1031 Exchange Blog

1031 EXCHANGE GENERAL

Tax Reform Must Wait

11/18/13

Tax Reform Must Wait: Chairman Camp’s Decision Better for Tax Reform in the Long Run.

Body:

<h4>Chairman Camp’s Decision Better for Tax Reform in the Long Run</h4>

<p>House Ways and Means Chairman Dave Camp recently delayed moving forward with the most substantial tax code rewrite since 1986.</p>

<p>Thursday’s meeting with House Speaker John A. Boehner, Majority Leader Eric Cantor and Majority Whip Kevin McCarthy to discuss the legislative overhaul resulted as many predicted: the committee decided to table their plans for the time being.</p>

<p>Many attribute the postponement to a spiteful GOP reveling in the Affordable Care Act fiasco. However, Camp’s decision not to move forward with the bill is seen by many as the right move given the current status of the economy.</p>

<p>There are myriad issues facing the legislative overhaul, including the short congressional calendar and the ongoing negotiations in a House-Senate budget conference committee. Comprehensive tax reform is critical to support a strong long-term economy but pushing a bill too quickly will cause immeasurable damage to a fragile recovery. While the tax reform will address corporate and individual tax provisions, a hastily created bill will fall short of the full reform needed and will snuff out the chance to do so correctly.</p>

Metatags:

Title:

Tax Reform Must Wait

11/18/13

Tax Reform Must Wait: Chairman Camp’s Decision Better for Tax Reform in the Long Run.

Special End-of-Year Planning Alert for 1031 Like-Kind Exchanges

11/12/13

Remember, the deadline to complete a 1031 Like-Kind Exchange (LKE) is the earlier of 180 calendar days, or the due date, with ...

Body:

<h4>Your tax relief deadline might be closer than you think!</h4>

<p>Remember, the deadline to complete a 1031 Like-Kind Exchange (LKE) is the earlier of 180 calendar days, or the due date, with extension of your income tax return.  If you are currently participating in an LKE, be sure to contact your tax advisor right away.  You might have to extend your tax return in order to take advantage of the full 180 days.</p>

<p>If you are thinking about starting the LKE process, <a href="/contact-us" target="_blank">contact Accruit today</a>.  Our representatives will carefully discuss the details and highlight how much money you can save through our custom LKE solutions.</p>

Metatags:

Title:

Special End-of-Year Planning Alert for 1031 Like-Kind Exchanges

11/12/13

Remember, the deadline to complete a 1031 Like-Kind Exchange (LKE) is the earlier of 180 calendar days, or the due date, with ...

The Impact of 100% Bonus Depreciation on LKE Programs

03/15/11

In this article, we discuss looking at more than just the Federal tax benefit when considering the suspension of a 1031 ...

Body:

<p><em>Article republished with permission of our Joint Business Relationship partner, <a href="http://www.pwc.com/" target="_blank" title="PwC">PwC</a>.</em></p>

<p>Many companies with active like-kind exchange (LKE) programs are trying to understand how the new 100% bonus rules will impact their LKE benefits, and may even be considering suspending their programs for 2011 due to the enhanced bonus deduction. Since a program suspension could potentially create new tax and business process issues, it is important to look at more than just the Federal tax benefit when considering the suspension of a LKE program. Other factors to consider include:</p>

<ul>
<li>Impact of state decoupling from Federal "bonus" rules</li>
<li>State NOL considerations</li>
<li>Federal Alternative Minimum Tax ("AMT") considerations for individual owners of S-Corporations and partnerships</li>
<li>Ability to utilize used property as replacement property to maximize LKE and bonus benefit</li>
<li>Bonus depreciation sunset planning opportunities</li>
<li>Utilizing LKE service providers for fixed asset tax compliance and reporting</li>
<li>Time and resources needed to "de-institutionalize" a company's LKE processes</li>
</ul>

<p>A more detailed overview of each consideration is listed below.</p>

<p><strong>The Federal tax impact of 100% bonus - with and without a LKE program</strong></p>

<p>On December 17, 2010, President Obama signed HR 4853, the "Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010" (the "Act"). The Act increases the bonus depreciation deduction from 50% to 100% for qualifying property acquired and placed in service after September 8, 2010 and before January 1, 2012. In addition, it also extends a 50% "bonus" depreciation deduction for property acquired and placed in service in 2012. In order to qualify for "bonus" depreciation, the property must be new and it must have a tax recovery period of 20 years or less.</p>

<p>The impact of 100% bonus depreciation on companies with and without LKE programs is illustrated in the following example where an asset is sold for a gain and the replacement property qualifies for 100% bonus depreciation. In this example, a five year MACRS asset acquired in 2009 is sold for $15,000 with a tax basis of $4,800, resulting in realized gain of $10,200. A like kind asset is acquired for $25,000. Since gain deferred by LKE reduces the depreciable basis of replacement property acquired as part of an exchange, it also reduces the amount of the 100% bonus depreciation allowed in regard to that property.</p>

<p>While it's clear from the example above that there is no Federal tax benefit derived from an LKE program during the period of 100% bonus depreciation (September 9, 2010 to December 31, 2011), only considering the Federal impact fails to address a number of other important factors. Failure to do so could result in significant additional Federal and state taxes in both the current and future tax years.</p>

<p><strong>Impact of states decoupling from Federal "bonus" rules</strong></p>

<p>In the current economic environment, many states are experiencing significant fiscal challenges that prevent them from adopting generous Federal bonus depreciation rules (100% bonus or otherwise). Approximately 80% of the states have not adopted previously enacted Federal bonus depreciation rules. These states are likely to continue this trend and others may join. In states that decouple from the Federal bonus depreciation rules, <strong>the suspension of a company's LKE program could result in an additional 2011 state tax liability equal to the company's forgone LKE deferral multiplied by the state's highest marginal tax rate</strong>. Depending on the state, that tax bill could amount to as much as 11% of the foregone LKE deferral.</p>

<p>To illustrate, let's assume the same asset is sold as in the previous example. In this instance, let's also assume that the relevant state has decoupled from Federal bonus depreciation. For state purposes, a gain of $5,400 would be realized (sales proceeds of $15,000 less state tax basis of $9,600).</p>

<p>This example illustrates the potential state tax savings from the sale of one asset. While individual company situations will vary, we expect that state tax savings will be significant for many companies if they are filing in states that have decoupled from bonus depreciation. Please contact us if you would like more information on the states that have decoupled. As more fully explained below, a reduction in state taxes can also reduce the alternative minimum tax ("AMT") for owners of closely held companies.<strong> </strong></p>

<p><strong>State Net Operating Loss (NOL) considerations</strong></p>

<p>Many states have Net Operating Loss (NOL) carryback and carryforward provisions that are more restrictive than the "2 years back and 20 years forward" provisions under Federal law. In addition, for the same budgetary reasons mentioned above, some states have suspended or eliminated NOL carrybacks and carryforwards. Where NOLs are restricted, taxpayers need to closely examine their own facts and circumstances to determine the impact of bonus depreciation on their taxable income.</p>

<p><strong>AMT considerations for individual owners of S-Corporations and partnerships</strong></p>

<p>As explained above, maintaining LKE can result in a reduction of state taxes since most states did not allow bonus depreciation. Because individual taxpayers are not allowed to deduct state income taxes in calculating their Federal Alternative Minimum Tax (AMT), LKE will generally reduce the state tax preference item which may either decrease or eliminate AMT. However, <strong>if a taxpayer suspends its LKE program, its state tax liability will increase, increasing the state preference item, and possibly result in additional AMT. </strong></p>

<p>In addition, AMT resulting from lost state tax deductions is not allowed in the calculation of AMT credits that are typically allowed to offset certain regular tax liabilities in future tax years. Accordingly, for those taxpayers who incur additional state income tax as a result of suspending their LKE program and who are also subject to AMT, <strong>suspending their LKE program may result in additional AMT that can not be recouped in future years.</strong></p>

<p>AMT can be influenced by a number of factors and is taxpayer specific. We are available to help you better understand the AMT benefits that may be achieved with your LKE activity.</p>

<p><strong>Ability to utilize used property as replacement property to maximize LKE and bonus benefits</strong></p>

<p><strong>Used property does not qualify for bonus depreciation.</strong> However, LKE allows used property to be used as replacement property to complete an exchange. In addition, LKE safe harbor rules provide taxpayers flexibility in matching relinquished and replacement properties to complete exchanges. This flexibility presents a planning opportunity for companies to complete exchanges with "used" replacement property acquisitions that do not qualify for bonus depreciation rather than new property acquisitions that would otherwise qualify for 100% bonus depreciation. For companies who acquire used property, this can be an important consideration in evaluating the benefit of LKE activity in 2011.</p>

<p><strong>Bonus depreciation sunset planning opportunities</strong></p>

<p>LKE rules give taxpayers who "identify" potential replacement property up to 180 days to acquire identified replacement assets. Consequently, assets sold after July 1, 2011 can be exchanged for assets acquired after December 31, 2011 which are not eligible for 100% bonus depreciation. In this way, taxpayers can take advantage of the 100% bonus depreciation deduction for assets acquired in 2011 while still achieving a benefit for gains deferred from assets sold in the second half of 2011.</p>

<p>Careful planning in this area may significantly increase the amount of Federal and state NOLs available to offset income which can be used to reduce taxes in past and future years through carryback and carryforward provisions.</p>

<p><strong>Utilizing your LKE Service provider for fixed asset tax compliance and reporting </strong></p>

<p>Most companies use their LKE provider to periodically calculate and report tax depreciation on LKE, and in some cases, non-LKE assets. For these companies, suspending their LKE programs might not result in a significant cost savings since they would need to develop and implement alternative processes to calculate and report tax depreciation, or continue to use their LKE provider for this service.</p>

<p><strong>Time and resources needed to "de-institutionalize" a company's LKE processes</strong></p>

<p>The requirements of an LKE program necessitate changes to operational business processes in order to institutionalize LKE for asset dispositions and acquisitions. Designing and implementing these operational changes requires significant time and resources from company professionals in a variety of areas including treasury, accounting, tax, procurement, remarketing, legal, and customer and vendor communications.</p>

<p>Suspending an LKE program may require amendments to the company's exchange agreements, modifications of the company's cash processes and account structures, or require changes to communications that the company makes to its customers and vendors. All of these changes require time, effort and expense to modify. These costs and changes to institutionalized business processes must be considered relative to the benefits of suspending an LKE program for a relatively short period of time.</p>

<p><strong>Summary</strong></p>

<p>As discussed above, only considering the Federal tax benefits of 100% bonus depreciation does not provide a complete analysis of the issues that should be considered when deciding to maintain or suspend an LKE program during 2011. While the long term advantages of an LKE program are clear, the short term benefits during periods of 100% bonus depreciation require a careful evaluation of all relevant factors to determine the best overall tax position and course of action for the company.</p>

<p>LKE programs represent an effective tool that companies can use for Federal and state tax planning, and streamlining their fixed asset processes. In addition, if 100% bonus depreciation is utilized, an LKE strategy becomes even more important when bonus expires, as a company's tax basis in its fixed assets will be reduced to zero which ultimately will lead to large tax gains unless deferred through an LKE program.</p>

<p></p>

Metatags:

Title:

The Impact of 100% Bonus Depreciation on LKE Programs

03/15/11

In this article, we discuss looking at more than just the Federal tax benefit when considering the suspension of a 1031 ...

IRS Chief Counsel Advisory 201025049: are there implications for your 1031 exchange program?

07/15/10

Accruit monitors the marketplace for factors that may have an impact on its clients and partners. Read more about the ...

Body:

<p>Accruit is committed to closely monitoring the marketplace for factors that may have a potential impact on our clients and partners. The IRS recently issued a ruling that we believe is of interest to many companies with 1031 exchange programs, and we thought we'd take this opportunity to offer some details on that ruling.</p>

<p>It should be noted that this is <em>not</em> intended as tax advice - Accruit does not provide tax guidance. We do, however, encourage any business that thinks they may be affected to discuss the following information with their respective tax advisors. Accruit is glad to be involved, as appropriate, in those discussions.</p>

<h4>The Ruling</h4>

<p>On June 25, 2010 the Internal Revenue Service (IRS) National Office of the Chief Counsel released Chief Counsel Advisory (CCA) 201025049. <strong>In brief, this ruling reaffirms that depreciation deductions and like-kind exchange (LKE) treatment may not be allowed for equipment held primarily for sale.</strong></p>

<p>It is of the utmost importance to note that this CCA is heavily dependent on a very specific set of facts and circumstances surrounding a single taxpayer employing LKEs as part of their overall tax planning strategy. Furthermore, under Title 26, section 6110(k)(3), CCA determinations are not to be used or cited as precedent. This said, published determinations like this CCA can provide important insight and guidance regarding specific issues.</p>

<p>It's also important to note that the phrase "property held primarily for sale" is not arbitrary. It appears throughout the Internal Revenue Code (IRC) and, as such, has undergone extensive litigation. Additionally, the Supreme Court has held under the definition of capital assets that "primarily" is defined as "of first importance" or "principally."</p>

<p>Ultimately, and despite the taxpayer's own designation of the equipment as primarily held for rental, the Chief Counsel determined the property was principally held for sale, with rental of secondary importance. (Note: the taxpayer in question is not an Accruit client.)</p>

<p>The following summarized facts serve to support the Chief Counsel's position:</p>

<ul>
<li>The taxpayer structured the sales of designated rental equipment as LKE transactions.</li>
<li>Taxpayer's overall revenue structure consists of:
<ul>
<li>equipment sales making up 91% of total income, and</li>
<li>equipment rentals making up 9% of total income.</li>
<li>Information provided to the IRS indicated that a substantial portion of the equipment designated as rental was sold prior to generating any rental income.</li>
</ul>
</li>
<li>The IRS Examination Division sampled a number of replacement properties received in LKE transactions and determined that many were disposed of shortly after purchase and none of the replacement properties were rented prior to disposition.
<ul>
<li>Of all the replacement property purchased during Year 1, 40% was disposed of that same year.</li>
<li>Nearly half of these dispositions occurred within 90 days of the replacement property's receipt by the taxpayer.</li>
</ul>
</li>
</ul>

<h4>Implications</h4>

<p>Under IRC section 1031(a), Qualified LKE sales are disposals of relinquished property defined as "held for productive use in a trade or business or for investment." Property that is held primarily for sale (inventory) is specifically disqualified from LKE treatment.</p>

<p>Does this ruling mean that companies with 1031 exchange programs should conduct a review? Perhaps. This depends on the details of the particular program. The CCA does highlight the importance of properly classifying and qualifying both relinquished and replacement property with respect to LKE eligibility, and it's always a good idea to make sure that a program remains in compliance with the guidelines established during implementation.<strong> </strong></p>

<p><strong>Accruit advises any company that believes it may be implicated by the Chief Counsel's reasoning to discuss with their tax advisor what steps should be taken (and documented) to help ensure that relinquished property is truly separate and distinct from those assets that are held exclusively or primarily for sale.</strong></p>

Metatags:

Title:

IRS Chief Counsel Advisory 201025049: are there implications for your 1031 exchange program?

07/15/10

Accruit monitors the marketplace for factors that may have an impact on its clients and partners. Read more about the ...

1031 Exchange Tips: a look at simultaneous exchanges (or swaps)

06/10/10

Learn more about the most basic type of 1031 exchange, the simultaneous LKE, also known as the "swap."

Body:

<p>Education has always been a key component of the like-kind exchange (LKE) industry and frankly, it has always been one of the more enjoyable parts of my job. Despite the fact that the 1031 exchange business focuses on a very narrow part of the tax code, there will always be significant challenges associated with anything that involves the IRS. So for this month's 1031 Tips, I'm stepping back and reexamining the most basic type of 1031 exchange, the <em>simultaneous LKE</em>, also known as the "swap."</p>

<p>The oldest form of exchange, the simultaneous LKE can take on three basic forms:</p>

<ul>
<li>Two-party swap format, without the use of a Qualified Intermediary (QI)</li>
<li>Three-party format, without the use of a QI</li>
<li>Two or three-party format, with a QI</li>
</ul>

<p>For the purposes of this article, I'll stick to the two-party swap format.</p>

<p>Three-party LKEs can be structured without the use of a QI, but the accommodating party is potentially exposed to liability issues related to property they have little information about. This potential exposure makes three-party LKEs without the use of a QI, a rare (and risky) occurrence.</p>

<p><strong>On the other hand, the two-party swap format represents an exchange in its most understandable and unadulterated form.</strong> Structured as a true trade, <em>the ownership transfers must occur simultaneously with care taken in order to account for each property's respective fair market values to ensure tax liabilities are fully deferred</em>. Furthermore, since the two properties don't usually share the same fair market values, cash or other property used as part of the purchase / sale price must be carefully delivered directly to the other party.</p>

<p>The two-party swap is illustrated as follows:</p>

<p>Two-party swaps can be a great way to keep an LKE simple and cost effective. However, what may begin as a simple swap can quickly evolve to suit the circumstances of the seller (exchanger) and / or buyer. It's these variable circumstances that can move the transaction beyond the requirements for a successful LKE. The old saying goes that the devil's in the details, and LKEs are heavily dependent on the proper transaction form. Any deviations from that form can be fatal to the exchange.</p>

<p><strong>Assuming the properties qualify for LKE treatment, the primary threat to the exchange lies in delays.</strong> Delays in ownership transfers (or the delivery of cash or other considerations) can have a profoundly negative impact on the integrity of the two-party swap, so proper planning is vital. This planning is especially important if you're involved in a <em>dealer trade-in</em> or a <em>pass-through transaction</em>. In some instances, pass-throughs and trade-ins can fall outside the prescribed format, requiring the use of a QI. In other cases, where the two-party swap format doesn't require the use of a QI, exchangers may choose to involve one in the transaction. In doing so, they add some very important elements to the LKE:</p>

<ul>
<li>An experienced, knowledgeable professional.</li>
<li>An approved "Safe Harbor" component.
<ul>
<li>Exchangers should be very careful regarding transactions that position the dealer as the QI. There are very specific rules within the tax code prohibiting the use of an individual / entity that has a recent agency relationship with the exchanger.</li>
</ul>
</li>
<li>A safety net against LKE-destroying occurrences, such as:
<ul>
<li>Actual receipt or constructive receipt of funds (this is especially important if the values of the traded properties are not equal).</li>
<li>Delays in the sequential transfer of the properties.</li>
</ul>
</li>
</ul>

<p>In other words, simultaneous exchanges are legal and valid, but they can expose you to significant liability if they're conducted improperly. The best way to assure that your swap complies with Section 1031 is to begin the planning process by calling a QI. At Accruit, we don't charge any fees to discuss the proposed transaction, and our Exchange Operations team can provide you with an honest appraisal of the transaction's integrity, including whether or not you should use a QI.</p>

<p>Short version: make a call with your QI a prerequisite step in your due diligence process. You won't regret it.</p>

Metatags:

Title:

1031 Exchange Tips: a look at simultaneous exchanges (or swaps)

06/10/10

Learn more about the most basic type of 1031 exchange, the simultaneous LKE, also known as the "swap."

Like-kind exchange insight: when can exchangers get their proceeds back?

05/07/10

How soon will you receive all, or part of your exchange proceeds back?

Body:

<p>Exchangers frequently inquire about when they may receive all, or part of their exchange proceeds back. It is a question I have been asked countless times, and in certain circumstances giving the right answer can be difficult. We're talking, after all, about the proceeds from the exchanger's sale, and sometimes the need for their return is pressing. Regardless of the need, though, there are very rigid regulations regarding when qualified intermediaries (QIs) can release a client's exchange proceeds. Those same regulations make no provision for how badly those funds may be needed for purposes outside a properly structured like-kind exchange (LKE).</p>

<p>Given the incredible benefits that LKEs afford and the tight restrictions regarding their application, it's important to understand how and when exchangers can get their proceeds back.</p>

<p>Let's begin with the exchange agreement. Signed at the start of the LKE, the agreement must explicitly state the restrictions on an exchanger's "rights to receive, pledge, borrow, or otherwise obtain the benefits of money, or other property before the end of the exchange period." Within the LKE industry, these limitations are referred to as the (g)(6) limitations, after United States Treasury Regulation 1.1031(k)-(1)(g)(6). The language within a properly worded agreement must be clear, read and understood, prior to execution by the exchanger.</p>

<p>Within a properly written agreement, it is fairly easy to understand the limitations on the exchanger's rights mentioned above. What's not always readily understood is the definition of the exchange period. Officially this period begins on the date the ownership of the relinquished property is legally transferred to the buyer(s) and officially ends with one of the following triggering events:</p>

<ul>
<li>The expiration of the 45-day identification period if the exchanger has either,
<ul>
<li>failed to identify replacement property(s) or,</li>
<li>properly revoked the previously submitted identification form, or</li>
<li>after properly identifying replacement property(s) and without revocation, encounters a "material and substantial" contingency preventing the purchase of the identified replacement property(s), or</li>
</ul>
</li>
<li>The receipt, by the exchanger, of ALL of the properly identified replacement property(s), or</li>
<li>At the expiration of the 180-day completion period.</li>
</ul>

<p>What this means is that the earliest day exchange proceeds may be returned to the exchanger is on day 46. There is simply no avenue available for the exchanger to terminate the LKE and receive the proceeds before the 45 days pass. Furthermore, after proper identification and the passing of the first 45-day deadline, if an exchanger does not purchase the identified replacement property(s), the exchanger must wait until the full 180-day exchange period expires to receive the remaining funds.</p>

<p>Exchangers should be very careful about claiming that a material and substantial contingency has prevented the purchase of the properly identified replacement property(s). This exemption may only be claimed after identification has been made and the 45-day date has passed. In addition, the proper application of the contingency demands a very careful analysis of the nature and character of the event by an experienced tax advisor. Even within that context, a careful QI will not release funds for a material and substantial contingency without coordinating with its own legal advisor.</p>

<p>In summary, it's very important to know your options before signing an exchange agreement. A QI with a comprehensive approach will explain the (g)(6) limitations in a manner that makes them easily understood. We also strongly encourage you to beware of "overly accommodating accommodators" - a QI who's willing to play fast and loose with the letter of the law is placing your business in jeopardy. Accruit doesn't strictly adhere to the tax code just for our own protection, we do it because it's in your best interests, as well.</p>

<p>As a general rule, always have your tax advisor review the exchange agreement prior to signing. By working together, the QI and the tax advisor will be able to give you a clear picture of all the timing issues related to an LKE.</p>

Metatags:

Title:

Like-kind exchange insight: when can exchangers get their proceeds back?

05/07/10

How soon will you receive all, or part of your exchange proceeds back?

1031 EXCHANGE GENERAL

BLOG UPDATES