Big Sky Review | Issue 3 by First American Title - Agency Division

2017 | ISSUE 3

BIG SKY Review

~ A M O N TA N A A G E N C Y N E W S L E T T E R ~

JUST THE BASICS

1031 EXCHANGE

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Just the Basics: 1031 Exchange

Knowing some basic rules behind Internal Revenue Code §1031 can help investors defer paying capital gain tax on property dispositions, resulting in more money to invest in a property acquisition. Generally, any real or personal property can be exchanged, provided it is held “for productive use in a trade or business” or for “investment” and is exchanged for property of “like-kind” that will also be held for one of these same purposes.

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EXCHANGE OF PROPERTY The first requirement of a 1031 exchange is that the transaction must be structured as an exchange, rather than as a sale and purchase. In order to accomplish this, a qualified intermediary must be involved with the sale of the relinquished property (property sold) and acquisition of the replacement property (property acquired). To ensure that the transaction is considered an exchange, rather than a sale followed by a purchase, the investor must sign an exchange agreement, assignment of the purchase contract, as well as other documentation before the relinquished property sells, and the intermediary must hold the proceeds until they are used to buy the replacement property. As long as the appropriate documentation is signed, the intermediary does not need to take title to the property.

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LIKE-KIND REQUIREMENT The replacement property must be considered “like-kind” to the relinquished property. The like-kind requirement is fairly broad for real property exchanges. For example, an office building can be exchanged for vacant land, an apartment building can be exchanged for a single family rental home, or a duplex can be exchanged for a retail strip center; basically any real property held for investment qualifies as “like-kind.” Continued on next page The information contained in this document was prepared by First American Title Insurance Company (“FATICO”) for informational purposes only and does not constitute legal advice. FATICO is not a law firm and this information is not intended to be legal advice. Readers should not act upon this without seeking advice from professional advisers. First American Title Insurance Company makes no express or implied warranty respecting the information presented and assumes no responsibility for errors or omissions. First American, the eagle logo, First American Title, and firstam.com are registered trademarks or trademarks of First American Financial Corporation and/or its affiliates. AMD: 11/2017

JUST THE BASICS

1031 EXCHANGE SAME TAXPAYER RULE In order to qualify for tax deferral treatment, the same taxpayer selling the relinquished property must purchase the replacement property. For example, if Company B sells the relinquished property, Company B must also acquire the replacement property. An exception to this requirement is entities that are considered disregarded for tax purposes, such as single member limited liability companies and revocable trusts. For example, Sue Smith may own a commercial building in her own name. She can sell that property and acquire replacement property in her own name, or she may take title in the name of a limited liability company in which she is the sole member, or she may create a revocable trust and take title in the name of the trust. In each case, Sue Smith is still considered the same taxpayer thus allowing her to complete an exchange. HOLDING FOR INVESTMENT PURPOSES Both the relinquished and replacement properties must be held for investment purposes or for use in the investor’s business. Property that is held for the purpose of appreciation or for rental income should satisfy the investment requirement. Typical exchange transactions involve an office or commercial building, a rental home or an apartment building. Personal residences, vacation homes frequently used by the owner, and property held for sale (i.e., new homes constructed by a homebuilder) would not qualify. Mixed use properties such as home offices or duplexes in which the investor lives in one unit and rents the other unit can qualify for a tax-deferred exchange for the portion of the property used for business or investment purposes. The tax code does not clearly specify a minimum time frame that an investor must continue to hold the investment property to qualify for tax deferral treatment. However, when the IRS examines exchange transactions, the investor must be able to show that the investor intended to hold the property for investment purposes at the time it was acquired. If an investor only holds his replacement property for a few months prior to selling it, the IRS may question whether the investor actually intended to hold the property for investment purposes. DEFERRING ALL TAX In order to defer all tax completely, the property that the investor is purchasing must be equal or greater in value, equity, and debt (but the debt can be replaced with cash) than the relinquished property. If any of these criteria are not met, the exchange may still be valid; however the transaction will likely be at least partially taxable.

TIMING AND IDENTIFICATION The investor has 45 days from the closing of the relinquished property to identify replacement property. Proper identification of replacement property is a requirement for a valid exchange, and the investor can only acquire property which has been properly identified during the 45-day identification period. Replacement property that is acquired (i.e., closes) within the 45day time period is considered properly identified. For property not purchased within the 45-day time frame, the identification must unambiguously describe the property (with an address or legal description), and must be made in writing, signed by the investor and sent before midnight of the 45th day. If multiple relinquished properties are grouped together in one exchange, the 45-day time period starts to run as of the closing of the first property. At First American Exchange, we provide you with forms to help you meet the required guidelines. If an investor wants to identify more than one replacement property, there are several options. The two most common methods to identify multiple properties are: The “Three Property” rule: the investor may identify up to three properties without regard to their fair market value; or The “200%” rule: the investor may identify any number of properties so long as the total fair market value of all of the listed properties does not exceed 200% of the value of the relinquished property. Once escrow closes on the relinquished property, the investor has the lesser of 180 days from the date of closing, or the date on which the investor’s tax return for the year the relinquished property was sold is due, to close the purchase transaction and complete the exchange. For exchanges closing in the final quarter of the year, the taxpayer will need to get an extension to file his tax return to get the full 180 days. TRUST THE EXPERTS Tax-deferred exchanges are an incredible investment tool. When considering a tax-deferred exchange, consult with your tax advisor and contact First American Exchange Company before the sale of the relinquished property. As the national leader in 1031 exchanges, First American Exchange can assist you through every step of the process. Mark A. Bullock, Esq., Counsel and Manager First American Exchange Company 215 South State Street, Suite 380, Salt Lake City, UT 84111

mbullock@firstam.com | 866.516.1031

First American Title | Big Sky Review | 2017 - Issue 3

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F I R S T A M E R I C A N . Y O U R H O M E W A R R A N T Y S O L U T I O N .

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Matt Olsen Area Manager- Utah, Montana, South Dakota

801.633.8188 maolsen@firstam.com

Phone Orders: 800.444.9030

www.firstamrealestate.com | Service: 800.992.3400 *Prices listed are for single-family homes under 5,000 sq. ft. Call 800.444.9030 for quote on: homes over 5,000 square feet, multiple units, new construction, guest homes and optional coverage pricing. See contract for coverage details. First American Home Warranty Corporation makes no express or implied warranty respecting the information presented and assumes no responsibility for errors or omissions. First American, the eagle logo, firstam.com, and First American Home Warranty Corporation are registered trademarks of First American Financial Corporation and/or its affiliates. First American Home Warranty Corporation also operates as First American Home Buyers Protection Corporation and First American Home Warranty Corporation of Florida.

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FA_NPWS_1_17

E&O Renewal - New Procedure First American Title is pleased to announce the redesign of our Errors and Omissions monitoring program which leverages our AgentLinx system functionality and provides additional efficiencies for our agents. Agents with E&O policies having an expiration date of September 2017 and later will no longer receive paper notifications delivered through the United States Postal Service (USPS). We will utilize new functionality within AgentLinx based on key data elements of an Insurance Renewal Contact and the expiration date of the E&O policy on record.

High-Level Overview of New Procedure »

Individuals who have been identified as an Insurance Renewal Contact at the agency will receive an email reminder when the expiration date of the current E&O policy of record is within 60 days.

If First American Title is not in receipt of renewal documentation by the date of expiration, another email will be sent to the designated Insurance Renewal Contact.

The sender of email notifications will appear as First American E&O Updates and will contain detailed information regarding requested documentation and submission instructions.

Please contact your First American Title agency representative with any questions you may have about this new process or your designated Insurance Renewal Contact.

First American Title Insurance Company makes no express or implied warranty respecting the information presented and assumes no responsibility for errors or omissions. First American, the eagle logo, First American Title, and firstam.com are registered trademarks or trademarks of First American Financial Corporation and/or its affiliates.

First American Title | Big Sky Review | 2017 - Issue 3 AMD:07/2017

www.firstam.com

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E&O Policy Certificate Holder Renewal Notification to First American Title You can facilitate the renewal notification process by adding First American Title Insurance Company as a Certificate Holder on your E&O Policy.

What is a Certificate Holder? As a Certificate Holder, First American Title can receive notification from your Insurer upon renewal or cancellation of your E&O Policy. Many carriers will provide a certificate at no cost. The request is not to be a Named Insured.

Adding First American Title as a Certificate Holder You can add a Certificate Holder by contacting your Insurer directly or going through your insurance broker and making the request to add the following as a Certificate Holder to receive notifications: First American Title Insurance Company 2082 Summit Lake Drive Tallahassee, FL 32317 Email: eo-insuranceupdates@firstam.com

If you have any questions, please contact your First American Title Agency Representative.

First American Title | Big Sky Review | 2017 - Issue 3

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Since its launch in 2011, the Pass-Thru Marketing Program has helped thousands of First American agents across the country educate their business partners and consumers about a wide-range of topics. From first-time homebuyers and the value of an Owner’s Policy to FIRPTA, TRID and cyber fraud, the PassThru Marketing Program has what you need. Material can be customized with your company logo and contact information then downloaded for print, posting online or distribution by email. • • •

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Log into AgentNet® and access the Pass-Thru Marketing Program today! Program not available in CA First American Title Insurance Company makes no express or implied warranty respecting the information presented and assumes no responsibility for errors or omissions. First American, the eagle logo, First American Title, and firstam.com are registered trademarks or trademarks of First American Financial Corporation and/or its affiliates. AMD: 08/2016

First American Title | Big Sky Review | 2017 - Issue 3

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Our offices will be closed November 23-24, as we celebrate the Thanksgiving holiday.

Our offices will be closed

December 25th

as we celebrate the

Holiday Season.

Paul Newton Amie Voss VP, Agency State Manager D: 303.305.3358 abvoss@firstam.com

Cindy Guanell Regional Underwriter Mountain Region D: 208.321.5184 cguanell@firstam.com

First American Title | Big Sky Review | 2017 - Issue 3

Mountain Region Underwriting Counsel D: 801.316.0608 panewton@firstam.com

Lance Lewis Associate Underwriter D: 208.321.5157 lancelewis@firstam.com

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