1031 eri pp

Exchange Resources, Inc. 1031 Exchange Class

Phil Atwan Senior Vice President 213-479-8800

www.ExchangeResources.Net

Exchange Resources, Inc. Corporate Office: San Diego

Regional Offices: San Francisco Los Angeles Orange County Inland Empire Dallas, Texas

Nationwide Exchange Company

Universal Exclusion Capital Gain

for Primary Residence  Owned and used home for 2 out of the last 5 years. Does not have to be concurrent or consecutive.  Exclusion:  Married couple $500,000  Single $250,000  Any amount over this limit will be subject to capital gains tax

California Withholding 3.33%  Prepayment of the state tax. Escrow is required to withhold 3.33% of the sales price at COE or the full 12.3% at COE. Unless seller: Effects a 1031 exchange Loss on the property Exempt: Corp, LLC, Bank, Ins.

 Cash boot and seller carrybacks are subject to withholding.  What happens if exchange fails?

Exchange Terminology      

Starker Exchange Relinquished Property / Down Leg Replacement Property / Up Leg Cash Boot Debt Boot Accommodator/QI

What is a §1031 Exchange?

A transaction in which the taxpayer trades investment property for substitute investment property / properties.

 Why are investors doing them?

The Capital Gains Tax  Short term capital gains tax: Investment held less than one year, based on tax bracket Long term capital gains tax: Investment held longer than one year 0-20% federal TAX California State Tax: 12.3% Recapture of Depreciation Tax: 25% Medicare TAX 3.8%

Benefits of § 1031 Exchange?  Increase portfolio of wealth  Change the type of investment property  Moving and exchanging your investment property to new location  New depreciation schedule

1031 Investment Property Converted to Primary Residence Oct. 22, 2004

 Investment property acquired in a 1031 exchange and converted to a primary residence must now be held for 5 years before taxpayer sells it and utilizes universal exclusion.

Exceptions (not allowable):  Stocks and bonds  Stock in a trade

 Partnership Interest  Mortgages and promissory notes

 Property held primarily to sell (dealers)

2nd homes do not qualify Unless‌  Converted to a valid Exchange Property by renting out & holding as a legitimate rental property.

Types of Exchanges:  Delayed Exchange

 Simultaneous Exchange  Build to Suit Exchange  Reverse Exchange  Hybrid  Personal Property Exchange

Things To Think About?

Taking the listing?

What should I look for?

What should I ask my seller?

Verbiage for Sales Contract: “Buyer hereby acknowledges it is the intent of the Seller to effect an IRC Section 1031 tax deferred exchange which will not delay the closing or cause additional expense to the Buyer.”

 Relinquished property contract – 1st leg)

How to open an Exchange  To open an exchange, Exchange Resources, Inc. needs the following items: 1. Escrow Instructions of Contract 2. Preliminary Title Report An exchange agreement, assignment of parties rights and instruction letter will be prepared.

An exchange agreement, assignment of parties rights and instruction letter will be prepared.

Economics of an Exchange  Buy equal to or greater, less costs, than what the taxpayer sold for.

 Assume the same amount of debt $$$ New cash offsets new loan To great of a loan  Use all the proceeds/cash into the new property/properties

There are 2 different kinds of boot:  Cash Boot – Cash left over after the purchase of the Replacement Property.

 Debt Relief Boot – Debt not taken on from the purchase of the Replacement Property.

Capital gains tax paid on cash or debt boot.

How long do I have to do my Exchange?

180 Days after the close of sale escrow.

Or‌ April 15th (or the date of the filing taxes) whichever comes first.

How many days do I have to identify new property?

45 days after the C.O.E. How do I identify my property?

Identification of Replacement Property The taxpayer has 45 days, from the close of the relinquished property, in which to identify replacement property.

What is Like-Kind Property?

The Three Property Rule

The taxpayer can identify a maximum of (3) replacement properties without regard to fair market value.

200% Rule: When identifying more than (3) properties, the total aggregate value of all properties identified cannot exceed 200% of the relinquished property value.

Example of 200% Rule: Relinquished property sold for 550,000.00 2x = $1.1 million.

Value $300,000 2. 131 USA Avenue, Anytown WA: Value $400,000 3. 555 Exchange Ln, Anytown VT: Value $200,000 4. 1212 Tax Alley, Anytown VT: Value $200,000 1. 123 Main Street, Anytown TX:

TOTAL VALUE LISTED: $1.1 million

Exception: 95% Rule: If too many properties are identified, taxpayer must acquire 95% of the total value of all identified properties to still qualify for an exchange.

Like-Kind Property?

Examples of like-kind properties:

 Commercial building for ranch land

 Vacant land for residential  Rental property for an easement  Leasehold interest of 30 years or more for income property

Domestic for domestic...

Foreign for foreign...

Like-Kind Personal Property?

   

Personal property is considered like-kind only if it appears in the same General Asset Class or Business Class: Therefore...

Airplane for an airplane Boat for a boat Truck for a truck Dental office for a dental office

Domestic for domestic...

Foreign for foreign...

I have found my replacement property

What next?

Contact us with Escrow Info.

For Replacement Property  Escrow Instructions  Preliminary Title Report

Documents will be provided for each Replacement Property

Replacement Property  Make sure there is a cooperation clause in the contract wherein the seller will cooperate with the exchanger to compete the exchange.

Replacement Property 1. Exchange Resources, Inc. will be assigned into the Contract/Escrow Instructions as the buyer.

2. At closing funds held by Exchange Resources, Inc. will be deposited into escrow to fund the closing.

3. Should escrow require additional funds to close, the taxpayer can deposit funds directly into escrow.

Simultaneous Exchange  Concurrent closing of the relinquished property (sale property) and the replacement property (purchase property).  IRS safe harbor recommends the use of a qualified intermediary.

Reverse Exchange September 2000 Rev. Proc.  Replacement property acquired first.  Property is parked with EAT (Exchange Accommodation Titleholder).  Relinquish property must be identified within 45 days and sold within 180 days of purchase.

Build to Suit Exchange  Must identify land and a description of future completed improvements.

 ERI takes title to land.  Exchange funds need to be used within 180 days and exchange concluded.

Exchange Resources, Inc. Strengths  Fidelity Bond $1 Million  Errors and Omissions $1 Million

 Segregated bank accounts at  Union Bank  Independent debt free company  Work with your favorite Title / Escrow

Exchange Resources, Inc.  Our professional staff has over 110 years of combined experience.  In house Legal Council,  Exchange Administrators and FEA Certified Management.  Qualified Trust Accounts  Bonding  E & O Insurance  Written Authorization BEFORE funds may leave the Qualified Trust Account