<p>Last month the Federation of Exchange Accommodators (FEA) held its annual conference in Las Vegas.&nbsp; The FEA is the national organization that represents professionals engaged in the practice of facilitating like-kind exchanges, known as qualified intermediaries (QIs).&nbsp; The FEA also counts as members, professionals not acting as QIs, but providing important services related to Section 1031 transactions.&nbsp; This year, economic expansion has resulted in higher attendance numbers, translating into one of the biggest conferences in recent memory.</p>

<p>This year’s meeting provided a forum for electing officers, conducting critical strategic planning sessions, and for leading highly informative educational sessions.</p>

<h2>Election of Officers</h2>

<p>This year, Accruit’s own Steve Chacon, Vice President of Exchange Service Operations was elected as the association’s president.&nbsp; Also elected were:</p>

<ul>
<li>Teresa Person, President-Elect</li>
<li>Mike Anderson, Treasurer</li>
</ul>

<p>Margo McDonnell will continue to serve as the association’s Immediate Past President.</p>

<h2>Strategic Planning</h2>

<p>Prior to the conference’s kickoff, the association’s Board of Directors met to focus upon legislative issues.&nbsp; The FEA Board of Directors also met for a wider strategic planning session to ensure the organization continues to effectively serve its membership through an updated plan to guide the organization into the future.</p>

<p><strong>A Focus on Legislative Issues – Threats to Section 1031</strong></p>

<p>The FEA’s Government Affairs Committee, Co-Chaired by Accruit CEO, Brent Abrahm, assembled an agenda to identify and guide the board through legislative challenges that lie ahead, including:</p>

<ul>
<li>The House Republican Blueprint for Tax Reform &nbsp;</li>
<li>Senator Ron Wyden’s proposal for depreciation pooling &nbsp;</li>
<li>The President’s proposed 2017 budget</li>
<li>Overall tax reform plans</li>
</ul>

<p>Threats also lie within proposals to limit like-kind exchanges from Secretary Clinton and Nominee Trump.&nbsp; Trump’s campaign has expressed interest in eliminating corporate tax expenditures which could directly impact Section 1031 and the role of the QI.</p>

<p><strong>A Focus on a Wider Strategy</strong></p>

<p>Leveraging feedback from the association’s membership, the board conducted a strategic planning session that included the following targeted outcomes:</p>

<ul>
<li>Identifying mission and core values</li>
<li>Confirming the vision statement</li>
<li>Confirming key goal areas</li>
<li>Listing actions, responsibilities and time frames</li>
</ul>

<p>The process for achieving the targeted outcomes included:</p>

<ul>
<li>Reviewing targeted outcomes for the session and the strategic planning model</li>
<li>Identifying member characteristics and statistics</li>
<li>Sharing survey results</li>
<li>Setting goal performance measures</li>
</ul>

<p>The FEA’s Board of Directors is currently reviewing, refining and finalizing the FEA’s wider strategic plan.&nbsp; The final plan will incorporate the results of the legislative strategic planning session and provide a comprehensive roadmap for the preservation and expansion of the association.</p>

<h2>Educational Sessions</h2>

<p>This year’s educational lineup included a host of technical experts conducting sessions with topics such as:</p>

<ul>
<li><strong>A View from the Hill</strong> – Accruit CEO, Brent Abrahm, joined by the FEA’s D.C. lobbyist and members of the Government Affairs Committee, gave an overview of the prospects for tax reform after the presidential election.</li>
<li><strong>Protecting Against Cyber Fraud</strong> – Discussion on current cyber fraud/cyber-crime activities targeting banks and their clients and what companies can do to protect themselves</li>
<li><strong>Foreign Investor: What You Need to Know for 1031 and FIRPTA Purposes</strong> – Discussion on how transactions subject to FIRPTA are complex and can potentially expose a QI to withholding obligations</li>
<li><strong>State Issues Affecting 1031 Exchanges</strong> – Discussion on state-specific considerations for IRC Section 1031 transactions</li>
<li><strong>Exchanges of Agricultural Property &amp; Equipment, Conservations Easements, Water Rights and Other Assets</strong> – A discussion on agricultural exchanges, including their importance and how they are a catalyst for economic activity</li>
</ul>

<h2>The Road Ahead</h2>

<p>Like-kind exchanges have been a hot topic amongst our federal lawmakers.&nbsp; With recent focus on federal deficits, budgets, tax reform and Presidential Nominee Trump’s tax returns, like-kind exchanges represent a significant revenue-raising opportunity.&nbsp; The FEA’s conference provided an important forum for those in the like-kind exchange industry to come together to refine and expand efforts to preserve and expand Section 1031.</p>

<h2>What are safe harbors and why are they needed?</h2>

<p>The 1991 tax deferred exchange <a href="/sites/default/files/Internal Revenue Service Regulations IRC Section.pdf" target="_blank">regulations</a> provided for various “safe harbors” to allow certain specific actions set forth in the regulations to be utilized by parties without otherwise running afoul of the rules. Without the safe harbors, these actions would disqualify an exchange. These safe harbors were put into the regulations as solutions for problems in the mechanics of an exchange prior to the 1991 regulations and in order to make a delayed exchange easier to accomplish. Some of these safe harbors have come to be used in almost every single transaction, while others are seldom used. Let’s take a more detailed look at these safe harbors:</p>

<ul>
<li>Security or Guaranty Arrangements</li>
<li>Qualified Escrow and Qualified Trust Accounts</li>
<li>Use of Qualified Intermediaries</li>
<li>Interest and Growth Factors</li>
</ul>

<h2>The Security or Guaranty Arrangement Safe Harbor</h2>

<p>The vast majority of exchanges are done on a delayed basis. In other words, the relinquished property is sold on a certain day, and the replacement property is acquired up to 180 days later. A taxpayer is not allowed to exercise any <a href="/blog/actual-or-constructive-receipt-funds-1031-exchange" target="_blank">actual receipt or constructive receipt of the exchange funds</a> paid by the buyer at the time of the sale. If the taxpayer did have any control, then the transaction would be deemed to be a sale followed by an unrelated purchase, but not an <a href="/blog/are-1031-reverse-tax-deferred-exchanges-real-estate-approved-irs" target="_blank">exchange of one for the other</a>. The idea here is that the buyer does not pay the seller/taxpayer, rather the buyer is promising to later come up with the funds to be applied to the taxpayer’s purchase of the replacement property.</p>

<p>So the safe harbor that was meant to deal with this problem allows a taxpayer to secure the buyer’s obligation to acquire and transfer the replacement property at the time the taxpayer has picked it out and is ready to receive it. More specifically, the taxpayer is allowed to receive security for that contractual obligation in the form of a mortgage/deed of trust or a standby letter of credit in favor of the taxpayer. The regulations further allow for the buyer’s legal promise to be secured by a guarantee of a third party. In the event a mortgage/deed of trust is utilized, the secured property can be the taxpayer’s relinquished property that is being sold to the buyer or an unrelated property that is owned by the buyer.</p>

<h2>The Qualified Escrow and Qualified Trust Account</h2>

<p>Ensuring that a taxpayer is not in actual or constructive receipt of sale proceeds while also making sure that funds will be readily available when needed can be a delicate dance. The second safe harbor provides a way to ensure availability of funds while not putting the taxpayer in any sort of receipt of them. The difference between this approach and that of the first safe harbor is that, in this case, the buyer is out of the picture as soon as the closing on the relinquished property sale is finished.</p>

<p>The use of an escrow or a trust for this purpose is very similar. Both disallow an escrowee or a trustee if that party is an agent of the taxpayer or is a <a href="/blog/1031-tax-deferred-exchanges-between-related-parties" target="_blank">related party to the taxpayer</a>. Further, the escrow or trust agreement must affirmatively state that it “expressly limits a taxpayer’s rights to receive, pledge, borrow, or otherwise obtain the benefits of the cash… held by” the party holding it. The party acting as the escrowee or trustee can be the same or a related entity acting as the qualified intermediary (QI) for the transaction. For instance, a bank may be acting as qualified intermediary but hold the funds in a trust capacity in the bank’s trust department.</p>

<p>This safe harbor offers benefits additional to making the buyer’s involvement in the taxpayer’s transaction unnecessary after the initial closing.&nbsp; To avoid constructive receipt by the taxpayer, the funds are held away from the buyer but not deemed received by the taxpayer. Further, an unscrupulous qualified intermediary could not unilaterally withdraw the funds without the acquiescence of the taxpayer. This can be achieved with or without an escrow or trust if the QI has dual controls in place internally when transferring money out of an account.&nbsp; This should not be a concern when due diligence allows for <a href="/blog/1031-exchange-tips-selecting-right-qi" target="_blank">choosing a well-regarded qualified intermediary</a>.&nbsp; There have been past instances in which a qualified intermediary failed to clearly segregate individuals’ exchange proceeds&nbsp; In the unlikely event of a bankruptcy of the QI, holding the funds in an escrow or trust is one way to make the clear case that they belong to the exchanger and are not subject to creditor claims against the QI.&nbsp; Another way to accomplish this important degree of separation is by clearly holding each clients’ funds in separately-marked accounts for the benefit of the clients.</p>

<h2>The Qualified Intermediary Safe Harbor</h2>

<p>The Qualified Intermediary Safe Harbor is the most important safe harbor, constituting the most significant portion of the 1991 treasury regulations. At the inception of IRC §1031 in 1921, an exchange was expected to be a two-party, simultaneous exchange of like-kind property. So A and B exchanged with one another, and if either one need to kick in some cash to equalize value, then only the receipt of the cash was subject to tax. The thinking at the time was to allow the deferral of tax on a transaction in which the taxpayer started with one property and ended with a like-kind property.</p>

<p>Over time, permutations for conducting an exchange crept in. Eventually, it became possible for A to sell to B and then acquire replacement property up to 180 days later from C. While the logic seemed clear in the original example of A and B simultaneously trading like-kind property, it was difficult to envision applying this to a three-party transaction that allowed up to 180 days for completion.</p>

<p>The Treasury Department came up with the idea of a qualified intermediary providing logical underpinnings to such a delayed exchange between a taxpayer, a buyer, and a third party seller. It is worth noting that “qualified intermediary” can really just be thought of as “intermediary.” Certain individuals or businesses are disqualified from acting as intermediary (such as family member, agent, accountant etc.) so anyone not disqualified is, in fact, qualified. So by inserting an <em>intermediary </em>into the mix when selling to one party and buying from another, the taxpayer is deemed to have completed an exchange with the intermediary rather than with the buyer and/or seller.</p>

<p>The taxpayer transfers certain rights in the sale contract to the QI who, for tax purposes, transfers the old property to the buyer. Later, the taxpayer transfers certain rights in the purchase contract to the QI, who for tax purposes, acquires the new property and transfers it to the taxpayer.</p>

<h2>The Interest and Growth Factor Safe Harbor</h2>

<p>Prior to the issuance of the 1991 Treasury Regulations, the accrual of interest on exchange funds deposited into a bank account was a vexing problem. The legal fiction taking place was for the taxpayer to sell to a buyer and for the buyer’s funds to be held back for up to 180 days before being applied toward the purchase of the taxpayer’s replacement property. If interest was accrued for the benefit of the seller, then the funds must have belonged to the taxpayer all along. This conundrum resulted in some special measures that take place when negotiating the sale contract with the buyer. One option was to let the buyer receive the interest on the funds put into the escrow by the buyer. This often resulted in a windfall for a buyer in an exchange. Another option was to let the buyer receive the interest, but require the buyer turn it over to the taxpayer after the exchange was completed. Last, the parties might try and anticipate how much interest was expected to be received by the buyer and then “goose up” the contract sale price by an equal amount.</p>

<p>Since these measures were so unwieldy, the Treasury Department decided to clean this up by providing a safe harbor for the taxpayer’s receipt of interest or some other type of yield (growth factor) on the deposit. The safe harbor essentially states that even though the accrual and payment of interest on the funds is inconsistent with the fact that they are not considered the taxpayer’s funds while on deposit, it was still permissible to allow the taxpayer to receive the benefit of interest on the funds. The interest is reportable as income whether the taxpayer includes those funds with the balance of the purchase price for replacement property, or simply receives a check for the interest upon closing of the transaction.</p>

<h2>Summary</h2>

<p>Purchases of real estate are often among the biggest financial decisions a person makes during his or her lifetime. It would be foolhardy to make such an investment without title insurance. Likewise, selling a property and buying a new one as part of a like-kind exchange is a significant investment. The IRS offers taxpayers some “exchange insurance” via the safe harbors. Although the regulations state that an exchange does not necessarily need to adhere to the safe harbors to be valid, by staying within the safe harbors the IRS is providing to the taxpayer the assurance that the transaction will not be challenged in any way regarding these aspects.</p>

<p>At the Federation of Exchange Accommodator's recent Annual Conference, the organization presented the President's Award to nine individuals for their continued support of the FEA's mission to support and grow the 1031 like-kind exchange industry.</p>

<p>Honored with the President's Award were&nbsp; Accruit CEO, Brent Abrahm; Suzanne Goldstein-Baker, CES^®; Lucas Ecklund-Baker; David A. Brown, CES^®; Mary Cunningham, CES ^®; David E. Franasiak; Max Hansen, CES^®; William Horan, CES^®; and John Wunderlich.</p>

<p><a href="/sites/default/files/FEA_2016_Presidents_Award.pdf" target="_blank">Read more about the 2016 FEA President's Award</a>.</p>

<p>The<a href="http://1031.org/&quot; target="_blank"> Federation of Exchange Accommodators (FEA)</a> is among 26 groups that signed letters sent to the Hillary Clinton and Donald Trump presidential campaigns last week. The letters explain the benefit of real estate exchanges for small businesses, farmers, ranchers, and for use in land conservation. The timing of these letters are important, as both campaigns are developing and revising tax plans.&nbsp;</p>

<p>A revised Clinton tax reform proposal released September 22, 2016 mentions limitation of gain deferral under Section 1031 exchanges, expected to be similar to the Administration's FY2017 Budget proposal.</p>

<p>Our goal is to dispel common myths and to inform the candidates and their policy advisors as the tax reform proposals from both candidates continue to evolve and change.</p>

<p>The letters make some important points about like-kind exchanges:</p>

<ul>
<li>Exchanges are used by taxpayers of all sizes;</li>
<li>Exchanges encourage domestic investment and job growth;</li>
<li>Exchanges encourage improvements on real estate;</li>
<li>Exchanges encourage transaction activity on properties that would not otherwise be sold;</li>
<li>Exchanges help small businesses build equity and avoid third-party financing;</li>
<li>Exchanges help maintain affordable housing across the country;</li>
<li>Exchanges help facilitate the preservation of open spaces and environmentally sensitive areas.</li>
</ul>

<p><a href="http://www.1031taxreform.com/wp-content/uploads/Hillary-Clinton-Campaig…; target="_blank">Read the letter to Secretary Clinton here</a>.<br />
<a href="http://www.1031taxreform.com/wp-content/uploads/DJTrump-ltr-re-LKE-FINA…; target="_blank">Read the letter to Donald Trump here</a>.</p>

<p>&nbsp;</p>

<p>While congressmen and women are out campaigning, congressional staff continue to work in the area of tax reform.&nbsp; As part of Accruit’s continued advocacy efforts on behalf of our real estate and personal property LKE clients and as co-chair of the <a href="http://1031.org/&quot; target="_blank">Federation of Exchange Accommodators</a> Government Affairs Committee, I’ve made six trips to Capitol Hill this year to meet with congressional staff, specifically targeting members of the House Ways &amp; Means Committee and <a href="http://www.finance.senate.gov/&quot; target="_blank">Senate Finance Committee</a>, both of which determine U.S. tax policy.</p>

<h2>House Ways &amp; Means Draft Blueprint for Tax Reform</h2>

<p>Earlier this year, House Ways &amp; Means Chairman Kevin Brady, (R-TX) introduced the draft blueprint for comments and, learning from the experiences of past Chairman Dave Camp, is soliciting input on the blueprint from members of Congress, the business community, and other interested groups prior to voting out of committee.&nbsp; &nbsp;I’d like to highlight several points in the draft House Blueprint that could impact your business:</p>

<p><strong>100% Immediate Expensing</strong></p>

<p>Accelerating write-offs of capital assets is not a new expansion method and is still very popular.&nbsp; The idea dates back to the 1980s, and more recently we have seen bonus depreciation as a widely accepted form of this.&nbsp; But there are areas that the blueprint does not yet specify.&nbsp;</p>

<p><strong>Eligibility for new and used assets:</strong> Though the House Ways &amp; Means Committee is currently silent, comments from senior staff indicate a preference to include all assets, new and used, <u>except land</u>..&nbsp; Excluding land may cause complications when allocating cost between land and buildings. Also, excluding land could prove problematic when it comes to maintaining a reasonable debt-to-equity ratio when funding projects up front. There are also indications of further exclusions for certain classes of assets, but details are still unavailable.</p>

<p><strong>No interest deductibility</strong>:&nbsp; 100% immediate expensing is costly, so the funds for the blueprint would come partially come from eliminating interest deductions on debt.&nbsp; For our clients whose business model requires a higher debt-to-equity ratio, such a measure would make supporting growth initiatives or even maintaining current operations difficult.&nbsp;</p>

<p><strong>Potential elimination of 1031 like-kind exchanges:&nbsp; </strong>Ways &amp; Means senior staff indicated that while the elimination of like-kind exchanges is not currently drafted, it is still up for consideration as offset to cover the plan. During our meetings, we made very strong points as to why 1031 like-kind exchanges need to remain intact, should this bill move forward.</p>

<ol>
<li>Not all companies would choose 100% expensing.&nbsp; Depending on a company’s tax situations, immediate write-offs for tax purposes may not provide the flexibility needed to achieve company goals.&nbsp;&nbsp;</li>
<li>Not all states may recognize 100% expensing for state tax purposes.&nbsp; Like-kind exchanges must be the vehicle to defer gain recognition at the state level.</li>
<li>Not all assets may fall into 100% expensing categories.&nbsp; Absent 1031s, <a href="/blog/1031-like-kind-exchange-impact-study-results-released">per the independent studies regarding repeal of 1031s</a>, a contraction may occur in GDP due to the lock-in effect if assets’ sales trigger gains and there is no means of deferral.</li>
<li>If land is not eligible for immediate expensing, then 1031s must remain the vehicle to defer gain recognition and encourage subsequent investment.</li>
</ol>

<h2>Senator Wyden’s Pooling Proposal</h2>

<p>The <a href="/blog/tax-reform-discussion-draft-released-simplify-depreciation">pooling proposal from minority leader of the Senate Finance Committee, Senator Ron Wyden (D-OR)</a>, is another draft proposal worthy of continual monitoring. Election pundits suggest we may see a flip in the Senate from Republican to Democrat, placing Senator Wyden as chairman of the committee.&nbsp;</p>

<p>There are some new ideas for U.S. tax code in Wyden’s draft, the basis of which has its roots in Canadian tax policy.&nbsp; Wyden’s plan attempts to simplify depreciation calculations by pooling like assets in large groups (though FEA coalition members indicate the need to continue track assets on an individual basis negating most, if not all, of the simplification message). &nbsp;&nbsp;</p>

<p>Unlike past Senate proposals, Wyden does not eliminate 1031s.&nbsp; In fact, he continues to be a big supporter of the ability to defer gain recognition to encourage reinvestment.&nbsp; As we continue our dialog with committee members, applauding the retention of 1031s, we want to better understand how a new pooling regime provides the much-touted simplification while protecting the integrity and spirit of 1031 exchanges.&nbsp;&nbsp;&nbsp; &nbsp;</p>

<h2>Avoid Unintended Consequences</h2>

<p>Accruit continues to invest in advocacy efforts, hoping to connect the dots when tax reform bills are introduced so that you, our clients, will be informed on the details and not rely solely on the headlines.&nbsp; While in DC we constantly state our goal of <em>avoiding unintended consequences</em>.&nbsp; Members of Congress who introduce ideas that not only disrupt your business, but ours as well, need to understand the real implication of bills that may score well into a ten-year window. Though in the short term they appear to drive growth, they may, in the long term, impede business and dampen the economy.</p>

<h2>Congressional Member Offices Visited in August</h2>

<ul>
<li>Barbara Angus – House Ways and Means Committee</li>
<li>Aruna Kalyanam and Alan Lee, House Ways and Means Committee (Minority)</li>
<li>Rep. Kenny Marchant (R-TX-24)</li>
<li>Rep. George Holding (R-NC-13)</li>
<li>Rep. Jason Smith (R-MO-8)</li>
<li>Rep. Peter Roskam (R-IL-6)</li>
<li>Senator Chuck Schumer (D-NY)</li>
<li>Rep. Pat Tiberi (R-OH-12)</li>
<li>Rep. Jim Renacci (R-OH-16)</li>
<li>Rep. Pat Meehan (R-PA-7)</li>
<li>Senator Bob Menendez (D-NJ)</li>
<li>Rep. Tom Reed (R-NY-23)</li>
<li>Rep. Adrian Smith (R-NE-3)</li>
</ul>

<p>The <a href="http://www.1031.org&quot; target="_blank">Federation of Exchange Accommodators (FEA)</a> Annual Conference is the exchange industry's premiere annual event. Industry professionals are immersed in the requirements of IRC Section 1031, Treasury Regulations, the role of the qualified intermediary (QI), and more.</p>

<p>This year, conference co-chair and President-Elect,&nbsp; Steve Chacon, and Government Affairs Committee co-chair, <a href="/users/brent-abrahm">Brent Abrahm,</a> join nearly 200 like-kind exchange professionals for strategic planning sessions, committee meetings, legislative updates, and educational breakouts on a number of 1031-related topics.</p>

<p>View the full <a href="http://www.1031.org/FEAPdfs/FEA_2016_Annual_Conference_Brochure.pdf&quot; target="_blank">FEA 2016 Annual Conference brochure</a>.</p>