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A DVANCED T OPICS IN 1031 E XCHANGES REAL ESTATE TAXATION, UNIVERSITY OF HOUSTON LAW CENTER OCTOBER 30, 2014 AUSTIN C. CARLSON, GRAY REED & MCGRAW, P.C.

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Presentation on theme: "A DVANCED T OPICS IN 1031 E XCHANGES REAL ESTATE TAXATION, UNIVERSITY OF HOUSTON LAW CENTER OCTOBER 30, 2014 AUSTIN C. CARLSON, GRAY REED & MCGRAW, P.C."— Presentation transcript:

1 A DVANCED T OPICS IN 1031 E XCHANGES REAL ESTATE TAXATION, UNIVERSITY OF HOUSTON LAW CENTER OCTOBER 30, 2014 AUSTIN C. CARLSON, GRAY REED & MCGRAW, P.C.

2 1031 Exchange Topics  Oil and Gas Royalties – Crooks v. Commissioner  Construction Arrangements  Installment Sale Rules in 1031 Exchanges  1031 Exchanges using Taxpayer Property as Replacement Property 2 Advanced Topics in 1031 Exchanges, Real Estate Taxation, October 30, 2014

3 Crooks v. Commissioner Facts: Petitioners owned a farm under which oil was discovered in In 1982, petitioners conveyed all of their interest in the minerals underlying the farm to Henry Energy Corp. in consideration for four other farms, new farm equipment, and a one-fourth royalty interest in all oil and gas produced from the conveyed mineral interest. 3 Advanced Topics in 1031 Exchanges, Real Estate Taxation, October 30, 2014

4 Crooks v. Commissioner Issues  Sale v. Lease  Sale with subsequent conveyance of one-fourth royalty interest  Economic interest  Alternative source of recovery of capital  1031 Exchange Treatment for Farms and Farm Equipment  Personal property v. real property  Leasehold of 30 or more years 4 Advanced Topics in 1031 Exchanges, Real Estate Taxation, October 30, 2014

5 Crooks v. Commissioner Holding: …when a mineral interest is assigned for real property and the assignor retains a right to receive a specified percentage of all oil and gas produced for the economic life of the mineral deposit, the transaction is a lease for Federal income tax purposes 5 Advanced Topics in 1031 Exchanges, Real Estate Taxation, October 30, 2014

6 Construction Arrangements Issues  What kind of 1031 problems can arise from property that is being constructed during the exchange period?  What about property that is not finished by the end of the exchange period? 6 Advanced Topics in 1031 Exchanges, Real Estate Taxation, October 30, 2014

7 Construction Arrangements  Identification - The description of property must be made with as much detail as practical.  200 Percent and Identical Property Rules – Estimated fair market value on the date taxpayer expects to receive property. Treasury Regulations Section (k)-1(e)(2).  “Substantially the Same” –  Small variations are disregarded.  If incomplete on day of exchange, compare to condition if completed by day of exchange.  Additional Construction –  Paid for by Third Party – Boot  Paid for by Taxpayer - Disregarded 7 Advanced Topics in 1031 Exchanges, Real Estate Taxation, October 30, 2014

8 Installment Sales Issues:  Installment sale rules deem constructive receipt when cash or cash equivalents are placed into escrow.  Installment sale rules deem constructive receipt upon receipt of a third party’s indebtedness. Contradictory to deferred exchange safe harbors:  Escrow account safe harbor  Qualified intermediary safe harbor 8 Advanced Topics in 1031 Exchanges, Real Estate Taxation, October 30, 2014

9 Installment Sales Installment Sale Rule Dispensation Requirements: 1.Bona fide intent to enter a deferred exchange determined under a facts and circumstances test. Treasury Regulations Section (k)-1(j)(2)(iv). 2.Relinquished property cannot be disqualified property. Treasury Regulations Section (k)-1(j)(2)(v). 3.Time limit must be met – either end of the exchange period or when the taxpayer has an immediate right to receive, pledge, borrow or otherwise obtain the benefits. Treasury Regulations Section (k)-1(j)(2)(i). 9 Advanced Topics in 1031 Exchanges, Real Estate Taxation, October 30, 2014

10 Taxpayer Property as Replacement Property Example of Abuse (Rev. Proc ) Taxpayer transfers property it wishes to renovate to exchange accommodation titleholder (the “EAT”), then lends to EAT funds to complete the renovation. Taxpayer then transfers other like kind property to EAT in exchange for renovated property. EAT then sells the other property and uses proceeds to repay the loan. 10 Advanced Topics in 1031 Exchanges, Real Estate Taxation, October 30, 2014

11 Taxpayer Property as Replacement Property Rev. Proc  Reverse starker safe harbor does not apply “if the taxpayer owns the property intended to qualify as replacement property before initiating a QEAA.”  ALSO, modified Rev. Proc to say it does not apply to replacement property held in QEAA if the property is owned by the taxpayer within the 180-day period ending on the date of transfer. 11 Advanced Topics in 1031 Exchanges, Real Estate Taxation, October 30, 2014

12 Taxpayer Property as Replacement Property Unresolved Issues  Does the statutory requirement of “exchange” (plain language reading of Section 1031(a)) bar this transaction?  Use of affiliates.  Use of affiliate outside of the 180 day window – business purpose.  Definition of the property received. 12 Advanced Topics in 1031 Exchanges, Real Estate Taxation, October 30, 2014


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