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1031 Exchanges: Yesterday, Today and Tomorrow PRESENTED BY Margo McDonnell, CES® Certified Exchange Specialist® 1031 CORP., President.

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Presentation on theme: "1031 Exchanges: Yesterday, Today and Tomorrow PRESENTED BY Margo McDonnell, CES® Certified Exchange Specialist® 1031 CORP., President."— Presentation transcript:

1 1031 Exchanges: Yesterday, Today and Tomorrow PRESENTED BY Margo McDonnell, CES® Certified Exchange Specialist® 1031 CORP., President

2  Certified Exchange Specialist®  Over 19 years in 1031 industry  Involved in thousands of exchanges of various size and complexity  Serve on Board of Directors of FEA  Spearheaded industry’s effort to launch a 1031 certification and CE program  Frequent presenter of 1031 courses ABOUT ME Margo McDonnell Certified Exchange Specialist®

3  Current 1031 trends  Anticipated 1031 activity over next decade  Misconceptions about capital gains and their unexpected tax bills  Quick overview of 1031 exchanges  Using your 1031 knowledge to your advantage  Selecting a Qualified Intermediary (QI)  Q & A TODAY’S OBJECTIVES

4 WHAT IS A 1031 EXCHANGE? Section 1031 of Internal Revenue Code provides no gain or loss will be recognized on the exchange of property held for productive use in a trade or business or for investment. Not for primary residences, flips or most vacation homes. 1031 EXCHANGE

5 1031 BENEFITS  Immediate Tax Avoidance  Time Value of Deferral  Avoid higher income tax bracket and new 3.8% Medicare Tax  Preserve personal exemptions and stay out of Pease Tax  Greater Buying Power  Increased ROI  Less Management  Consolidation  Fresh depreciation schedule  Create new cash flow  Diversification of assets  Relocation or expansion of business  Future conversion to primary residence or vacation home  Possible elimination of gain  Estate preservation with stepped up basis

6 Tax Facts and Rates The Power of a 1031 Exchange

7 FACTS  Taxes are due on capital gain  Due on appreciation  Short-term capital gains are taxed as ordinary income  Maximum long-term capital gain tax rate for individuals who held property more than 12 months TAX FACTS AND RATES

8 CAPITAL GAINS*  20% for taxpayers with ordinary incomes exceeding $400,000 ($450,000 for married taxpayers)  15% for incomes more than approx. $36,000 ($71,000 for married taxpayers) and less than $400,000 ($450,000 for married taxpayers)  0% for incomes less than approx. $36,000 ($71,000 for married taxpayers) * Consult tax advisor to determine actual tax rates. TAX FACTS AND RATES

9 NEW 3.8% UNEARNED INCOME MEDICARE CONTRIBUTION  New tax goes went into effect 1/1/2013; part of Affordable Care Act (Obama Care)  Applies to unearned income (rental income, capital gains, dividends, annuities)  Affects individuals with a gross annual income exceeding $200,000 and married couples exceeding $250,000 TAX FACTS AND RATES

10 DEPRECIATION MUST BE RECAPTURED  Generally taxed at 25% regardless of tax bracket. TAX FACTS AND RATES

11  Each state has different rules regarding exchanges.  The Commonwealth of Pennsylvania generally does NOT recognize a 1031 exchange.  PA Gov. Corbett called for a PA version of section 1031 in 2013 budget address.  Many states simply follow the Federal Code or have adopted similar regulations  Some states have special requirements such as the replacement property must be located within the state  Some states have no income tax STATE INCOME TAX

12 ASSUMPTIONS  Individual owned property for many years  Annual Salary of $125,000 and $50,000 of add’l income (interest, dividends, rental income)  Paid $250,000  Made no capital improvements  Depreciated down to $100,000  Selling for $500,000 1031 vs. SALE

13 ASSUMPTIONS  Capital gains of $250,000  With $175,000 of income, falls into 20% capital gains tax rate  Subject to 3.8% Medicare Tax  Subject to highest income tax bracket of 39.6%  Deprecation recapture of $150,000 @ 25%  Would likely face a phase out of Personal Exemptions and be subject to the Pease Tax 1031 vs. SALE

14 Taxable Sale1031 Exchange Sale Price$500,000 Capital Gains$37,500*0 3.8% Medicare Tax$9,500 Depreciation Recapture$37,5000 Federal Tax Liability$84,5000 Net Proceeds$415,500$500,000 Buying Power (30% down) $1,385,000 $1,666,667 *Calculated at 15%. Actual amount could be higher.

15  Immediately avoids $84,500 federal tax liability  Able to invest all proceeds  Leverage extra $84,500  Acquire new property worth $281,667 MORE than you could if you paid the tax  Collect higher rents from Day 1  More depreciation available  Enjoy greater appreciation long-term 1031 vs. SALE

16 1031 Trends and Projections

17 MULTIPLE REPLACEMENT PROPERTIES  Investors are taking advantage of current CRE market opportunities and historically low interest rates to leverage into several replacement properties CURRENT TRENDS

18 COMMERCIAL PROPERTIES  Commercial properties selling for over $2.5M are being exchanged as a much faster rate than in many years CURRENT TRENDS

19 SHORT EXCHANGE PERIODS  Exchangers are lining up their replacement property and are ready to acquire it immediately after conveying the old property to a buyer  Average exchange is now completed within 43 days (down from average of 93 days just two years ago) CURRENT TRENDS

20 REVERSE EXCHANGES  More and more investors are finding the ideal replacement property before lining up a buyer  Must be structured several weeks in advance  Preserves clients ability to defer gain when property eventually sells  QI thru an EAT acquires either the old or the new property and “parks” title for up to 180 days CURRENT TRENDS

21 OIL & GAS ROYALTIES  Investors are acquiring oil and gas royalties as replacement property  Current oil prices make this investment more attractive  Provides good returns with no hands on CURRENT TRENDS

22 NO MORTGAGES ON REPLACEMENT PROPERTY  Higher than usual number of Exchangers choosing to put in additional equity or trade down in property value rather than put a mortgage on the new property  Trade downs are taxed on the amount of the trade down CURRENT TRENDS

23 INCREASE IN PERSONAL PROPERTY 1031s  Without the 100% bonus depreciation we had for 18 months, we are seeing a big increase in exchanges of other assets held for investment  Companies are purchasing capital assets using 1031  New purchases to increase efficiency  Examples: airplanes, equipment (cranes, lifts), printing presses, railroad cars CURRENT TRENDS

24 EXCHANGING PROPERTY WITH NO GAIN  Investors are exchanging properties with little or no gain, maybe even selling at a loss, to avoid costly depreciation recapture CURRENT TRENDS

25  FEA member surveys estimated exchange activity dropped approximately 80% from 2005 to 2010  Activity is definitely picking up nationwide  Using data from FEA member surveys, the Joint Committee on Taxation (JCT) estimates 1031 deferrals of $2.5B in next 5 years and $18.2B in next 10 years  Significant increase is expected as the real estate market continues its rebound 1031 ACTIVITY: YESTERDAY, TODAY & TOMORROW

26  Beginning in September 2012, there has been quite a bit of noise regarding section 1031  1031 has been identified as one of the top tax expenditures and a potential target in the tax reform battle  JTC has rescores section 1031. Now $42 – 47B!  Entire real estate industry, including FEA, working together to preserve top real estate expenditures 1031 ACTIVITY: YESTERDAY, TODAY & TOMORROW

27 Unlocking the Power of Exchanges Overview of 1031 Exchanges

28 REAL PROPERTY (REAL ESTATE) EXCHANGES  Refers to the nature or character of property  Specific type of property not essential  Very broad and liberal definition  Must be used for business use or investment  Located within 50 states, D.C. or selected territories  Can buy or sell multiple properties LIKE-KIND DEFINED

29  Examples of like-kind real estate  Duplex, apartment building, rental house  Office building, warehouse, shopping center  Land  Tenant-in-Common (TIC) interest  Conservation easements, utility easements  Leasehold interest of 30 years (including options)  Cell tower easements  Oil and Gas Royalties; Mineral Interests LIKE-KIND EXAMPLES

30  Examples of non like-kind real estate  Personal residence and most vacation homes  Partnership interests  Mortgages and notes  Cash  Non real estate assets  Dealer property and inventory  Stocks LIKE-KIND EXAMPLES

31 PERSONAL PROPERTY EXCHANGES  Any asset held for business use or investment can be exchanged.  Definition of like-kind is much more restrictive for personal property  Assets must be within the same asset classification code or the same kind of asset  Examples of personal property assets: Equipment, aircraft, franchise agreements, livestock, collectibles, antiques, distribution routes, furniture and fixtures, etc. LIKE-KIND DEFINED

32  Holding period not defined in regulations  One year is good rule of thumb  Taxpayer Relief Act of 1997 defined “long-term” investments as held longer than one year  Two year safe harbor in Rev. Proc. 2008-16  Intent of taxpayer is key  Look at the picture you have painted  Personal use must be minimal (§280A) Consult tax and/or legal advisor to determine best strategy. QUALIFIED USE

33  QI acts as “middleman” to facilitate an exchange  Exchanger cannot have access to exchange proceeds  Time Periods:  Replacement Property* must be identified within 45-Day Identification Period  Replacement Property must be acquired within 180-Day Exchange Period *Title must be held in the same name as relinquished property ADDITIONAL REQUIREMENTS

34  Exchange must be set up (and 1031 docs signed) before title passed to buyer  To maximize deferral, replacement property must have equal or greater VALUE and EQUITY.  Value takes closing costs into account.  A trade down in property value or equity is taxed just on the trade down. ADDITIONAL REQUIREMENTS

35  Your QI is your partner throughout the exchange  Choose company who is responsive, experienced and has good knowledge of local real estate and title practices  Make sure funds are held in segregated FDIC insured exchange account  Look for fidelity bond coverage  Seek Certified Exchange Specialist® (CES®)  Look for member of Federation of Exchange Accommodators (FEA) CHOOSING YOUR QI

36  1031 exchanges are a great wealth accumulation vehicle.  Build real estate portfolio with pre-tax dollars  Great way to accomplish long-term objectives  Excellent estate planning tool  Creates many opportunities to grow your business  The more you know, the more you will benefit.  1031 CORP. can help! SUMMARY

37 QUESTIONS & ANSWERS Margo McDonnell, CES® Certified Exchange Specialist® 1.800.828.1031 Mobile: 610.680.6896 margo@1031 CORP.comwww.1031 CORP CORP

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