QINews

Flawless Section 1031 Exchanges For Over 28 Years                                                                       Volume - 7.2  June 2009

Ok, so we are trying to get excited about Facebook, Twitter, Myspace and all of the other social networking sites and are slowly adapting to the new world. We have, however, officially entered the blogosphere...

Our new Blog -"Section 1031 for Investors & Professionals" was launched last month and we are starting to have a LOT of respect for the work that goes into establishing a relevant, well-produced and published blog.

This edition of QINews is linked to our Blog. The longer articles will take you there. We hope you find it informative, and as always your comments and input are greatly appreciated...now you can comment on the blog!! 
 

George has returned from the warmth of Florida and it is rumored that his cottage in Maine is open for relaxation once again.  Chris enjoyed a brief trip along the Hudson Valley of NY last month and had an opportunity to visit the only National Park honoring a former First Lady, Eleanor Roosevelt's cottage Val-Kill in Hyde Park. Chris is passing along this bit of wisdom from Mrs. Roosevelt:

"Learn from the mistakes of others.  You can't live long enough to make them all yourself."

John is recovering from his 50^th birthday party, an event that lasted more than a week by our count.  Also Phyllis is still beaming from the graduation ceremony she attended for her son Rick, who is now a certified police officer.

We have welcomed Spring in the North Country and are reminded of the Swedish Proverb that says "God gives every bird a worm, but he does not throw it into the nest."  Translation, we are busy teaching birds (real estate & accounting professionals) to pick up worms (transactions ripe for 1031 exchanges).   

Golfers will be familiar with the term "mulligan", it has a history steeped in myth and folklore but the simple explanation is that a "muffed" shot gets disregarded and the golfer can replay his/her shot, hopefully with far better results. 

The same principle applies to investment property acquired while the market was hot and tenants were easy to find.  A careful analysis of your real estate investment portfolio may bring you to the conclusion that a sale and reinvestment in other property will produce better results than trying to play your shot from the first lie.

When this strategy is discussed with clients, their first concern is that they will suffer a loss if they sell the property now.  What they fail to realize is that often the property was acquired with 1031 exchange proceeds and that the tax basis or cost is much lower than the acquisition cost of the property.  Far better to re-employ the investment dollars in new property that will stand up to recessionary pressures.  Properties in the healthcare industry, education and certain housing markets are strong in spite of the downward spiral in other real estate sectors.

Take a mulligan, sell the old property regardless of the decreased value, and put the investment to work in real estate that can produce returns and value.
Start hollering.......FORE!!!
 

It's important to understand that there are three distinctively different types of real estate. Some can be exchanged, but some are prohibited from tax deferred exchange treatment.  The three types are personal use, business/investment use and dealer property. 

Favorable treatment exists for the sale of a personal residence if the property has been the primary residence of the taxpayer for two of the preceding five years.  Section 121 of the Internal Revenue Code provides an exclusion from capital gains tax upon the sale of a primary residence of $250,000 per taxpayer or $500,000 for a married couple filing jointly.  IRS Publication #523 provides complete guidance on a variety of scenarios and a few exceptions do exist for special circumstances.  Click here to read more.

State by state individual efforts have been made to control sprawl, but it has been a slow and arduous task and the controls have not been nearly as effective as a regional or national approach.

Several national initiatives have bubbled to the surface to foster conservation efforts.  Since 2004, the Departments of Defense, Interior, Agriculture, Commerce, and the Environmental Protection Agency have been working to implement a vision for Cooperative Conservation. A direct result of this collaborative is the 2007 Farm Bill (signed into law in early 2008). The bill included an additional $7.8 billion to conserve and protect natural resources.  Several initiatives will accomplish new protection: 

• Increasing by 50% the acreage to gain protection under the Wetlands Reserve Program.
   

• Creating a Regional Water Enhancement Program with an additional $1.75 billion in funding over ten years.
   

• Sustaining the Conservation Reserve Program.  Click here to read more.

We are often asked how Section 1031 transactions are monitored by the Internal Revenue Service (IRS) and whether a 1031 police force exists to monitor taxpayer actions.  The truth is that in nearly three decades of practice, we have never been informed of the existence of this authority. 

However, we regularly point out to clients that each action they take with respect to their investment property is documented in their own books and records and collectively comprise a written trail for the IRS to follow in the event of an audit.  Click here to read more.
 

On the surface, this seems pretty easy to comply with, however, what if the Relinquished Property is titled to a husband and wife and they desire to acquire the new property in their revocable trust or a single member limited liability company?  Since the IRS is tracking the taxpayer identification number in each real estate transaction, it will be clear that the two numbers do not match and therefore the ownership interest has changed from the old property to the new property and the exchange will fail on its face.  Click here to read more.

 Three for three.

Our client arranged for the sale of three condo units and elected to structure the transaction by utilizing three separate exchanges.  He could have elected to aggregate all three properties into one exchange, however, he was concerned about the number of selections he could make for his Replacement Property choices.  He selected the Three Property Rule for Identification purposes for each exchange.

Because the market was drifting downward, by spacing out the sales of the Relinquished Properties, he could select  different options. Ultimately, he chose one property that was common to all of his Letters of Identification and the other six properties were all different. This strategy provided the ultimate in identification flexibility and acquisition.  In the end, three properties were sold and three properties were acquired.
 

Case Study #28

 Vacation home at the shore.

We represented three siblings that had acquired family owned property at the shore. The tax basis was very low creating a large capital gain exposure for each of them at sale. It had been many years since the family had used the vacation property and occasional rental to past tenants was the norm. Personal use had been limited to less than 14 calendar days by virtue of the distance that each now lived from the property.

After several family meetings, the three agreed to sell the property.  One cashed out at closing and two chose to exchange their combined 2/3's interest to acquire a vacation rental closer to their primary residences.  They will rent it for the next two years and later abandon the rental and share the use during the season.
 

Edmund & Wheeler, Inc. QI
Littleton, NH 03561
603-444-0020
603-444-6611 (Fax)

exchange@section1031.com

section1031.com

Christine Latulip

QINews Copyright 2009 Edmund & Wheeler, Inc. All rights reserved. Reproduction without permission is strictly prohibited.
Contact Christine S. Latulip at 603-444-0020 for information.