s1031 for real estate professionals

Sponsored By:

Shhhhh.

Don’t tell anyone.

Your clients are eligible forinterest free loans from the USGovernment…

…for as long as they’d like.

…for as many times as they’d like.

Of the approximately $200Billion in commercial real

estate transactions last year, it is estimated that 20-25% could have

benefited from Section 1031 treatment.

Only 3% did.

What’s In It For You?

• Absolutely Part of Your Fiduciary Responsibility• Tax Ramifications on the Sale of Investment Property are Key

• Clients Will Appreciate Your Resourcefulness• Potentially More Sides & Multiple Commissions!

• Help Your Client Sell and then Buy Replacement Property(ies)• You Never Know Until You Ask “Whatcha’ Want” & “Whatcha’ Got”

• Become Involved With Client’s Overall Real Estate Strategy

• Strengthen & Expand Your Referral Base

About Our Firm• Practice began in 1981; incorporated in 1987

• Exchanges are our exclusive line of business

• Have Completed Exchanges is 48 States– Please send us a client from S. Dakota or Alaska

• Member of Federation of Exchange Accommodators

• Specialize in Passive Replacement Options

Today We Will Explore…

• What Is Section 1031?• Section 1031 Misconceptions• How To Recognize When to Use Section 1031?• Who Qualifies For an Exchange?• What Qualifies For an Exchange?• Real-life Examples of Our Exchanges• Alternative Exchange Strategies

Primary Objectives of This Course

• Provide a Basic Section 1031 Education

• Provide Tools & Information Enabling You to Better Serve Your Clients

• Assist You In Recognizing the Strategic Applications of Section 1031 and ExploreAlternative Replacement Strategies

Primary Objectives of This Course

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

• Assist you to earn more money through your enhanced knowledge of the tool!

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 real estate and replace it with new

property that doesn’t trigger any tax.• Its essential elements are:

– Give a Deed– Get a Deed– Don’t handle Cash

The Five Critical Elements

1. Intent

2. Form and Documentation

3. Control of Funds

4. Like-Kind Properties

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 property to be held either for productive use in a trade or business or for investment (the ‘replacement property’).”

QI

An Exchange at a Glance

Exchange Documents

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

Replacement Property•Assignment •Notification•Settlement Instructions

QI

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 property

YOU MUST PROVE INTENT!

Section 1031 Works ONLY with Investment property

YOU MUST PROVE INTENT!

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. Section 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?• Full capital gains tax deferral

• Relocation of investment

• Change in investment type

• Diversification of investment– Passive– Fractional– ONG– Eventual Personal Use

• Re-leverage Equity

• Increase cash flow

Three essential elements:

• The properties must be exchanged (not sold)

• Both the “Relinquished” property and the “Replacement” property must be held by the same taxpayer for investment or productive use

• The properties must be “Like-Kind” with one another– Real property for real property– Personal property for personal property

Replacement Property Rules

• The Three Property Rule The Exchangor may identify up to three properties, without regard to their value; or

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

• The 95% Rule The Exchangor may identify any number of properties, without regard to their value, provided the Exchangor acquires 95% of those properties.

Like-kind requirement

• The term “like-kind” refers to the nature or character of the property and not to its grade or quality

• Real property cannot be exchanged for personal property

• Qualifying personal property can be exchanged for property of a similar character

Examples of Like-kind

• Improved real property for Unimproved real property

• Lease for >30 year

• Partial interest for a whole interest

• One property for more than one property and vice versa

Like - Kind

Single Family Dwelling

Land

Apartments

Condos

Commercial Development

What is Like Kind?

ANY REAL PROPERTY IS LIKE KIND WITH ANY OTHER REAL PROPERTY….

Apartment Building

Single Family Dwelling

What is Like Kind?

ANY REAL PROPERTY IS LIKE KIND WITH ANY OTHER REAL PROPERTY….

Multi-family Dwelling

Single Family Dwelling

What is Like Kind?

ANY REAL PROPERTY IS LIKE KIND WITH ANY OTHER REAL PROPERTY….

Land Development

Single Family Dwelling

What is Like Kind?

ANY REAL PROPERTY IS LIKE KIND WITH ANY OTHER REAL PROPERTY….

Commercial Property

Single Family Dwelling

Personal Property

• Same General Asset Class or Product Code• North American Industry Classification System• Sector 31-33-Manufacturing

– Examples: Heavy Construction Equipment, Well Drilling Equipment, Logging Equipment, Commercial Vessels, Commercial Laundry Equipment

– See www.census.gov/naics

Timing is everything!

• The Exchange period begins on the transfer of the Relinquished Property

• Exchangor must identify qualified Replacement Property within 45 days of closing

• Exchangor must acquire within 180 days

• There are no extensions unless mandated as a federal disaster

Can Anyone Handle An exchange?• No! It must be a “Qualified Intermediary”(QI) as defined by

regulation:

• Cannot Be the Exchangor or a Relative

• Cannot be an Agent of the Taxpayer One who has acted as employee, attorney, accountant, investment

banker, broker or real estate agent with 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?• Creates Exchange Agreement

• Has Standing in the Sale of Relinquished Property and Purchase of Replacement Property

• Notice of Assignment

• Closing Instructions to Settlement Agent

• Banking and Safeguarding of Exchange Funds

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

• Final accounting for tax purposes

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, trusts and any other taxpaying entity may set up an exchange of business or investment properties for business or investment properties under Section 1031.

Does Your Situation Qualify?

The Five Most Common Section 1031 Misconceptions

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

The Five Most Common Section 1031 Misconceptions

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

The Five Most Common Section 1031 Misconceptions

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

The Five Most Common Section 1031 Misconceptions

4 1031 Exchanges must be limited to 1 exchange and 1 replacement property.......

The Five Most Common Section 1031 Misconceptions

5 A Section 1031 is NOT a path to cash.

Break Time…

The Power of Section 1031

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

…with radically different approaches?

The Power of Section 1031

Joe is going to sell his propertyoutright, and pay his taxes!

The Power of Section 1031

Joe’s Boss is going to use Section 1031to build his wealth while leveragingUncle Sam’s money.

First Transaction - Today

Hypothetical Example Assumptions

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 $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)

• Joe The Plumber (in Year 15)– Has Property worth $448,056; all taxes have been paid

• His Boss (in Year 15)– Has property worth $659,100, with $136,810 tax due

• Net Result (after tax):– His Boss has $74,234 more wealth than Joe, and has

received $92,779 more income.

– But why would his Boss ever pay the tax when he can exchange over & over?

The Most Common Exchange Types

• Delayed Exchange– The client sells his property, identifies replacement property options

within 45 days, then purchases the property(ies) within 180 days.

• Reverse Exchange– 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.

• Build-to-Suit– The client wishes to purchase and improve a property(ies) with the

proceeds from the sale of his relinquished property. This is also accomplished with a Single Purpose Entity.

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

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

www.section1031.com

Case Study 1ABDC-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.

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

BUYING A NEW PROPERTY BEFORE THE OLD PROPERTY SELLS

Negotiated the Purchase of a Significant New Property…

…but unable to sell a piece of existing property in time to do the the deal.

ACQUIRE A RENTAL PROPERTY FOR A FAMILY MEMBER

Exchange for a home for the kids…

…charge fair market rent.

Then gift the property.

Case Study 3ACBD-Delayed, Build-to-suit (or Improvement) ExchangeDirect Format

COMMERCIAL PROPERTY FOR RAW LAND WITH IMPROVEMENTS

Sell a commercial property…

…buy a vacant lot and build a new building.

Case Study 4ACBD-Delayed/Simultaneous Build-to-suit ExchangeReverse Format - Exchange Last

INDUSTRY SPECIFIC BUILDING ON IDENTIFIED PROPERTY

Build a new building…

…then sell existing property.

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

ACQUIRING ABUTTING PROPERTY TO PRIMARY RESIDENCE

Purchasing shore front land with bank funds…

…selling rental property to pay down the debt.

4 $imple Qualification Questions…

1. What’cha Got?

2. Howd’ya Get It?

3. What else ‘ya Got?

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?

– Does the property include personal property or other intangibles?

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

– Is the property from an estate or family?

– How long has the property been owned?

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?

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

using untaxed funds.– Diversification i.e. type, location, quantity.

Break Time…

Alternate Exchange Opportunities

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

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

Tenants-in-commonAny Real Property

Who is a Typical SEC TIC Investor?

Courtesy of Grubb & EllisCommercial Real Estate Services

Why Use TICS in an Exchange?

Courtesy of Grubb & EllisCommercial Real Estate Services

What is a TIC?

Courtesy of Grubb & EllisCommercial Real Estate Services

SEC TIC Property Characteristics• Undivided Fractional Ownership in Real Estate• Each Owner Receives a Proportional Share of Net

Revenues• Under Sponsored Structure, TICs are:

• Grade “A” Real Estate Investments• Professionally Managed

• The Result Is A Passive Ownership

Courtesy of Grubb & EllisCommercial Real Estate Services

RE TIC Property Characteristics

• Undivided Fractional Ownership in Real Estate

• Each Owner Receives a Proportional Share of Net Revenues

• RE TICS are Marketed as REAL ESTATE and NOTBroker / Dealers.

• Real Estate Commissions are Earned!

RE TIC Property Characteristics• Undivided Fractional Ownership in Real Estate• Sponsor does not manage or own interest in the

Properties.• Smaller amount required for entry.• Typically smaller properties

• Single Tenant• Single Purpose• No Debt

• TICS for the rest of us!

• Undivided Fractional Ownership in Real Estate• Sponsor does not manage or own interest in the

Properties.• Smaller amount required for entry.• Typically smaller properties

• Single Tenant• Single Purpose

TICS for The Rest of Us!

• Specialize in Fresenius Medical Care & Other Single Tenant Opportunities

• Properties Carry No Debt!

• Rockwell develops three to five projects per year.

• 6-7% Cash on Cash paid monthly.

Courtesy of Grubb & EllisCommercial Real Estate Services

Rockwell Properties

Direct Ownership vs. TICConventional Direct Ownership

Property Exchange 1031 Tenant-in-Common

Property Exchange

Lower returns on less desirable properties Higher returns on institutional-quality properties

Difficult to comply with Section 1031 45 day ID rules; Exchangor must find properties

Easy to comply with Section 1031 45 day ID ruleswhen properties are pre-identified

Difficult to match Section 1031 exchange debt and equity

Easy to match Section 1031 exchange debt and equity

Investor must negotiate and arrange loan Prearranged financing

Expensive and time-consuming property management

Professional proven property management in place.  You receive a monthly or quarterly income check.

Cash flow, depreciation, and appreciation potential

Cash flow, depreciation, and appreciation potential

Ability to use the Section 1031 exchange again Ability to use the Section 1031 exchange again

Ability to refinance and distribute proceeds “tax free”

Ability to refinance and distribute proceeds “tax free”

Diversification

Courtesy of Grubb & EllisCommercial Real Estate Services

How Does it Work?

Courtesy of Grubb & EllisCommercial Real Estate Services

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)

Any Real Property

Exchange!

What Is An UPREIT?

• Similar to a Mutual Fund For Real Estate Investors.

• Allows Exchanging Real Property Into Operating Partnership (OP) Shares of Existing REITs

• REITS can convert existing properties into TICs allowing 35 ownership positions; then• TICs are then converted back to REIT shares and

investors then hold shares in the REIT’s entire portfolio.• 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.

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 LeasesINVESTORS CAN EXCHANGE REAL PROPERTY FOR INTERESTS IN PRODUCING OIL & GAS ENTERPRISES

Any Real Property

Oil & Gas LeaseAN EXTREMELY VIABLE ALTERNATIVE FOR AN EXCHANGE.

A Viable Alternative Investment for "like-kind" 1031 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 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 SalesSTRUCTURED SALES ALLOWS THE INVESTOR TO ARRANGE FOR A FUTURE PAYCHECK

Any Real Property

Exchange!

The Structured SaleThe Structured Sale is a method for selling appreciated assets such as real estate and businesses that allows sellers to:

•Defer capital gains taxes to future 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 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 TypicalInstallment Sale

• The Structured Sale Provides a Safe Alternative

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

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

The Structured Sale

How Do You Summarize 104 Slides?

Quickly!

Section 1031 is An Interest Free Loan

From The Government

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

should be!

Real Estate Professionals owe it to

their clients to understand this powerful tool!

More Commissions.More Commissions.

More Commissions.

Section 1031 is about Relocation and

Reallocation of Assets without Paying Capital

Gains!!!

Any Real Property Can Be Exchanged For Any

Other Real Property!

Section 1031 can be used to dramatically increase the value of

holdings by leveraging Uncle Sam’s money.

Ask the 4 Questions1.What’cha Got

2.Howd’ya Get It?3.What Else ‘ya Got?

4.What’cha Want?

Nearly every tax paying entity qualifies for a

Section 1031 Exchange!

Personal property can also be Exchanged.

“Like-kind” is literal!

There are replacement options available for

Section 1031Understand Them!

Tenants-In-CommonManagement Free Real Estate Investments in Grade A Properties

UPREITExchange into a Real

Estate Investment Trust

Oil & GasA timely alternative to

owning real-estate with the same benefits and

flexibility.

Structured SalesAn annuity based

“Paycheck” for failed exchanges and

business transfers.

Also…

• Must employ a Qualified Intermediary• Time limits of 45 and 180 days• Properties must be “Like-Kind”• Business or Investment Purpose• Relinquished and Replacement Properties held

by same taxpayer• Exchanges can be done either forward or reverse

If you have questions.If your clients have

questions.If you want to strategize…..

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

…Contact UsFor over 30 Years Edmund & Wheeler has helped clients to defer $Millions…

Thank you for your valuable time!!!