<h2>Converting a C Corporation to an S Corporation</h2>

<p>Thinking about changing your corporate structure from a C corporation to a subchapter S corporation?&nbsp; S corporations, partnerships, and certain LLCs are considered pass-through entities, which means they "pass through" various types of taxable income: interest, dividends, deductions, and credits to the shareholders, partners, or members responsible for paying tax. This avoids the double taxation associated with C corporations that pay entity-level taxes and then distribute dividends that become subject to individual taxes.</p>

<h2>What is Built-in Gains Tax?</h2>

<p>With all of the tax advantages provided to S corporations, many companies are making the move.&nbsp; However, there are some pitfalls.&nbsp; One of these is the tax recognition of built-in gains (BIG). Generally, BIG tax is triggered when existing assets are sold during the holding period, a period after the conversion to S corporation status. The holding period is currently 10 years, starting from the date of the conversion.&nbsp; During this period, the existing assets are encumbered by the corporate tax rate of 35%.&nbsp;&nbsp;&nbsp;&nbsp;</p>

<p>For ESOP companies contemplating the conversion from C Corporation to S Corporation, one of the factors to consider is that stock-option purchases generated by employee participation in an ESOP are also subject to the IRC Section 1374 – Built-In Gains (BIG) Tax.</p>

<h2>Holding Periods for Built-in Gains Tax</h2>

<p>When it comes to tax law, Congress has a habit of letting certain provisions expire, only to extend/amend them in later tax years.&nbsp; Built-in gains are no exception:</p>

<ul>
<li>For 2009 and 2010, Congress shortened the holding period to seven years.&nbsp;</li>
<li>In 2011 through 2013, the holding period was further shortened to five years.&nbsp;</li>
<li>For 2014 and 2015, the holding period is 10 years.</li>
</ul>

<p>The shorter holding periods of prior years proved beneficial for a great number of companies that were concerned about the traditionally long (10 year) holding period, helping many avoid recognizing gains at a punishing 35%.</p>

<h2>Disposing of Assets during the Built in Gains Holding Period with a 1031 Exchange</h2>

<p>In the ordinary course of business, companies may need to dispose of existing assets, whether those assets are underutilized, aging fleets, idle or obsolete equipment, or rental assets routinely sold and replaced. Holding on to such assets takes up yard space and triggers unnecessary insurance costs and maintenance fees.&nbsp; Exchanging them through a Section 1031 like-kind exchange (LKE) will protect those built in gains from income recognition (taxation), free up working capital, and significantly increase cash flow to continue growing and expanding operations.</p>

<h2>Beyond the Holding Period: The Like-Kind Exchange Program</h2>

<p>Implementing a 1031 exchange will not only keep the BIG tax at bay, it can reduce or eliminate other holding costs and secure tax benefits beyond the holding period.&nbsp; It is a little bit like having your cake and eating it too.&nbsp; Asset owners that maintain an LKE program throughout the holding period can permanently avoid the pain of BIG tax and implement a business process that protects them from triggering taxation after the holding period ends.&nbsp;</p>

<p>Absent an ongoing like-kind exchange program, future sales will likely be subject to income taxation (flowing out to S Corp owners).&nbsp; Leveraging a 1031 like-kind exchange program immediately after the conversion provides tremendous cash flow opportunities, as does keeping the program in place thereafter.&nbsp;</p>

<h2>Summary</h2>

<p>Asset owners, with recent C to S corporation conversions should evaluate their tax positions with their advisors, and consider the potential negative impact of their built-in gains.&nbsp; With the help of a qualified intermediary, owners can project the returns that like-kind exchanges can generate by allowing access to a low cost of capital, deferring gain recognition, and ensuring that their BIG will never get small.<br />
<br />
<a href="/contact-us">Contact us</a> for a free consultation.</p>

<p>During his campaign, President-elect Trump was criticized for the non-release of income tax returns.&nbsp; The information available is limited to his own statements and the release of three pages from his 1995 returns of income from New York and New Jersey.&nbsp; These pages reveal what amounts to a $900M loss.&nbsp; Unfortunately, these documents are driving misstatements and generating misleading information related to Section 1031 Like-Kind Exchanges – one of the real estate industry’s most popular tax strategies</p>

<p>Misstatements and Misleading Information about 1031 Like-Kind Exchanges</p>

<p>Several articles framed like-kind exchanges in a negative light, including:</p>

<ul>
<li><a href="http://r20.rs6.net/tn.jsp?f=001kO1MibvhX-jGOl_vH8ILV0RlPt2BIPI0a2GeXhCx…; target="_blank"><em>The New York Times: "How Donald Trump Turned the Tax Code Into a Giant Tax Shelter," by James B. Stewart, October 2, 2016</em></a></li>
<li><a href="http://r20.rs6.net/tn.jsp?f=001kO1MibvhX-jGOl_vH8ILV0RlPt2BIPI0a2GeXhCx…; target="_blank"><em>Washington Post: "How Donald Trump and other real-estate developers pay almost nothing in taxes," by Max Ehrenfreund, October 4, 2016</em></a></li>
<li><a href="http://r20.rs6.net/tn.jsp?f=001kO1MibvhX-jGOl_vH8ILV0RlPt2BIPI0a2GeXhCx…; target="_blank"><em>PBS Making Sen$e: "The tax rules that let real estate moguls like Trump pay no federal income tax," by Steven M. Rosenthal, October 3, 2016</em></a></li>
<li><a href="http://r20.rs6.net/tn.jsp?f=001kO1MibvhX-jGOl_vH8ILV0RlPt2BIPI0a2GeXhCx…; target="_blank"><em>Tax Policy Center: "Does Donald Trump pay taxes, ever?" By Steven M. Rosenthal, October 3, 2016</em></a></li>
<li><a href="http://r20.rs6.net/tn.jsp?f=001kO1MibvhX-jGOl_vH8ILV0RlPt2BIPI0a2GeXhCx…; target="_blank"><em>USA Today: "Fact check: Spinning Trump's taxes," by Eugene Kiely and Robert Farley, FactCheck.org, October 3, 2016&nbsp;</em></a></li>
<li><a href="http://r20.rs6.net/tn.jsp?f=001kO1MibvhX-jGOl_vH8ILV0RlPt2BIPI0a2GeXhCx…; target="_blank"><em>USA Today: "Trumping Real Estate Taxes: Our View," USA Today Editorial Board, October 5, 2016</em></a></li>
</ul>

<p>Beyond the tone of these article, there’s specific information that deserve attention:</p>

<h2>Like-Kind Exchanges – Not a Sweet Deal for Developers</h2>

<p>Section 1031’s introductory&nbsp; paragraph clearly states, “No gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like kind which is to be held either for productive use in a trade or business or for investment.” The second paragraph moves into more detail, plainly declaring that stock in trade and <strong>other property held primarily for sale</strong> is disqualified from like-kind exchange treatment.&nbsp; It couldn’t be any clearer.&nbsp; Inventory <strong>does not</strong> <strong>qualify</strong> for Section 1031 treatment, and given that developers primarily deal in inventory, most of what they produce is disqualified under Section 1031.&nbsp; A simple investigation into the first 83 words of Section 1031 provides the reader with a basic understanding of the developerversus investor issue.</p>

<h2>Comparisons between Like-Kind Exchanges and Stocks and Bonds</h2>

<p>Like-kind exchanges are sometimes criticized for their application to business use property and other investment property, but not for stocks and bonds. In doing so, critics have suggested that well-off real estate investors receive special and favorable treatment, treatment not available to the wider investing public.&nbsp; While it is true that Section 1031 specifically excludes stocks and bonds from like-kind exchange treatment, the comparison is fundamentally misleading.&nbsp; &nbsp;</p>

<p>One of Section 1031’s original goals was to encourage the exchange of similar illiquid assets without significantly diminishing the net worth of the taxpayer. In promoting the sale and purchase of certain assets, Section 1031 encourages capital formation by discouraging the lock-in effect (the incentive to hold on to property) that taxation promotes. By specifically <strong>excluding</strong> stocks and bonds, Section 1031 can focus on supporting the sale and purchase of some of the largest and most valuable assets in the country.&nbsp;</p>

<p>It’s important to note that <a href="/blog/1031s-build-america">the disposition and acquisition of these types of assets employ thousands of United States taxpayers</a>, in both private and governmental roles.&nbsp; Blue collar and white collar workers all benefit from the movement of real estate.&nbsp; Real estate transactions move people into wage-earning action, allowing them to feed their families, pay their mortgages, and purchase goods and services.&nbsp; All of these activities generate the payment of taxes from the salaries they earn.&nbsp;</p>

<p>In comparison, stocks and bonds are often easily and readily transferable through the open market and do not typically suffer from the same type of lock-in effect.&nbsp; Securities often possess inherent liquidity through various, ever-changing market pressures.</p>

<h2>Section 1031 is not a Loophole for Real Estate Holders</h2>

<p><a href="http://www.dictionary.com/browse/tax-loophole?s=t&quot; target="_blank">A tax loophole is defined as</a>, “A provision in the laws governing taxation that allows people to reduce their taxes. The term has the connotation of an unintentional omission or obscurity in the law that allows the reduction of tax liability to a point below that intended by the framers of the law.”</p>

<p>Like-kind exchanges have been part of U.S. tax law for nearly 100 years.&nbsp; During this period, the tax code has not only survived but has been refined through congressional review and numerous court cases.&nbsp; At its core, Section 1031 speaks directly to its underlying theory - continuity of investment.&nbsp; Continuity of investment dictates no recognition of tax as long as exchanging taxpayers followed the law, didn’t cash out, and reinvested in similar (like-kind) property.&nbsp; From its beginnings, the framers of the law held this theory as central to its creation.&nbsp;</p>

<p>It is worth noting, a full 33% of like-kind exchanges involving real estate trigger some income tax and the vast majority (88%) of real estate exchanges result in a future taxable disposition of the replacement property.</p>

<h2>Section 1031 is Fair for the American Taxpayer</h2>

<p>Section 1031 is equitable tax policy.&nbsp; It has survived for nearly 100 years by empowering taxpayers across income levels and in a wide variety of businesses to efficiently leverage their investments to build wealth and create jobs.&nbsp; It’s a process that has been good for investors, good for the economy and good for the United States Treasury.&nbsp; With the election over and talk of tax reform heating up, please remember to be wary of statements intended to evoke emotional responses.&nbsp; More often than not, some careful research will yield more accurate information.</p>

<p>&nbsp;</p>

<p>&nbsp;</p>

<p>IRVINE, Calif., Nov. 14, 2016 — HomeUnion, an online real estate firm providing all of the services investors need to buy, sell and manage real estate, has formed a partnership with Accruit, a leading qualified intermediary for taxpayers executing like-kind exchanges. The partnership enables HomeUnion’s investor clients to access Accruit’s services, as well as their Certified Exchange Specialists® (CES®), when closing like-kind exchanges in real estate. A like-kind exchange in real estate – also known as a 1031 exchange – allows investors to sell a property and reinvest the proceeds from that sale into a new property to defer capital gains taxes.</p>

<p>Accruit, LLC, the nation’s leading provider of qualified intermediary (QI) services and 1031 like-kind exchange (LKE) program solutions, is pleased to announce the addition of Ted Jolly as Director of Marketing and Inside Sales.</p>

<p>Jolly is a marketing and digital communications professional with almost 20 years of corporate and agency experience.&nbsp; Most recently, he was a Strategic Marketing Manager for Baker Hughes, a global oilfield service company, where he was responsible for marketing strategies, content development, product launches, and marketing campaign implementation.&nbsp; Jolly was extensively involved in strategic planning for Baker Hughes and was instrumental in driving revenue growth for the company during his tenure there.</p>

<p>"We’re excited &nbsp;to have someone with Ted’s breadth and depth of experience join us,” said Accruit President and COO, Karen Kemerling.&nbsp; “His passion for marketing and effective communication will help Accruit meet evolving challenges in the industry.”</p>

<p>Jolly’s focus will be on developing a marketing and inside sales strategy to grow current markets and&nbsp; further develop the Accruit and Bankers Escrow brands. When asked about his new role, Jolly was enthusiastic. "I’m passionate about marketing’s potential and the unique challenges presented in this industry. My goal, as always, is to discover how we can better connect with customers.”</p>

<h2>Professional QIs Are Central to 1031 Exchanges and Help a Wide Variety of Asset Owners</h2>

<p>Las Vegas, Nevada (September 15, 2016)</p>

<p>The U.S. Treasury rules giving rise to the like-kind exchange “Qualified Intermediary” turn 25 this year. Established by Treasury safe harbor regulations in 1991, professional Qualified Intermediaries (QIs) promote compliance with the law and make the benefits of like-kind exchanges, also known as 1031 exchanges, accessible to business and property owners nationwide.</p>

<p>QIs act as independent third-party principals in 1031 exchange transactions. “QIs are equal parts facilitator, educator, and compliance officer,” said Margo McDonnell, president of 1031 CORP., a Philadelphia-based Qualified Intermediary, and outgoing president of the Federation of Exchange Accommodators (FEA), the national 1031 exchange trade association for QIs. “Taxpayers benefit from the guidance Qualified Intermediaries provide. The strict requirement of Internal Revenue Code Section 1031 must be met for an exchange to be approved by the IRS. Without the guidance of Qualified Intermediaries, investors would see many more like-kind exchanges disqualified, negatively affecting business reinvestment and job growth. This would also increase the risk of abuse,” said McDonnell, speaking from the FEA 2016 Annual Conference in Las Vegas on September 14, 2016.</p>

<p>FEA member Qualified Intermediaries help taxpayers of all sizes efficiently redeploy capital across the country, leading to job creating spending in local communities. Professional QIs simplify the exchange transaction for all parties, including the asset owners seeking 1031 tax deferral as well as their tax/legal advisors, the closing officer preparing the closing statements, and real estate professionals assisting the taxpayer. “Investors often need input to understand the strict rules of identification and other procedural issues,” said McDonnell, “QIs are integral to the efficiency of the process.”</p>

<p>Encouraging active and ongoing reinvestment in property were central to Congress’ original intent for enacting the tax deferral status of IRC Section 1031 in 1921. Under the rules, a taxpayer completing an exchange cannot have receipt of the funds from a sale without creating a taxable event. Professional QIs ensure that the sale proceeds are properly restricted. Any funds unused for reinvestment are returned to the taxpayer at termination of the exchange and this portion is then taxable.</p>

<p>The rise of the professional QI in the last 25 years has given small investors valuable assistance in complying with IRC 1031s provisions, while providing a check on exuberant investors trying to abuse the tax code. While larger assets are routinely exchanged, a 2011 survey of members of the Federation of Exchange Accommodators found that more than a third of exchange transactions were below $500,000. “Through Section 1031, many asset owners are exchanging to build or preserve their life savings. We see a significant amount of middle class taxpayers exchanging single family rental homes, farmland, and construction equipment. There’s no doubt that Section 1031 promotes investment in small to medium sized businesses. Most QIs are small businesses, themselves,” said Steve Chacon, incoming president of the FEA and a vice president at Accruit, a national QI firm based in Denver. Typical fees for a Qualified Intermediary’s services are between $750 and $1500 per exchange.</p>

<p>California and Colorado see the highest number of exchange transactions each year, but the use of 1031 exchanges is widespread across the country. QIs facilitate exchanges nationally in many industries, including both residential investment real estate and commercial real estate, construction, the vehicle/equipment rental and leasing industries, transportation, agriculture, farming and ranching and other industries.</p>

<h2>About the Federation of Exchange Accommodators (FEA)</h2>

<p>The FEA (www.1031.org), whose tagline is “The Voice of the 1031 Industry,” is a national trade association representing professionals who conduct like-kind exchanges under Internal Revenue Code Section 1031. Members of the association include Qualified Intermediary firms, title companies, their primary tax and legal counsel, and affiliated industries (TIC sponsors, banks, real estate brokers, title companies, settlement/escrow agents, etc.). The FEA helps QIs raise the professional quality of their services while keeping their fees affordable for small investors. The FEA offers professional QIs the opportunity to demonstrate their experience, technical expertise and commitment to ethical practices by obtaining the Certified Exchange Specialist® (CES®) designation. The designation requires a QI to have three years’ full-time experience as a QI, to pass a rigorous knowledge exam, and to adhere to a strict code of ethics.</p>

<h2>FEA Contacts</h2>

<p>Margo McDonnell<br />
1031 CORP.<br />
Providence Corporate Center<br />
100 Springhouse Drive, Suite 203<br />
Collegeville, PA 19426<br />
Toll-free: (800) 828-1031<br />
Local: (610) 792-4880<br />
Fax: (610) 489-4366<br />
<a href="mailto:margo@1031corp.com">margo@1031corp.com</a></p&gt;

<p>Steve Chacon<br />
Accruit, LLC<br />
1331 17th Street, Suite 1250<br />
Denver, Colorado 80202<br />
(866) 397-1031<br />
<a href="mailto:stevec@accruit.com">stevec@accruit.com</a></p&gt;

<p>Most users of Section 1031 understand the 180-calendar day deadline to complete their like-kind exchange.&nbsp; This general understanding of the exchange period deadline is fine for most transactions, but many exchangers remain unaware of the more nuanced definition of this critical period.</p>

<h2>What do the regulations say?</h2>

<p>Section 1031’s underlying regulations state, “The exchange period begins on the date the taxpayer transfers the relinquished property and ends at midnight on the earlier of the 180th day thereafter or the due date (including extensions) for the taxpayer’s return of tax imposed by chapter 1 of subtitle A of the Code for the taxable year in which the transfer of the relinquished property occurs.”</p>

<h2>What do the regulations mean?</h2>

<p>The regulations generally allow for 180 calendar days for taxpayers to complete their <a href="https://www.accruit.com/blog/1031-real-estate-exchanges-what-like-kind&…; title="like-kind exchange">like-kind exchange</a> transactions.&nbsp; However, individual taxpayers that began a 1031 exchange after October 19 of this current year must understand the exchange period does not guarantee a full 180 days.&nbsp; The bottom line is that individuals who are unable to purchase replacement property by April 17 should consider filing a tax extension to give themselves the full 180 days.&nbsp; Like-kind exchanges that begin late in the year can also trigger special reporting considerations.&nbsp;</p>

<h2>Reporting the Transaction</h2>

<p>After completing the exchange (purchasing the replacement property), taxpayers will report the transaction on <a href="/blog/reporting-like-kind-exchanges-irs-form-8824" title="Form 8824 Reporting Like-Kind Exchanges">Form 8824, Like-Kind Exchanges</a>.&nbsp; Form 8824 is prepared and filed in the same tax reporting year in which the relinquished property was transferred/sold.<br />
<br />
For failed <a href="https://www.accruit.com/property-owners/1031-exchange-explained&quot; title="1031 exchange">1031 exchanges</a> that straddle tax years, taxpayers may seek installment tax reporting on IRS Form 6252 in the year of the relinquished property sale.&nbsp; For instance, if the relinquished property closed between November 16 and December 31, the 45-day identification would be in the following calendar year.&nbsp; Similarly, if the relinquished property closed after July 5, and potential replacement property was identified within the 45-day identification period but no replacement property was actually acquired, the end of the exchange period would be in the following calendar year.&nbsp; If the 1031 exchange fails by non-identification or by failure to purchase a replacement property, the sale proceeds would be returned to the exchanger in a different tax reporting year.&nbsp; In this circumstance, the IRS allows taxpayers to either report the gain in the year of sale or in the year the proceeds were received under IRC 453 installment sale rules.&nbsp; This would allow the taxpayer to select the year of reporting that is most beneficial.&nbsp; One might say that a year’s worth of tax deferral is available regardless of the exchange having failed.</p>

<h2>Taxpayers Beware</h2>

<p>Installment sale treatment generally requires a bona fide intent to complete an exchange.&nbsp; This means that the taxpayer had reason to believe, based on the facts and circumstances at the beginning of the exchange, that a like-kind replacement property would be acquired during the exchange period.<br />
Other installment sale issues:</p>

<ol>
<li>If there was debt paid off at closing of the relinquished property and gain associated with this debt, relief is generally recognized in the year of sale.&nbsp;</li>
<li>Depreciation recapture under section 1245 or 1250 is taxable as ordinary income in the year of sale.</li>
<li>Interest is charged on the tax deferred if the sale price of the relinquished property is over $150,000 and certain other instalment obligations exceed $5 million.</li>
</ol>

<p>For taxpayers who have a taxable gain, there is one additional issue to consider.&nbsp; If you are unsettled about current tax rates, you may extend your tax return to report by October 15.&nbsp; This way, you can wait and see if the Congress will change the rates and select the year of reporting that is most beneficial for you.<br />
Check with your tax advisor to determine the correct tax forms and tax extensions to utilize along with the selection of the reporting year for your exchange.</p>

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