68 4. Taxation and Contracts In this module, we will discuss: 1031 exchanges IRS 1033—threat of condemnation Estate planning Contracts in land sales

69 Tax-Deferred 1031 Exchanges Allow the investor to exchange investment or business real estate for like-kind real estate with little or no recognition of gain

70 Tax-Deferred 1031 Exchanges (cont.) Real estate exchanging is a powerful sales tool. Can save clients valuable tax dollars Recognizing an exchange situation and the basic elements of structuring an exchange is necessary for all real estate professionals.

71 Tax-Deferred 1031 Exchanges (cont.) Motivating factors: Geographical problem Lack of diversity in an investor’s portfolio Management problem

Exchange Requirements Property exchanged and property received must be held for productive use in trade or business, or for investment. Properties exchanged must be of like- kind. Requires an actual exchange

73 Qualified Property Properties that qualify for 1031 treatment include properties held: For business use For investment Properties that do NOT qualify for 1031 treatment are properties held: For personal use (personal residence, vacation home) For sale (developer’s lots, builder’s homes)

74 Types of Exchanges 1.Simultaneous exchange 2.Delayed or Starker exchange 3.Reverse exchange

75 Simultaneous Exchange Rare because finding two properties with same valuation and implementation can be difficult. Relinquished Exchangor Replacement Seller

76 Delayed or Starker Exchange Phase One Sale Relinquished Facilitator Deeded to New Buyer Phase Two Sale Replacement Facilitator Exchanger Used most frequently because neither seller nor buyer accepts liability for becoming a grantor on a property they do not want

77 Rules of Delayed Exchanges  New property must be identified no later than 45 days after the transfer date of the old property.  New property must be transferred before the earlier of: 180 days after the date of the transfer Due date of the tax return for the tax year of the exchange

78 Reverse Exchange Relinquished Facilitator Warehouses Title Deeded to facilitator upon closing of replacement Later deeded to new buyer Replacement Facilitator Warehouses Title Deeded simultaneously with closing of relinquished property Exchangor Used if clients have purchased a replacement property prior to the sale of the relinquished property

79 Boot Consideration Receiving boot in a like-kind exchange does not defeat the exchange. Tax is only on the gain that comes from:  Amount of money received, PLUS  Fair market value of unlike property received Gold, silver, foreign currency Airplanes, motor homes Precious stones Real estate for personal residence

—Threat of Condemnation Provides relief if property is lost through an “involuntary exchange”. The taxpayer may defer tax on any gain from this sale.

81 Examples of Involuntary Exchange Destroyed Stolen Condemned Disposed of under the threat of condemnation

82 Involuntary Exchange Requirements Reinvestment is made in substantially similar property. Reinvestment is substantial continuation of taxpayer’s prior commitment of capital. Character of taxpayer’s investment has not changed. Entire transaction allows taxpayer to return closely to his or her original position.

83 Estate Planning An estate tax is imposed on the “taxable estate,” which is net value of total property transferred or considered transferred at death. For deaths in 2006, 2007, and 2008, net estates of less than $2 million pay no federal estate tax. State death taxes may be due for smaller estates, however.

84 Contracts in Land Sales Some states require final contracts to be prepared by an attorney. Some states have created generic contracts.

85 Provisions Names Legal descriptions Purchase price Property tax issues Possession Assignment of risk for losses Method of payment Time limitations Agency disclosure and confirmation

86 Additional Provisions Terms Earnest money Inspections Remedies for failed transactions Survey Tax-free exchange Drainage Improvements Ground water hazard statement Disposal sites Well disclosures Underground storage Environmental disclosure Zoning information