for sale in the
immediate future is not held for
investment

What are the benefits of an Exchange?
1.
1 Full capital gains tax deferral (Exchange goes Even or Up in Value)

2. The ability to use Uncle Sam’s money to enhance holdings

3. Compounding effect

4. Estate planning

5. Exchange into passive holdings

6. Solve
6 Sol e problem of joint o nership
ownership

7. Increase cash flow

Three Essential Elements:
Properties Must Be Exchanged
• Not Sold

Properties Must Be Like-Kind

• Real Estate
• Personal Property

Held By Same Taxpayer

• Relinquished & Replacement

Replacement Property Rules Reg 1.1031(k)-1-(c)(4)
• The Three Property Rule - The Exchangor may identify up to
three (3) properties, without regard to value; or

• The 200% Rule - The Exchangor may identify more than three
properties, provided their combined fair market values does not
exceed 200% of the value of the Relinquished Property; or

• The 95% Rule - The Exchangor may identify any number of
properties, provided the Exchangor acquires 95% of those
properties (by value).

• Properties received before the 45th day do not have to be
identified, but must appear on one of the ID’s after Day 45.

Like-Kind Requirement:
• The term “like-kind” refers to the nature or character of the
property and not to its grade or quality (Reg 1.1031(a)-1(2)(b))

• Real property cannot be exchanged for personal property (Reg
1.1031(a)-1(2)(b))

• Qualifying personal property can be exchanged for property of a
similar character (NAICS (formerly SIC) Codes must match; the
Code must fall within Sector 31, 32 or 33 of NAICS; last digit
g
cannot be a 9.) (Regs 1.1031(a)-2, et seq.)

Examples of Like-kind
• Improved real property for Unimproved real property
(Reg 1.1031(a)-1(2)(b))

• Lease for >30 years (Reg 1.1031(a)-1(2)(c))

• Partial interest for a whole interest

• O property for more than one
One t f th
property and vice versa

What is Like Kind?
ANY REAL PROPERTY IS LIKE KIND WITH ANY OTHER REAL
PROPERTY….

Single Family Dwelling
Apartment Building

What is Like Kind?
PROPERTY….

Multi-family Dwelling


What is Like Kind?
PROPERTY….

Land Development


What is Like Kind?
PROPERTY….


Commercial Property
p y

Personal Property (Regs 1.1031(a)-2, et seq.)

• Same General Asset Class or Product Code
• North American Industry Classification System
• Sector 31-33: Manufacturing
– Examples: C
Construction Equipment, Well Drilling Equipment, Logging
Equipment, Commercial Vessels, Commercial Laundry Equipment

– See www.census.gov/naics
ce sus go / a cs

Timing is everything!
• The Exchange Period begins on the transfer of the
Relinquished Property – This is Day #0

• Exchangor must identify qualified Replacement Property within
45 days of closing (the “Identification Period”)

• Exchangor must acquire within 180 days, or due date of the tax
f
return (counting extensions) for the tax year of the sale (the
“Exchange Period”) (Reg 1.1031(k)-1(b), et seq.)

• There are no extensions unless a federal disaster is declared in
the vicinity of the taxpayer or the property.

Can Anyone Handle An Exchange?
• No! It must be a “Qualified Intermediary”(QI) as
Qualified Intermediary (QI)
defined by regulation: see Regs 1.1031(k)-1(k), et
seq.

• Cannot Be the Exchangor or a Relative (Sec. 267(b)
or Sec. 707(b)(1))

• Cannot be an Agent of the Taxpayer
– One who has acted as employee attorney accountant investment
employee, attorney, accountant,
banker, broker or real estate agent within the past 2 years
– The QI Handles All Aspects of the Exchange and Should be
Involved EARLY in the Process

What does the QI do? Regs 1.1031(k)-1(g)(4), et seq.
• Creates Exchange Agreement; signed by Taxpayer.
g g g y p y

• Has Legal Standing in the transaction

• Notice of the Assignment required to be given to Buyer and
Seller, with Closing Instructions to both Settlement Agents.

• Banking, Safeguarding & Delivery of Exchange Funds

• Assurance of Critical Deadlines Including the 45 & 180 Day
g y
Deadlines

• Final accounting for tax purposes

Straight Talk About Section 1031
& t e Q Industry
the QI dust y
• Several failures during 2008-2009 costing taxpayers
MILLIONS in Exchange funds.

• QI’s are unregulated therefore EXTREME due diligence is
required.

• BIGGER IS NOT BETTER

• A few bad apples….

Are They Kidding?
From a recent
F t
Webinar given by a
national, well
known Qualified
Q
Intermediary.

• Client s
Client's funds in segregated accounts using their own
taxpayer ID.

• C e t as online access to t e o
Client has o e their own accou t
account.

• Client MUST log in and approve funds transfers, EWI can
NOT move money without this approval.
y pp

• Surety bond and E&O insurance.

Who Qualifies for an Exchange?

Owners of investment property and business property may
qualify for a Section 1031 deferral. Individuals, C Corporations,
S corporations, partnerships (general or limited), limited liability
corporations limited)
corporations, trusts and any other taxpaying entity may set up
an exchange of business or investment properties for business
or investment properties under Section 1031.

www.irs.gov

The Five Most Common Section 1031
p
Misconceptions

All 1031 Exchanges must involve
swapping or trading with other
property owners......

Misconceptions
p

It’s required that all types of 1031
exchanges must close
simultaneously......

Misconceptions
p

"Like-kind" means purchasing the
same type of property which was
sold.......

Misconceptions
p

1031 Exchanges must be limited to 1
exchange and 1 replacement
property.......

p
Misconceptions

A Section 1031 is NOT a path to cash.

What about the States?
• All states but PA allow a Section 1031
within or outside the state
• Most states follow the Federal rules
closely.
closely
• Some states require a Waiver of
withholding
• Other states w/ income taxes don’t bother
don t
• Land Gains Tax in VT: Old & New
properties must be in-state; New Property
takes Old Holding Period
• Some states have a formal Waiver; others
permit a Seller Affidavit

NH & Disregarded Entities – Beware!
• NH has recently been auditing Exchanges

• Disallowing a change of name for the
g g
acquisition of Replacement Property

• R
Resulting i HUGE t bill f E h
lti in tax bills for Exchangors

• Do NOT change the name of entity or
g y
taxpayer between the sale and the
purchase

What is “New Money” (Basis Additions):
• The Taxpayer picks up new basis for all “New Money
New Money”
that is added to the transaction.

• “New money” = N t new cash + N t i
“N ” Net h Net increase i d bt
in debt

• “Strike Price” = Sales price – costs

• Taxpayer gets increased basis if the
New property + acquisition costs
p p y q
= or exceeds the Strike Price

What is “Boot?

• If the Price + costs of the New Boot Triggers
Property is less than the Price – TAX…
TAX
costs of the Old, Boot results.

• Boot can be avoided by exchanging
even or up …The Exchange
Could Still Work!
• Boot is property of an Unlike Kind;
Cash Boot is net cash; Mortgage
Boot is less net debt.

IRS Form 8824 – Reporting an Exchange

08

123 Main Street, City, State; 4 Family Rental

456 Main Street, City, State; Single Family Rental

1 2 1997 Property Information
6 1 2008 & Exchange Dates
7 16 2008
11 28 2008
Related Party? YES
Line 8, NO Line 12
Part II
Part III

Related Party - Sec. 267(b) or Sec. 707(b)(1)

Joe Related Taxpayer Brother XXX-XX-XXXX
Related Party
789 Main Street, City, State, Zip
Information

Must remain
NO for two
tax years

Related Party -
Sec. 267(b) or
Sec.
Sec 707(b)(1)

If 9 or 10 is YES, 11 C is most probable answer (attach statement)

Multi-asset
Exchanges

“Boot”
FMV
Old basis +
“New money”
“N ”
Eg. A building
for vacant land

Exchanges That Cross 2 Tax Years:

• Reported for the year of the sale of the Old Property

• July 5 + 180 days (or Nov. 17 + 45 days) = Jan. 1st

• Election under Reg. 1.1031(k)-1(j) (Coordination of Sec.
1031 & 453):

• Provided the Client had a bona-fide intention to exchange at
the start of the Exchange Period

Can a Failed Exchange Be Fixed?
• IRS Regulations allow a sale to be rescinded
within the same tax year if the parties are
restored to their original positions (Rev Rule 80-
58)

– Un-close with the Buyer.

– Re-close with the Buyer properly, using a
Q.I.

• Can make buyer nervous, will want
compensation

Section 1031 Exchanges for
p
Partnerships

• Exchange Must be at the Entity Level
• Drop & Swap Technique Does Not Work
• IRS Is Now Asking on Form 1065:
“At any time during the tax year, did the partnership
distribute to any partner a tenancy-in-common or other
undivided interest in partnership property?” Question #14

Partnerships (2)
• Swap & Drop Technique Does Not Work Either
• IRS Is Also Asking on Form 1065
“Check this box if, during the current or prior tax year, the
partnership distributed any property received i a lik ki d
t hi di t ib t d t i d in like-kind
exchange or contributed such property to another entity
(including a disregarded entity)” Question #13

Partnerships – What to Do?
• Identify Partners Who Want To Depart
• Close on the Asset, Reserve Boot
• Departing Partners -> Cash
• Remaining Partners -> Like Kind Replacement
> Like-Kind
Property
• This Preserves the Partnership EIN# and Holding
p g
Period

Section 1031 or Section 1033?
• Section 1031 Can Be Used in concert or a
Substitution for Section 1033
• Section 1033 Has Strict Guidelines for
Replacement
• Section 1031 Has Shorter time Frames for
Performance,
Performance and;
• Is More Flexible in Choices of Replacement
p y
Property
• Before Cash is Accepted, Call a QI!!

The Power of Section 1031

What happens when both participate in 3 typical real
estate transactions…

…with radically different approaches?

Hypothetical Example Assumptions

Courtesy of Grubb & Ellis
Commercial Real Estate Services

First Transaction - Today


Second Transaction – In 5 Years


Third Transaction – In 10 Years


Fourth Transaction – In 15 Years

$361,336 $507,000
$108,400 $152,100
($21,680) $ 0
$448,056 $659,100
$2,240
$2 240 $3,296
$3 296


Summary of Wealth Building Benefits

4th Transaction $448,056 $659,100
Cumulative Increase 49.3% 119.7%


Summary of Increased Cash Flow

At 15th Year


The After-Tax Analysis (a sale in Year 15)
• Owner #1 (in Year 15)
– Has Property worth $448,056; all taxes have been paid

• Owner #2 (in Year 15)
– Has property worth $659,100, with $136,810 tax due

• Net Result (after tax):
– Owner #2 has $74,234 more wealth than Owner #1, and
has received $92,779 more income than Owner #1.

– But why would Owner #2 ever pay the tax when s/he can
exchange over & over, using THE POWER OF SECTION
1031?

Reverse Exchanges – Choice of Entity
• The EAT Can Be an Individual or an Entity
– Using an Individual is Very Dangerous (Liability/Bankruptcy/Death)
• For Protection the Entity Should be an LLC or C-Corp

LLC C-Corp

• Can Convey LLC Membership
y p • Fiscal Tax Year
• No Tax Filing in
• Could Save Transfer Taxes (Not NH) Middle of Exchange

• Better Audit Trail

Reverse Exchanges – Transfer Taxes
• Most S
States (
(Including NH) C
) Charge 2 Transfer Taxes:
f
• Property Conveyed to the EAT
• Property Conveyed out of the EAT
• ME and VT Offer a Waiver of The Second Tax
• Waiver MUST be Applied For BEFORE the Second Closing
• NH Collects Taxes on ALL Deeds With Few Exceptions

Business Sales – The Bucket List
• If the client is selling and then buying EXACTLY the same type of
business (B & B for B & B, etc.), a MULTI-ASSET EXCHANGE can
be considered; very complex…

• Most clients are changing course, so allocate the assets:
• Bucket #1: Residential RE try to maximize $ using Section 121.
• Bucket #2: Commercial RE – this figure gets exchanged.
• Bucket #3: FF & E, goodwill, etc. – this gets sold & taxed.
• Bucket #4: Inventory advance deposits, etc. – transferred at cost
Inventory, deposits etc cost.

Section 1031 & Section 121 Rev. Proc. 2005-14
• Home office, farm, excess land, etc.: Allocate Residential vs.
Business percentage, use same % as on past returns.

• If there has been no past depreciation of a part of the
residence, attempt to maximize the Section 121 portion for the
client’s best interest (the Adjusted Cost Basis of this asset +
$250K or $500K).

• Do not push the allocation past the FMV of the residence; use
municipal allocations for guidance.

• Balance of the Buyer’s offer for the commercial portion can be
exchanged.

A Note on Second Homes (Rev. Proc. 2008-16)
• Properties MUST be Held For
Investment Purposes, Therefore:
• Most Second Homes
WILL NOT QUALIFY

• Homes Must Be Rented for a
Minimum of 14 Days

• Personal Use is Limited to 2 Weeks or
10% of Time Rented, Whichever is Greater

• 24 Months of Business Use (Rev Proc. 2008-16)

• The Tax WILL be Due if IRS Finds the Property is Used as a Second Home

The Most Common Exchange Types
• Delayed Exchange (Regs 1.1031(k)-1, et seq )
1 1031(k) 1 seq.)
– The client sells his property, identifies Replacement Property options
within 45 days, then purchases the property(ies) within 180 days.

• Reverse Exchange (Rev. Proc 2000-16 & 2004-51)
– The client purchases (with a Single Purpose Entity) the Replacement
Property before his current property is sold. The client then has 180 days
to close on his Relinquished Property
Property.

• Build-to-Suit (Reg 1.1031(k)-1(e), et seq.)
– The client wishes to purchase and improve Replacement Property(ies) with
p p p p y( )
the proceeds from the sale of his Relinquished Property. This is
accomplished with a Single Purpose Entity, a/k/a an Exchange
Accommodation Titleholder (“EAT”).

Case Studies
The case studies outlined
are presented as a
representation of the 5 most
common types of Section
1031 exchanges
exchanges.

Please note that the case
studies have been simplified
and several essential steps
d l ti l t
have been omitted for clarity.
Click on the case study you
would like to review.

www.section1031.com

Case Study 1
ABDC-Delayed Exchange (Existing Property)
Direct Format

CAMPGROUND FOR SEVERAL SINGLE FAMILY
RESIDENCES

One campground
exchanged for 16 new
properties…

…including 2 new
campgrounds.

6 PROPERTIES FOR A DOZEN CONDOMINIUMS

Sold six properties to
aggregate funds to buy…

…over a dozen brand new
condo units.

CONVERTING INVESTMENT PROPERTY TO PERSONAL
RESIDENCE
Exchange for your dream
home, rent it for two
years…

…convert it to your primary
residence.

Note changes in Section
121 after 1/1/09 make the
non-primary residence time
periods taxable.

Case Study 2
ACBD-Delayed/Simultaneous Exchange (Existing Property)
Reverse Format - Exchange Last

ACQUIRE A RENTAL PROPERTY FOR A FAMILY MEMBER

Purchase a Home for the
Kids
…charge Fair Market Rent.
h F i M k tR t

Sell Multi-family Investment
Property

..After two (2) years, begin
gifting the property.

BUYING A NEW PROPERTY BEFORE THE OLD PROPERTY SELLS
Taxpayer Negotiates the
Purchase of a Significant
New Property…
…but is unable to sell a
piece of existing property
in time to do the deal…
…Park the New Property in
an EAT; 180 more days are
available to sell the Old
Property and complete the
P t d l t th
Section 1031 Exchange….

Case Study 3
ACBD-Delayed, Build-to-suit (or Improvement) Exchange
Direct Format
Di t F t

COMMERCIAL PROPERTY FOR RAW LAND WITH
IMPROVEMENTS

Taxpayer sells an existing
commercial property…

…EAT buys a vacant lot
and builds a new building
with the funds…

p y
…and delivers to Taxpayer
as improved, within 180
days….

Case Study 4
ACBD-Delayed/Simultaneous Build-to-suit Exchange
Reverse F
R Format - E h
t Exchange Last
L t

INDUSTRY SPECIFIC BUILDING ON IDENTIFIED PROPERTY
180 Days (total) are available – Rev Proc 2000-37

EAT Builds a new building to
Taxpayer’s specs, using
borrowed funds…
b df d

..Taxpayer takes occupancy..

…then sells existing property..

…...And, Exchanges with the
EAT to finish the transaction…

Case Study 5
Delayed Exchange (Existing Property) Reverse Format -
Exchange First

BUY INVESTMENT PROPERTY ABUTTING A PRIMARY RESIDENCE:

Taxpayer deeds F & C rental
property to EAT…

..EAT borrows equity from
taxpayer or the bank..

..Equity $$ used to Purchase
abutting shore front land …

…EAT sells rental property to a
Buyer to pay off the debt..

4 $ p e Qua cat o
$imple Qualification
Questions…

1.
1 What’cha Got?
2. Howd ya
2 Howd’ya Get It?
3.
3 What else ‘ya Got?
ya
4. What’cha Want?

1. What’cha Got?
– How has the property been used in the
client’s hands?

– Has there been personal use of the
property? (Rev Proc 2008-16)

– Does the property include personal
property or other intangibles?

– What is the Purchase Price Allocation?

2. Howd’ya Get It?
y
– As the result of a previous Exchange?

– Is the property from an estate or family, or
was it gifted?

– How long has the property been owned?

– What is the Adjusted Cost Basis?

3. What else ‘ya Got?
– Is there other property being sold?
– Are there other property rights or
easements?
– Any excess land associated with their
primary residence?
– Does the transaction need to be bigger,
smaller or done in stages?
– “Find
“Fi d a way to make it bigger; find a way
t k bi fi d
to make it smaller” Warren G. Harding

4. What’cha Want?
– What is the short term/long term strategy
for the property?
– Ideally the value should be even or up.
– An important element of building wealth is
the use of untaxed funds.
funds
– Diversify in type, location, quantity &
quality of the Replacement Property.
– In an Exchange, the adjusted cost basis
shifts first, followed by the cash or debt.

Alternate Exchange Opportunities
g pp

THERE ARE A MYRIAD OF OTHER
INVESTMENT OPPORTUNITIES THAT
CAN BE ACCOMPLISHED WITH AN
EXCHANGE!

Tenants - In - Common
TENANTS-IN-COMMON (TICs) OFFER A STRESS FREE
( )
OPTION TO OWN INVESTMENT GRADE REAL ESTATE

Tenants-in-common
Any Real Property

Why Use TICS in an Exchange?


What is a TIC?


Direct Ownership vs. TIC
Conventional Direct Ownership 1031 Tenant-in-Common
Property Exchange Property Exchange
Lower returns on less desirable properties Higher returns on institutional-quality properties

Difficult to comply with Section 1031 45 day ID Easy to comply with Section 1031 45 day ID rules
rules; Exchangor must find properties when properties are pre-identified

Difficult to match Section 1031 exchange debt Easy to match Section 1031 exchange debt and
and equity equity
Investor must negotiate and arrange loan Prearranged financing

Expensive and time-consuming property Professional proven property management in
management place. You receive a monthly or quarterly income
check.
Cash flow, depreciation, and appreciation Cash flow, depreciation, and appreciation potential
potential
Ability to use the Section 1031 exchange again Ability to use the Section 1031 exchange again
Ability to refinance and distribute proceeds “tax Ability to refinance and distribute proceeds “tax
free” free”

Who is a Typical Securitized TIC
Investor?


Diversification


Property Gallery


Real Estate TICS
• Undivided Fractional Ownership in Real Estate
• Can Be “Grade A”
• Can Be Single Tenant, No Debt Investments
• Senior Care Facilities
• Nationwide Retailers
• Student Housing
• Medical Office Buildings


• Single Tenant
• No Debt
• VERY Healthy Company

• Single Tenant
• No Debt
• Thrives During Downturn

How Does it Work?
1. Client sells investment property.
2. Proceeds transferred to QI (Edmund & Wheeler)
3. Client and advisor identify potential properties through a myriad of
sources within their 45-day ID period.
4. Client is granted a reservation.
5. Client and advisor fill out necessary paperwork to close.
6. Client is on title and receives a deed to the property.
7. Client assumes % interest of non-recourse financing (1)
8. Client receives % interest of the income generated from the property.
9. At the sale, the client receives % share of any and all potential profits.


Umbrella Partnership Real Estate
Investment Trust (UP-REIT)

Exchange!

Any Real Property

What Is An UPREIT?
• Similar to a Mutual Fund For Real Estate Investors.

• Allows Exchanging Real Property Into Operating
o s c a g g ea ope ty to Ope at g
Partnership (OP) Shares of Existing REITs

• REITS can convert existing properties into TICs allowing 35
gp p g
ownership positions; then
• TICs are then converted back to REIT shares and
investors then hold shares in the REIT’s entire portfolio.
p
• Portfolio is professionally managed with 95% of the net
income to investors.

Section 721 Exchange Overview
• Instead of Selling
and Exchanging,
The Investor
Contributes
Property to a
Partnership

• Receives Operating
Partnership (OP)
units.
units

UPREIT Benefits
• Transaction completed on a tax-deferred basis. If shares go
to an estate the ultimate recipients will receive a stepped up
basis.

• Transaction can be structured enabling property owner to
convert an interest in a specific property into a larger, more
balanced portfolio held by the UPREIT.

• Allows an interest in illiquid individual properties to become
more easily saleable.

Oil & Gas Leases
INVESTORS CAN EXCHANGE REAL PROPERTY FOR
INTERESTS IN PRODUCING OIL & GAS ENTERPRISES

Any Real Property

A Viable Alternative Investment for "like-kind" 1031 Exchange.

Oil & Gas Lease
AN EXTREMELY VIABLE ALTERNATIVE FOR AN EXCHANGE.
EXCHANGE

• Working and Royalty Interest

• Leasehold Interest Allows the Right to
Search for and Produce Oil and Gas

• Fractional Owners Have the Same
Rights as a Single Owner and Can
subdivide or Offer for Sale on the Open
Market

Oil & Gas Lease Characteristics
• Liquidity
• Active Secondary Market
• Life f P d ti
Lif of Production
• Supported by Qualified 3rd Party Reports
• Annual Return
• Average 15% - 18% Over Term
• Tax Treatment
• 15% Tax Free Depletion Allowance
• Valuation
• Valued on the Amount of Potential
Production

Oil & Gas Lease Benefits
• Immediate Economic Closing With Predictable Cash Flow

• Ability to Participate in the Future Production

• Highly Liquid Individual Fractional Ownership

• Diversification By Investing In One or Several Qualified
Working Interests in Different Markets

Structured Sales
STRUCTURED SALES ALLOWS THE INVESTOR TO
ARRANGE FOR A FUTURE PAYCHECK

Exchange!
g

Any Real Property

The Structured Sale
The St t d S l i
Th Structured Sale is a method for selling appreciated assets such as
th d f lli i t d t h
real estate and businesses that allows sellers to:

• Defer capital g
p gains taxes to future y
years
• Collect a stream of guaranteed payments over a set number of years

In Addition:

• Makes the transaction safer for the seller
• Doesn't require the seller to acquire new property.

This method was developed in 2005 and is becoming a sought after
method for tax deferral when selling a business or real estate.

The Structured Sale & Section 1031
• Identified as an Alternative Strategy In Exchange
Agreement

• Gives Buyer Full Title

• Can Be Used When Replacement Properties Cannot Be
p p
Identified and/or Purchased in the 45/180 Day Time
Restraints

• Can Be Used For Taxable “Boot”

The Structured Sale & Selling a Business
• There is Inherent Risk Associated With a Typical
Installment Sale

• The Structured Sale Provides a Safe Alternative

• Can Be Used in an Exchange for non “like-kind” Items like
g
goodwill and FF&E, or;

• Can be used for the entire transaction amount if the client
wants to exit the real estate class

How Do You Summarize 122 Slides?

Section 1031 is the
same as an interest-
free loan f
f l from the
th
Government
G t

Section 1031 is used in
less than 10% of the
transactions that it
should be!

Accounting
Professionals owe it to
their clients to
understand this
powerful tool!

Section 1031 is about
Relocation and
Reallocation of Assets
without Paying Capital
y g p
Gains!!!

Any U S Real Property
U.S.
Can Be Exchanged For
Any Other U.S. Real
Property!

Section 1031 can be
y
used to dramatically
increase the value of
holdings by leveraging
g y g g
Uncle Sam’s money.

Ask the 4 Questions
1. What’cha Got
2. Howd’ya Get It?
y
3. What Else ‘ya Got?
y
4. What’cha Want?

Every t
E tax-paying entity
i tit
qualifies f a S ti
lifi for Section
1031 Exchange!

Personal property can
g
also be Exchanged.

“Like-kind” is literal!

There are replacement
options available for
p
Section 1031
Understand Them!

Tenants-In-Common
Management-Free
Real Estate
Investments in Grade A
Properties

UPREIT
Exchange into a Real
g
Estate Investment Trust

Oil & Gas
A timely alternative to
y
owning real estate with
g
the same benefits and
flexibility.

Structured Sales
An annuity based
“Paycheck” for failed
exchanges and
business transfers.

Also…with Section 1031 alone:
• Must employ a Qualified Intermediary
• Time limits of 45 and 180 days
• Properties must be “Like-Kind”
Like Kind
• Business or Investment Purpose
• Relinquished and Replacement Properties held by
y
same taxpayer
• Exchanges can be done either forward (Cases #1 &
#3) or reverse (Cases #2 #4 & #5)
#2,

Congratulations!
You are now a member of the elite, the
proud, the educated….

Edmund & Wheeler, Inc.

Alumni Association

Membership has it’s benefits!

www.section1031.com/alumni

For Legal Professionals

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