<p>Accruit Executive Vice President Max A. Hansen will be speaking at "Valuing Rural America," the Montana chapter of the American Society of Farm Managers &amp; Rural Appraisers' (ASFMRA) annual meeting. The event takes place February 18, 19 and 20 in Bozeman, Montana; Hansen will discuss 1031 like-kind exchanges in a presentation titled, "Back to Earth: The Current State of Sec. 1031 Exchanges" on Wednesday, February 20.</p>

<p>&nbsp;</p>

<p>ATG Trust&nbsp; Company and ATG Legal Education present Accruit Associate General Counsel Jordan Born in a program on the deferral of capital gains taxes using 1031 like-kind exchanges.The seminar is part of an ongoing series that provides trust and estate planning attorneys with the knowledge and skills to help them better serve their clients,</p>

<p>Born's presentation, which takes place on Wednesday, February 13, will educate attorneys on the rules and regulations governing a properly structured 1031 exchange for investor clients wishing to defer capital gains taxes on the sale of real estate. &nbsp;Born has worked primarily in real estate law since 2006. In 2011, he started his own practice where he advised and represented individuals, business entities, lenders, borrowers, landlords and tenants in all matters related to commercial and residential real estate. He joined Accruit in 2018.</p>

<h2>C-Corporations</h2>

<p>Corporations are one of the oldest forms of legal entities.&nbsp; A significant body of case law and statutes exist defining the rights and liabilities of shareholders, officers, directors, and third parties dealing with the corporate entity.&nbsp; Certain states, like Delaware, have particularly favorable business corporation statues.&nbsp; As a result, many firms will strategically organize in those states in order to obtain the benefit of those advantageous laws. &nbsp;</p>

<p>Unlike a general partnership that can come into existence without filing anything affirmative, a corporation has a separate legal existence.&nbsp; The corporate structure serves to insulate most of the debts from the shareholders.&nbsp; A corporation is able to hold property in its own name and provide its shareholders with limited liability so long as the shareholders do not commingle funds or engage in other prohibited, self-serving activities. &nbsp;</p>

<p>By-laws are controlling documents enacted by the incorporator who organizes the entity.&nbsp; The by-laws govern the actions of the corporation and relationships of the shareholders, directors, officers and third-parties dealing with the entity.&nbsp; They set forth the framework within which the corporation must operate regarding important aspects, such as management, distributions and dissolution.&nbsp; The board of directors and officers of the corporation provide the management. &nbsp;</p>

<p>Some advantages of c-corporations are:</p>

<ul>
<li>a perpetual life</li>
<li>no restrictions with regard to the participation in management</li>
<li>the permissibility of any power structure &nbsp;</li>
</ul>

<p>One particularly important benefit of utilizing the corporate form of ownership is the limitation of liability for officers and directors of the corporation.&nbsp; Unlike a limited partnership, the corporation’s shield of limited liability is not lost by the shareholder’s participating in the management of the corporation or its property. &nbsp;</p>

<p>Nevertheless, officers of corporations that own real estate must be aware of the potential for personal liability in certain circumstances.&nbsp; A court may decide to “pierce the corporate veil” whenever required by public convenience, fairness, or necessity. &nbsp;</p>

<p>For example, the corporate form may be disregarded by a court when there is such a unity of interest and ownership that the separate personalities of the corporation and the individual no longer exist.&nbsp; In other words, the corporation must strictly observe the formalities associated with this form of ownership or else risk having personal liability. &nbsp;</p>

<p>Another example where personal liability could potentially be imposed in a real estate ownership context is for environmental hazards under statutes like the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), known also as “Superfund.”&nbsp;</p>

<p>Significant disadvantages exist when using the corporate form for real estate investment.&nbsp; First and foremost, the individual shareholders cannot obtain any of the tax benefits generated by the investment.&nbsp; Unlike a partnership, no pass-through of the corporation’s income tax deductions exists.&nbsp; The corporation’s profits are taxed twice at the corporate level through the payment of the corporate income tax and at the shareholder level by the shareholder’s payment of individual income taxes on the distributions they receive from the corporation.&nbsp; States also impose corporate income and franchise taxes which can materially and adversely affect the financial considerations of owning real estate in a corporation.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; &nbsp;</p>

<h2>S-Corporations</h2>

<p>Subchapter-S corporations are c-corporations that have filed an election with the IRS using Form 2553.&nbsp; S-corps allow investors to avoid the double taxation of the corporation’s profit and the inability of the corporation to pass its income tax losses and credits onto the shareholders while still providing them with limited liability. &nbsp;</p>

<p>Nevertheless, certain limitations apply to Subchapter-S corporations such as: &nbsp;</p>

<ul>
<li>There can be no more than one class of stock.</li>
<li>There can be no more than 75 stockholders.</li>
<li>Essentially all investors must be individuals.</li>
</ul>

<p>Profits and losses pass through to the shareholders without a corporate income tax.&nbsp; Shareholders of S-corps are taxed the same as partners, and the taxable income is treated as partnership income. &nbsp;</p>

<p>A disadvantage of S-corps is the difficulty in transferring real estate and other property held by the corporation caused by the limitation on the number of investors.&nbsp; Also, S-corps are subject to the IRS passive loss rules.&nbsp; Lastly, an additional problem imposed by Subchapter-S occurs in the event of liquidation of the corporation or the conveyance of its assets to an operating entity.&nbsp; The corporation could be required to pay corporate level capital gains tax. &nbsp;</p>

<p>In part four of our continuing series of blogs, we will discuss limited liability companies as a form of real estate ownership.</p>

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<p>A group of knowledgable appraisers and valuation experts will provide a recap of land values and factors that affected land values in 2018 for the Northwest United States, specifically Montana and the Northern Rocky Mountain Region. Presenters will address a range of markets, "from hazelnuts to cattle," in discussing data related to 2018 trends and 2019 expectations.</p>

<p>The 20th Annual Montana Real Estate Roundup will be presented on Wednesday, January 9, 2019 by Norman C. Wheeler and Associates at the Hilton Garden Inn in Bozeman, and is sponsored by Southwest Montana Farm &amp; Ranch Brokers and Northwest Farm Credit Services. There is no cost to attend.</p>

<h2>Benefits of a Trust</h2>

<p>There are many reasons why a person may choose to hold assets in a trust rather than in other holding capacities.&nbsp; One of the primary reasons is to bypass probate proceedings.&nbsp; When a person’s assets are held in a trust, the trust extends beyond the person’s death. Property held by the trust doesn’t go through probate.</p>

<p>Another benefit of trusts is that they can effectively double the amount of wealth that can be passed on to heirs, and they can be structured to address special needs, for instance the appointment of a trustee for heirs such as minors, handicapped persons, or those with alcohol , drug or gambling addictions.</p>

<h2>Parties to a Trust</h2>

<ul>
<li>Grantor or Settlor - The person who creates the trust, granting or settling assets into the trust.</li>
<li>Trustee - The person responsible for administering the trust</li>
<li>Beneficiary - The person who inherits funds from or otherwise benefit from the trust.&nbsp;</li>
</ul>

<h2><span style="tab-stops:260.45pt">Revocable Trusts&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; </span></h2>

<p>Revocable trusts are the most common type of trust.&nbsp; As evidenced by the name, this type of trust may be revoked, modified or amended at any time by the grantor.&nbsp; Other names for such trusts include living trusts, self-declared trusts and inter vivos trusts.</p>

<p>With revocable trusts, the grantor, trustee and beneficiary are often one and the same person. These are “tax disregarded” entities and are taxed to the grantor using his or her social security number.&nbsp; The grantor of such a trust can meet the <a aria-label="1031 Exchange Same Taxpayer Requirements" href="/blog/same-taxpayer-requirement-1031-tax-deferred-exchange" title="1031 Exchange Same Taxpayer Requirements">same taxpayer requirement</a> of a 1031 exchange individually, as the trust or even as a single member LLC in which the grantor or the trust is the sole member.&nbsp;</p>

<h2>Irrevocable Trusts</h2>

<p>Irrevocable Trusts also work as their name implies.&nbsp; Once they are set up and funded, they cannot be changed in light of subsequent events.&nbsp; These trusts can be structured to minimize taxes and also can protect assets from creditor claims.&nbsp; An irrevocable trust has its own tax identification number and is not, for tax purposes, &nbsp;treated interchangeably with the grantor/settlor.</p>

<h2>Trust under Will</h2>

<p>A will can provide for a trust to come into being upon the death of the person leaving the will or testator.&nbsp; A testator may have been caring for a handicapped child and, upon his or her death, wishes to ensure that funds are on hand indefinitely to provide continuing care. Or, if beneficiaries of the will are be minors, a trust can set up to hold the assets for them until they are of a specified age.&nbsp; Once these types of trust come into being, they are irrevocable subject to the terms of the trust.&nbsp; Also, once the testator dies and the trust is established, a separate tax identification number is applied to the trust and used going forward.</p>

<h2>Land Trusts</h2>

<p>Land trusts can only hold real estate interests, and they will typically have a corporate trustee, such as a bank or trust company. Some states make broad use of land trusts while others do not recognize them &nbsp;due to technicalities of common law brought over from England when the various state laws were forming.&nbsp; Land trusts are like other revocable trusts; they can be revoked or amended while the primary beneficiary is living.&nbsp; Such a trust may name other persons as successor beneficiaries upon the death of the primary beneficiary.&nbsp;</p>

<p>Under Section 1031, there is a restriction against doing an exchange of a beneficial interest in an asset.&nbsp; However, the drafters of the code section had other types of investments in mind when they wrote this.&nbsp; In order to avoid confusion, the IRS released Revenue Ruling 92-105 stating that the owner of a beneficial interest in a land trust could participate in a 1031 exchange.</p>

<h2>Probate</h2>

<p>If a person dies without a trust, a court-supervised probate proceeding may be necessary to determine who inherits the assets from the deceased person.&nbsp; If the person dies with a will, it is referred to as a testate proceeding.&nbsp; If the person dies without a will, the proceeding is intestate, and the rules of heirship in their state of residence will dictate which heirs receive interests and at what percentage. If there is a will, an executor is named to carry out the distribution of the estate.&nbsp; If there is no will, that person will act as the administrator of the estate. &nbsp;As already mentioned, the existence of a trust will generally obviate the use of the will to transfer ownership of the assets left by the deceased. &nbsp;To the extent that any asset was unintentionally left out of the trust, the will sometimes “pours over” those assets into the trust upon death and the will which accompanies the trust is referred to as a <i>pour-over will</i>.</p>

<h2>Death during Pendency of a 1031 Exchange</h2>

<p>Normally in a 1031 exchange, the same person who sells a property is required to buy the new property, but sometimes the taxpayer sells relinquished property as part of a 1031 exchange and passes away before the exchange transaction is completed. &nbsp;Notwithstanding the old adage about death and taxes, the representative of the estate can, in this scenario, seek to complete the exchange and defer the taxes. In the event the exchange is not completed, the gains on the sale of the relinquished property would be paid as part of the deceased’s final tax return.</p>

<h2>General Partnerships</h2>

<p>A general partnership is essentially an association of two or more people to carry on a business as co-owners. No written agreement is necessary to have a general partnership. One advantage of the general partnership form of ownership is tax benefits. No taxable event happens at the partnership level. In other words, no double taxation occurs in a general partnership. The usual test the IRS uses to determine if a partnership exists is whether the partners share profits and losses, jointly own the capital and assets, and jointly control and manage the business.</p>

<h2>General Partnership Advantages and Disadvantages</h2>

<p>Other advantages of general partnerships include the following:</p>

<ul>
<li>Each partner can participate in the management of a general partnership.</li>
<li>Continuity of the general partnership can be established.</li>
<li>The ownership interest in a general partnership is treated as personalty rather than realty.</li>
</ul>

<p>The disadvantages of owning property in a general partnership include:</p>

<ul>
<li>There is unlimited liability for general partnership partners.</li>
<li>The decisions of one partner can bind the other partners.</li>
<li>The life of a general partnership is not perpetual in duration.</li>
<li>Each partner’s interest may not be easily marketable to third-party purchasers.</li>
</ul>

<p>The structuring of a 1031 exchange by a subsection of the partners is one of the most common questions asked by taxpayers and addressed in the article, <a href="/blog/1031-drop-and-swap-out-partnership-or-llc">“1031 Drop and Swap out of a Partnership or LLC.”</a></p>

<h2>Limited Partnerships</h2>

<p>A limited partnership is an association of two or more people in which the entity has one or more general partners and one or more limited partners. The limited partnership is usually established by filing a Certificate of Limited Partnership with the clerk of the county in which the partnership will be doing business or with the applicable Secretary of State’s office or similar agency.</p>

<h2>Limited Partnership Advantages and Disadvantages</h2>

<p>The major advantages of using a limited partnership to own real estate include</p>

<ul>
<li>A limited partnership allows a passive investor,not active in the management decisions of the partnership, to participate in the investment.</li>
<li>The liability of each partner is limited to the amount of capital that the investor has agreed to put “at-risk.”</li>
<li>There is continuity of a limited partnership in the event of death, bankruptcy, or withdrawal of one of its partners.</li>
</ul>

<p>The disadvantages of owning property in a general partnership include:</p>

<ul>
<li>In order for their liability to be limited, the limited partners cannot engage in the management of the partnership or its property.</li>
<li>The general partner is responsible for making management decisions concerning the limited partnership.</li>
<li>A limited partnership is difficult to market to third-party purchasers.</li>
<li>The limited partners must rely on the ability and expertise of the general partner or else they risk losing their limited liability.</li>
</ul>

<h2>Summary</h2>

<p>In the first of this series on selecting a real estate entity, we looked at sole proprietorships and tenant in common entities; in this installment we examined the advantages and disadvantages of two types of partnerships. <a href="/blog/selecting-entity-real-estate-purchase-–-corporations">In part three, we discuss corporations and the corporate form of ownership</a>.</p>