Section 1031 Exchanges and Tenant in Common Transactions

1
Section 1031 Exchanges andTenant in Common
Transactions

• Presented by
• Jonathan L. Schuster, CFA, CPA, CMA, CFM
• Partner, Axley Brynelson, LLP
• 608.283.6769
• jschuster_at_axley.com

2
Agenda

• Introduction to Section 1031 Exchanges
• The Basic Rules
• Types of Exchanges
• Delayed Exchange Process
• Tenants in Common

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Introduction to Section 1031 Exchanges

• Section 1031 of the Internal Revenue Code
  provides 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.
• Method by which property owner trades one or more
  relinquished properties for one or more
  replacement properties of like-kind, while
  deferring the payment of federal and some state
  taxes.
• Policy consideration is that the investment is
  still the same but the form may have changed.

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Introduction to Section 1031 Exchanges (continued)

• Advantages
• Exchange like-kind property without paying
  federal income taxes on transaction
• More money available to invest in another
  property because taxes are deferred
• Rebalance investment portfolio

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Introduction to Section 1031 Exchanges (continued)

• Disadvantages
• Reduced tax basis for depreciation in the
  replacement property

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The Basic Rules

• Relinquished property must be qualifying property
• Replacement property titled in same name as
  relinquished property
• Replacement property must be like-kind
• Boot taxable to the extent of gain realized on
  the exchange

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The Basic Rules (continued)

• Qualifying Relinquished Property
• Specifically Excluded
• Property held primarily for sale
• Inventories
• Stocks, bonds or notes
• Other securities or evidences of indebtedness
• Interests in a partnership
• Certificates of trust or beneficial interests

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The Basic Rules (continued)

• Like-Kind Replacement Property
• All qualifying real property in U.S. is like-kind
• Personal property relinquished must be either
  like-kind or like-class to the personal property
  that is acquired

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The Basic Rules (continued)

• Boot
• Money or FMV of other property received by
  taxpayer in an exchange (includes liabilities of
  the taxpayer or to which the property exchanged
  is subject to that is assumed by the other party)
• Taxable to the extent of gain realized on the
  exchange
• Trade across or up rather than down

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Types of Exchanges

• Simultaneous
• Improvement
• Reverse
• Revenue Procedure 2000-37 provides safe harbor
  for exchange
• Delayed

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Delayed Exchange Process

• Basic Approach
• Role of Qualified Intermediary
• 45-Day Identification Rule
• Three Property Rule
• 200 Rule
• 95 Rule
• 180-Day Replacement Rule

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Tenants in Common

• Deeded, undivided fractional interest in real
  estate
• Section 1031 Considerations
• Security or Real Estate
• Partnership or Real Estate

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Tenants in Common (continued)

• Securities and Real Estate
• Securities Regulation
• Investment contract under SEC v. W.J. Howey Co.,
  328 U.S. 293 (1946) (1) investment of money
  (2) in a common enterprise and (3) expectation
  of profits solely from the efforts of others.
• Federal Income Tax
• Tax Court decisions have held that property
  (e.g., mineral deeds) were not securities under
  the IRC even though considered securities under
  federal securities laws.

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Tenants in Common (continued)

• Partnership Issues / Sources of Law
• IRC
• Treasury Regulations
• Case Law
• Revenue Rulings
• Revenue Procedures
• Revenue Procedure 2002-22

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Tenants in Common (continued)

• Revenue Procedure 2002-22
• Tenants in Common Ownership
• Number of Co-owners
• No Entity
• Co-ownership Agreement
• Voting
• Restrictions on Alienation
• Sharing Proceeds and Liabilities Upon Sale

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Tenants in Common (continued)

• Revenue Procedure 2002-22
• Proportionate Sharing of Profits and Losses
• Proportionate Sharing of Debt
• Options
• No Business Activities
• Management and Brokerage Agreements
• Leasing Agreements
• Loan Agreements
• Payments to Sponsor

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Section 1031 Exchanges andTenant in Common
Transactions

• Questions
• Jonathan L. Schuster, CFA, CPA, CMA, CFM
• 608.283.6769
• jschuster_at_axley.com