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DISCLAIMER

This presentation is only intended to provide a broad overview of IRC Section 1031 tax deferred exchanges and does not address every potential 1031 exchange situation or all applicable 1031 exchange rules.

This tax-related information should not be construed as tax or legal advice specific to your situation and should not be relied upon in making any business, legal or tax related decision. A proper evaluation of the benefits and risks associated with a particular transaction or tax return position often requires advice from a competent tax and/or legal advisor familiar with your specific transaction, objectives and the relevant facts. You are urged to involve your tax and/or legal advisor (or to seek such advice) in any significant real estate or business related transaction.

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1031 EXCHANGE CODE

No gain or loss shall be recognized on the exchange of real property held for productive use in a trade or business or for investment if such real property is exchanged solely for real property of like-kind which is to be held either for productive use in a trade or business or for investment.

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1031 EXCHANGE TOPICS

1031 Exchange Changes?
Types of Exchanges an exchanger can use
Key points to keep in mind for a successful 1031 exchange
Issues and solutions
Frequently Asked Questions

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REASONS TO DO AN EXCHANGE

Capital Gains Tax
Diversify Portfolio
Increase Cash Flow
Like-Kind Property
Depreciation

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CAPITAL GAIN TAXES

Four levels of taxes:

1. Depreciation Recapture (25%)

2. Remaining Federal Gain (15%/20%)

3. Net Investment Income Tax (3.8%)

4. State Taxes (0 – 13.3%)

= TOTAL TAXES OWED

Contact your tax advisor/CPA prior to closing and have them provide an estimate of taxes owed if the relinquished property is sold in a taxable sale.

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EXAMPLE OF GAIN CALCULATION

Facts

Original purchase price of $500,000
Depreciation of $100,000
Capital Improvements of $25,000
Sales Price of $1,000,000

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	Gain Calculation
Sales Price	$1,000,000
- Adjusted Basis	$425,000
Gains	$575,000

	Adjusted Basis
Purchase Price	$500,000
- Depreciation	$100,000
+ Capital Improvements	$25,000
Adjusted Basis	$425,000

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EXAMPLE OF TAXES

	Rate	Taxes
Depreciation Recapture Tax	25%	$25,000
Federal Capital Gains Taxes	20%	$95,000
Net Investment Income Tax	$3.8%	$18,050
State Tax	10.3%	$59,225

Tax Bill		$197,275
Website:	https://apiexchange.com/capital-gain-tax-calculator/#federal

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TYPES OF EXCHANGES

Simultaneous Exchange:
Close on the sale AND purchase properties on the same day
Delayed Exchange
Close on the relinquished property prior to the replacement property
Reverse Exchange
Close on the replacement property prior to the relinquished property
Construction/Improvement Exchange:
Use any exchange funds towards the capital improvements of the replacement property
Reverse Construction Exchange:
Close on the replacement property first
Exchanger can start capital improvements right away

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KEYS POINTS TO KEEP IN MIND

Property Qualifications
What qualifies for a 1031 exchange
Tax Deferral
What are the 2 requirements to defer all taxes
Timeline
How much time do you have and what are the deadlines?
Identification Rules:
How do you identify?

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LIKE-KIND PROPERTY

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LIKE-KIND PROPERTY

What Real Property is Excluded?

Principal residence
Property held for sale/dealer property

Qualifying Real Property

Any relinquished real property held for productive use in a trade or business or investment exchanged for replacement real property held for productive use in a trade or business or investment.

Real Property Definition Can be Broad

Can include raw land, commercial, single family rental (SFR), multi-family, office, industrial, easements, air rights, water rights, vacation homes held for investment under Rev. Proc. 2008-16, fractional ownership, etc.

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TAX DEFERRAL

	Relinquished
Sales Price	$1,000,000
Non-recurring closing costs	($100,000)
Net Sales Price	$900,000

For full tax deferral, a taxpayer must meet two requirements:

Reinvest all net exchange proceeds
Acquire property and replace debt (with the same or greater debt)

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TAX DEFERRAL

	Relinquished
Net Sales Price	$900,000
Loan	($500,000)
Cash Proceeds	$400,000

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PARTIAL EXCHANGE

	Relinquished
Net Sales Price	$900,000
New Purchase Price	$800,000
Taxable Boot	$100,000

Don’t purchase equal or greater than your Net Sales Price
Options

Don’t spend the $100,000
Spend the $100,000 on more real property
Use it in an improvement/construction Exchange

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PURCHASING REPLACEMENT PROPERTIES


Net Sales Price	$900,000
Adjusted Basis	$500,000
Capital Gains	$400,000

Why Can’t I only use my capital gains?

Basis

Capital Gain

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TAKING SALES PROCEEDS


Net Sales Price	$900,000
Adjusted Basis	$500,000
Capital Gains	$400,000

Can I take some of my sales proceeds?

Basis

Capital Gain

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TIME REQUIREMENTS

45 Day Identification Period:

The taxpayer must identify potential replacement property(s) by midnight of the 45th day from the date of sale.

180 Day Exchange Period:

The taxpayer must acquire the replacement property by midnight of the 180th day, or the date the taxpayer must file its tax return (including extensions) for the year of the transfer of the relinquished property, whichever is earlier.

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IDENTIFICATION RULES

3 Property Rule

The taxpayer may identify up to three properties of any fair market value.

200% Rule

The taxpayer may identify an unlimited number of properties provided the total fair market value of all properties identified does not exceed 200% of the fair market value of the relinquished property.

95% Rule

If the taxpayer identifies properties in excess of both of the other rules, then the investor must acquire 95% of the value of all properties identified.

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IDENTIFICATION RULES

Identification must be:

Made in writing
Unambiguously describe the property
Hand delivered, mailed, telecopied or otherwise sent
Sent by midnight of the 45th day
Delivered to the qualified intermediary or a party related to the exchange who is not a disqualified person

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PROS AND CONS

	1031 Exchange	No Exchange
Sales Price	$1,000,000	$1,000,000
Adjusted Basis	$425,000	$425,000
Capital Gains	$575,000	$575,000
Capital Gains Tax	33.33%	33.33%
Taxes	$0	$197,275
Non-Recurring Closing Costs	$100,000	$100,000
$ Working for You	$900,000	$702,725

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THE REVERSE EXCHANGE

Steps

1. EAT (Exchange Accommodation Titleholder) creates an LLC

2. Client purchases the replacement property

i. Financing can be difficult

ii. Non-recourse loan

3. EAT parks replacement property in LLC

4. Client sells the relinquished property

5. EAT deeds replacement property to client

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THE IMPROVEMENT EXCHANGE

Why Perform an Improvement Exchange?

The property to be acquired in the exchange is not of equal or greater value to property being sold.
Build a new investment from ground-up.
The new investment is of equal or greater value, but it needs refurbishments.

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THE IMPROVEMENT EXCHANGE

Relinquished Property
Sales Price	$1,000,000
Debt	$0
Cost of Sale	$70,000
Net Equity to QI	$930,000

Replacement Property
Lot Purchase (Cash)	$600,000
Draw 1 Site Work	$100,000
Draw 2 Foundation	$230,000
Exchange Value	$930,000

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SPLIT TREATMENT

Relinquished Property
Net Sales Price	$1,000,000
Basis	$400,000
Gain	$600,000
50% Primary��50% Rental	$500,000 Primary��$500,000 Rental

Relinquished Property
50% Primary�50% Rental	$500k
Basis	$200k
Gain	$300k
50% Primary��50% Rental	$250/$500k Exclusion��$500k 1031 Exchange

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SPLIT TREATMENT

Relinquished Property
Net Sales Price	$1,000,000
Basis	$400,000
Gain	$600,000
50% Primary��50% Rental	$500,000 Primary��$500,000 Rental

Replacement Property
100% Rental Property	$500,000 or Greater
50% Primary and 50% Rental	$1,000,000? ��Rent out 50%
Single Family	Rent out $500,000 worth
Multi Family	Rent out $500,000 worth

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IRS FORM 8824

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IRS FORM 3840

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QUESTION AND ANSWERS

???

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THE API ADVANTAGE

EXPERIENCE • EXPERTISE • SECURITY

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