LIKE-KIND EXCHANGES

I.R.C. Section 1031Presenter

Jeffrey P. Zane, Esquire

RAPB Podcast Jeffrey P. Zane, Esq., President, JEFFREY P. ZANE, P.A. Practice Areas

Real Estate Law – residential and commercial closings and refinancing; landlord/tenant agreements & litigation and short sales.

Estate Planning & Probate – revocable living trusts, durable power of attorney, living will, healthcare surrogate, irrevocable life insurance trust, qualified personal residence trust, probate and probate disputes.

Corporate & Business Law – selection of and formation of all types of business entities, management agreements, ownership agreements, succession planning, purchase & sales of business entities.

Tax Law – authorized to represent taxpayers in front of the U.S. Tax Court & the I.R.S. regarding disputes

Professional Memberships

President of Attorneys’ Real Estate Council of Palm Beach County, Inc., representing the membership of over fifty attorneys whose practice area includes real estate law.

Member of the Organizing Committee of the Statewide Real Estate Council – part of the group organizing an umbrella organization for all of the county real estate councils statewide.

Serves on various committees of the Florida Bar Association and the Palm Beach County Bar Association and has spoken to many groups on real estate and estate planning issues.

Background Information

AV Rated attorney by Martindale-Hubbell which means that that attorney rating organization has given Mr. Zane the highest possible rating in both legal ability and ethical standards.

North Palm Beach County Chamber of Commerce – Member Temple Beth David, Palm Beach Gardens – President

Selling real estate normally creates an immediate taxable event just as the receipt of salary, interest, dividend, partnership, or capital gain income.

• I.R.C. Section 1031 provides an exception to this and allows for the taxpayer to POSTPONE the recognition of the tax liability.

• The easiest way to make use of this tax plan is to make a simultaneous exchange of like-kind property of equal value.

• Non-simultaneous or deferred exchanges are more complex; but they are possible. You can either do the traditional deferred exchange where you obtain the replacement property later or the non-traditional deferred exchange where you obtain the replacement prior to sell your previously owned property.

• If there is cash received or other non like-kind property there may be a CURRENT recognition of tax liability.

GENERAL TERMS &/ORSTRUCTURAL

REQUIREMENTS

• The disposition of the relinquished property that the Seller wants to sell and the acquisition of the replacement property that the Seller wants to obtain must be a combined mutually dependent part of an integrated transaction.

• Non-simultaneous exchanges have to comply with two time limits or the entire gain will become taxable These limits cannot be extended except for a presidentially declared disaster. The first limit is that you have 45 days from the date you sell the relinquished property. The property must be identified in writing and delivered to the seller of the replacement property or the qualified intermediary. Notifying someone else is not enough.

• The second time limit is that replacement property must be received and exchange completed no later than 180 days after the initial sale or the due date, with extensions, of the income tax return for the tax year in which the relinquished property was sold, which ever is earlier.

General Terms &/or Structural Requirements Continued

• In order to avoid the possibility of a premature receipt of cash or other proceeds I suggest the use of a Qualified Intermediary to hold the proceeds and the property until the exchange is complete unless it is simultaneous.

• Attorneys Title Insurance has an office in the tri-county area that offers this service to its closing agents of which I am one. Neither you or your accountant, lawyer, broker, banker, employee, etc. cannot act as your qualified intermediary .

• Dealers, people who hold real estate as inventory for resale, cannot use Section 1031 for those properties. If they are transferring property that they own as an investor they can use Section 1031.

• Cash to equalize a transaction is recognized immediately because it is not of like kind. This cash is called “Boot” and it is taxed at capital gains rate. Boot basically means “something given in addition to “ and it can include cash equivalents, debts, liabilities or mortgages of the taxpayer assumed by the other party or to which the property exchanged is subject to.

• Taxable gain is deferred and not forgiven• The basis of the property acquired is the basis of

the property relinquished with the required adjustments.

Steps of a 1031 Exchange

1.Obtain the services of an experienced real estate attorney and realtor.

2.Sell the property and include the Cooperation Clause in the purchase and sales agreement.

3.Enter into a 1031 exchange agreement with a Qualified Intermediary (through Attorneys Title Insurance).

4.The relinquished property closes and reflects that the Qualified Intermediary (“QI”) was the seller and the proceeds are held by the QI. This closing is day “0” and we have 45 days to identify the replacement property in writing to the QI and the identified property must be acquired within 180 days.

5.The written identification must be signed by everyone who signed the exchange agreement.

6.Taxpayer enters into an agreement to purchase replacement property where QI is listed as the buyer; but the deed reflects the true seller to the taxpayer.

7.The transaction must be complete within the 180 days.

8.Taxpayer files I.R.S. form 8824 when taxpayer’s tax return is filed as required.