<h2><em>Franchise Assets are no longer eligible for a 1031 Exchange due to the <a href="Tax Cuts and Jobs Act of 2017" title="/blog/tax-cuts-and-jobs-act-2017-and-its-effects-1031-exchanges">Tax Cuts and Jobs Act of 2017.</a></em></h2>

<h2>&nbsp;</h2>

<h2>Can Franchise Assets be Exchanged?</h2>

<p>People tend to equate tax deferred exchanges with real estate but exchanges can be equally advantageous when selling and buying franchises. In 1991 the tax deferred exchange regulations (<a href="/exchange-library/internal-revenue-service-regulations-irc-%C2%A71031">Internal Revenue Service Regulations: IRC§1031</a>) took effect, making completing an exchange easier and simpler than ever before.&nbsp; These regulations allowed for the removal of the buyer of the old property and the seller of the new property as participants in a taxpayer's exchange, with the addition of the qualified intermediary (QI).&nbsp; Also, as part of these new regulations, the asset sale and asset purchase that comprised an exchange could be separated by up to 180 days.&nbsp; Before that it was generally understood that the sale of an asset and the purchase of an another had to take place simultaneously.</p>

<p>It wasn't long before many owners of real estate began exchanging using the safe harbor procedures set forth in the regulations.&nbsp; Although personal property exchanges were covered in depth in the regulations, generally taxpayers' use of the exchange rules to do personal property exchanges lagged behind the use for real estate transactions.&nbsp; Even as personal property exchanges of machinery, equipment, vehicles, etc. gained traction, exchanges of certain intangible personal property interests such as franchise rights continued to be very underutilized.&nbsp; Neither owner-operators nor their professional advisors picked up on the fact that sales and purchases of franchises could be structured to defer taxes.</p>

<p>Since becoming law in 1921, the rationale for the inclusion of tax deferred exchanges in the IRS code, has been that a taxpayer who is vested with an asset (such as a franchise) and who receives in exchange other like-kind assets (such as of a similar franchise or franchises in a different location), and no cash, there is a continuity of holding the same or similar assets.&nbsp; Since the same kind of assets were sold and bought and the taxpayer pocketed no cash, the transaction isn't seen as a taxable event.&nbsp; The gain on the sale of the first franchise assets, the relinquished property, is deferred until the acquired like-kind franchise assets, the replacement property, are sold without a further exchange.</p>

<h2>What Qualifies for Tax Deferral upon the Sale of a Franchise?</h2>

<p>Perhaps the most common franchise exchanges are those that involve fast food restaurants.&nbsp; An owner might have one or more franchise locations that have greatly increased in value over time, value that the owner would like to parlay into additional restaurants.&nbsp; The exchange of such a business was formerly a more straightforward matter, because the IRS regarded the business as a whole entity that included the value of any underlying assets. This changed shortly before 1991's exchange regulations, and now the IRS requires that each underlying asset be seperated and valued individually.</p>

<p>For franchise exchanges this means that the value of the franchise rights are separate from the value of the furniture, fixtures and equipment (FF&amp;E). If a restaurant franchise, valued at $300,000 for the franchise rights and $200,000 for the FF&amp;E, is exchanged for another restaurant franchise with rights valued at $200,000 and FF&amp;E valued at $300,000, the $100,000 difference between the franchise rights sold and those bought would be taxed, even though, taken as whole entities, the two businesses are of equal value.</p>

<p>It's worth noting that any value associated with goodwill, including trademarks and trade names, is not capable of being exchanged, because the regulations state that goodwill is "inherently unique and inseparable from the business."&nbsp; For this reason, sellers of businesses may wish to minimize the value of the goodwill and increase another component asset of the sale which will be capable of receiving like-kind exchange treatment.&nbsp; Inventory and cash-on-hand are also not part of a franchise exchange since, unlike equipment, these assets are not held for use in a business or trade.</p>

<h2>Retaining the Services of a Qualified Intermediary</h2>

<p>A qualified intermediary (QI) is necessary for most exchanges in which the relinquished assets are sold to a buyer and the replacement assets are being acquired from a seller, who is not the same as the buyer of the relinquished assets. The taxpayer essentially sells the relinquished assets to the QI, who in turn sells them to the buyer. Similarly, the taxpayer purchases the replacement assets from the QI, who acquires those assets from the seller.&nbsp; In effect, the taxpayer completes an exchange with the QI.&nbsp;</p>

<p>The regulations are purposely liberal on the mechanics of transferring the relinquished and replacement assets to and from the QI.&nbsp; The standard practice is for the taxpayer to "assign rights," in the sale and purchase agreements, to the QI.&nbsp; For tax purposes, this means that the QI's right to receive the property is the same as if the QI took title from the taxpayer to the relinquished property and transferred title of the replacement property to the taxpayer.&nbsp; Notwithstanding the assignment of rights to the QI, the taxpayer is permitted to make a direct transfer of the assets by bill of sale, or otherwise, of the relinquished assets to the buyer and receive the replacement assets by direct transfer from the seller. There are a few other requirements as well to meet this safe harbor.</p>

<p><em>This interview is one in a series in which we've asked an industry leader questions on the topic of tax reform and the issues faced by Congress in addressing the tax code.</em></p>

<p><img alt="Scott Goodman - Sterling Bay" src="/sites/default/files/files/scott-goodman.jpg" style="width:200px; height:200px; margin:5px; float:right" />Scott Goodman is the Founding Principal of <a href="http://www.sterlingbay.com/&quot; target="_blank">Sterling Bay</a>, a commercial real estate investment and development firm he established in 1986. Today, Scott focuses on investor relations, procurement of financing and equity, and transaction structuring. Scott earned a BS in Economics from the University of Michigan and an MBA from Northwestern’s Kellogg School of Business. Scott is the former Board Chair and current Board member of both the <a href="http://www.pkdcure.org/&quot; target="_blank">PKD Foundation</a> and <a href="http://www.heartlandalliance.org/&quot; target="_blank">Heartland Alliance</a>. He is also a member of the <a href="https://www.econclubchi.org/&quot; target="_blank">Chicago Economics Club</a>.</p>

<h2>What are your thoughts on Congress allocating significant time and resources to tax reform in 2015?</h2>

<p>Congress’s attention to tax reform is long overdue.&nbsp; The tax code is just a series of layers on top of layers of&nbsp; either revenue generators or incentives which have relevance at the time they are enacted, but are not adequately reviewed over time.&nbsp;&nbsp;&nbsp; The fact that a majority of Americans are not capable of preparing their own tax returns is testament to the fact that the tax code is too complicated. This seems almost unconstitutional.</p>

<h2>Do you think Congress should address corporate-only or comprehensive tax reform, and why?</h2>

<p>Congress should undertake comprehensive tax reform.&nbsp; The U.S. is falling way behind in the condition of our infrastructure, whether it be the existing conditions of our roads, bridges, and electrical grid, or the need to build new wireless networks or fiber lines.&nbsp; Obviously our national debt needs to be addressed as well.&nbsp; Comprehensive tax reform can at once simplify our tax code and raise needed revenues for public projects.</p>

<h2>The upper end of the tax rate for U.S. corporations is 35% and the individual rate is pushing 40% for federal and state taxes alone. Should that be cut and do you think individuals and/or corporations would be willing to give up popular tax incentives to do so?</h2>

<p>I do not think the tax rates for corporations or individuals should be cut. In fact, greater distribution of wealth is exactly what is needed to give our economy a chance of fortifying the middle class.&nbsp; Current policies have created a clear ”have/have not” society in America, and this is dangerous.&nbsp; Corporate incentives should be scrutinized.</p>

<p>Many industries receive tax credits that are excessive and probably unnecessary. As for eliminating some of the popular incentives, again, they should be scrutinized.&nbsp; Because they are intended to affect behavior, we should analyze the tax incentives to be sure that the type of behavior they were intended to affect is still (a) effective (b) relevant, and (c) worth the cost of revenue loss.</p>

<h2>What part of your business would be impacted most by a repeal of 1031 exchanges and why?</h2>

<p>In the past, we used 1031 exchanges often.&nbsp; Today, we utilize them less frequently because the ownership structure of our deals has become more complex.&nbsp; Repeal of 1031 exchanges would, in certain instances, affect our ability to purchase certain properties because oftentimes property owners will only sell if they can trade into new properties and defer taxes.</p>

<h2>How can Washington simplify the tax code?</h2>

<p>Obviously a flat tax or a tax code devoid of deductions, special treatments and credits would be simpler; I'm just not sure it would be better.&nbsp; The tax code is too voluminous.&nbsp; Layers and layers of new taxes and provisions have been added over time, many cowing to special interests, many which have added to the complexity without fixing or amending the problems they were meant to address.</p>

<p>Time to start over. The tax code should be made fair and balanced, readable and understandable, easily compliable and accessible.</p>

<h2>Are there certain parts of the tax code today that would dramatically change your business should they be repealed?</h2>

<p>I am sure there are, but I am not familiar or knowledgeable&nbsp; enough to comment.</p>

<h2>Are you concerned by the recent spike in inversions undergone by U.S. corporations?</h2>

<p>No, not concerned, but this loophole should be closed.</p>

<h2>What is a build-to suit or 1031 improvement exchange?</h2>

<p>Often a taxpayer will sell his old property (the relinquished property) for a greater value than the cost of purchasing the new property (the replacement property).&nbsp; If nothing further is done, the excess value that is not reinvested is taxable and referred to as "boot" in the context of an Internal Revenue Code (IRC) <a href="/services/1031-exchange">1031 exchange</a>.&nbsp; However, if the new property is land to be constructed upon (a <a href="/property-owners/1031-exchange-explained#non-safe-harbor">build-to-suit exchange</a>) or consists of land with a structure on it that needs further improvements (a property improvement exchange), it is possible for the improvement costs to be incurred prior to the exchange.&nbsp; As is the case with many IRC §1031 procedures, there are safe harbor provisions which must be closely adhered to.&nbsp;</p>

<p>Many people assume that so long as the taxpayer uses exchange proceeds to acquire the new property and makes the improvements within the 180-day window for an exchange, the taxpayer can include the cost of the improvements into the value of the new property.&nbsp; However, <a href="/exchange-library/internal-revenue-service-regulations-irc-§1031">IRC §1031 regulations</a> require a valid exchange to consist of like-kind properties being exchanged.&nbsp; Hiring a contractor or other service provider and paying for labor and materials is not like-kind to the sale of real estate.&nbsp; As expressed by the IRS the problem is as follows:</p>

<blockquote>
<p>"The transfer of relinquished property is not within the provisions of Section 1031(a) if the relinquished property is transferred in exchange for services. Thus any additional production occurring with respect to the replacement property after the property is received by the taxpayer will not be treated as the receipt of property of a like kind." (Reg § 1.1031(k)-1(e)(4)).</p>
</blockquote>

<p>The exchange regulations became effective in 1991.&nbsp; Approximately ten years later, in 2001, the IRS issued <a href="/exchange-library/rev-proc-2000-37-reverse-exchanges">Revenue Procedure 2000-37</a> part of which dealt with this situation.&nbsp; The IRS came up with the idea of a Qualified Exchange Accommodation Titleholder, an entity able to work around the issue of improvements not being like-kind to the taxpayer's old property.&nbsp; Revenue Procedure 2000-37 refers to this entity as an "Exchange Accommodation Titleholder," now commonly called an EAT.</p>

<p>There are many companies that act as qualified intermediaries for conventional forward exchanges, and a limited number of those companies are also set up to provide EAT services.&nbsp; Selecting a knowledgeable qualified intermediary is critical to the success of the transaction (Read why in my recent discussion about the <a href="/blog/all-tax-deferred-exchange-companies-are-not-created-equal">Case of Kreisers Inc. v. First Dakota Title Limited Partnership</a>).</p>

<h2>How does the use of an EAT help in an exchange involving improvements?</h2>

<p>The EAT can acquire title to the new property on behalf of the taxpayer and to "park" it&nbsp; until the improvements are in place (but in no event beyond 180 days).&nbsp; Once the EAT transfers ownership of the property to the taxpayer, the taxpayer has acquired improved real estate, which then includes the value of the improvements that were made during the parking period.&nbsp; For the mutual benefit of the taxpayer and the EAT, it is customary for the EAT to take title to the property using a special purpose entity, usually a limited liability company (LLC).&nbsp; This insulates the client's exchange transaction from other clients' transactions as well as from the affairs of the exchange company acting as the EAT.</p>

<h2><img alt="build to suit 1031 exchange" src="/sites/default/files/files/property-improvement-exchange-2.jpg" style="width:400px; height:300px; margin-left:5px; margin-right:5px; float:right" /></h2>

<h2>What's the difference between how forward and reverse build-to-suit or improvement exchanges are structured?</h2>

<p>A build-to-suit or improvement exchange can take two different forms.&nbsp; The first occurs when the taxpayer has sold property and funded the exchange account prior to the acquisition date of the new property.&nbsp; The exchange funds can pass to the EAT to cover the purchase price of the new property.&nbsp; The balance of the funds are given to the EAT as necessary to cover the costs associated with making the improvements.&nbsp; This is known as a forward build-to-suit or property improvement exchange.</p>

<p>If the taxpayer wants to begin the improvements before the sale of the old property,&nbsp; a reverse build-to-suit or property improvement exchange is necessary, since the sequence of buying (by the EAT) and selling is "reverse" from a normal exchange. In the case of a reverse transaction, since the exchange account it not yet funded, funding of the purchase price and improvements needs to be provided to the EAT from a bank or taxpayer loan or sometimes both.&nbsp; These loans get paid back at the conclusion of the transaction when the exchange funds are used by the taxpayer to acquire the property from the EAT.</p>

<h2>Do all of the improvements need to be made during the 180-day parking period?</h2>

<p>It is not necessary for the improvements to be completed during the parking period, however the taxpayer only gets credit for the value of the land and improvements that are in place at the time the taxpayer takes direct ownership.&nbsp; The taxpayer can make additional improvements after the exchange has taken place.</p>

<h2>What flexibility does Revenue Procedure 2000-37 allow in a build-to-suit or property improvement exchange?</h2>

<p>Revenue Procedure 2000-37 contains some very taxpayer friendly provisions including:</p>

<ul>
<li>The terms of any build-to-suit/property improvement contract between the taxpayer and EAT do not have to be at arm's length.</li>
<li>The taxpayer may loan funds directly to the EAT.</li>
<li>The taxpayer is permitted to guaranty any bank loan made to the EAT.</li>
<li>The taxpayer may indemnify the EAT for costs and expenses incurred.</li>
<li>The taxpayer or a "disqualified person" (generally an agent of the taxpayer) may advance funds to the EAT.</li>
<li>The property may be leased by the EAT to the taxpayer during the parking period.</li>
<li>The taxpayer may act as the contractor (and receive a fee) or supervise the making of the improvements.</li>
</ul>

<p>In a reverse build-to-suit/property improvement exchange, at some time during the parking transaction (but no later than 180 days) the old property gets sold and the net proceeds go into the taxpayer's&nbsp; exchange account.&nbsp; No later than 180 days from the inception of the parking transaction, the exchange funds are sent to the EAT as the nominal seller and the EAT uses these funds to repay the original bank and/or taxpayer loan.&nbsp;</p>

<p>The procedure is much the same for a forward build-to-suit/property improvement exchange where the exchange account has been funded prior to the parking transaction.&nbsp; In this case, although the funds may have been paid out to the EAT, the taxpayer still needs to complete the conventional exchange by acquiring the improved property from the EAT.</p>

<p>Whether it is a forward or reverse build-to-suit exchange, completing the transaction is the same.&nbsp; The taxpayer's rights under the contract to acquire the improved property from the EAT are assigned to the qualified intermediary, and the transfer to the improved property is accomplished by either assigning the membership interest in the EAT to the taxpayer or by the EAT issuing a deed to the taxpayer.</p>

<p>Customary agreements that would be used to document this type of exchange include:</p>

<ul>
<li>Qualified Exchange Accommodation Agreement (required under Revenue Procedure 2000-37)</li>
<li>Assignment by the taxpayer to the EAT of the purchase contract for the new property</li>
<li>Loan documents between the EAT as borrower and the lender</li>
<li>Master Lease if the property has a tenant or tenants</li>
<li>Sale Contract for the sale of the property from the EAT back to the taxpayer</li>
<li>Environmental Indemnity Agreement</li>
</ul>

<hr />
<p>&nbsp;</p>
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<p style="text-align:center"><a href="https://cta-redirect.hubspot.com/cta/redirect/6205670/07878ab4-b454-43a…; target="_blank"><img alt="Start Your 1031 Exchange with Accruit today" class="hs-cta-img" height="295" id="hs-cta-img-07878ab4-b454-43ab-90e0-95efb684dc56" src="https://no-cache.hubspot.com/cta/default/6205670/07878ab4-b454-43ab-90e…; style="border-width:0px;" width="801" /></a></p>

<p>Download the free step-by-step guide, <a href="https://info.accruit.com/reverse-exchange-whitepaper">Parking the Relinquished Property in a Reverse Exchange</a>.</p>

<h2>The Facts</h2>

<p>We were contacted by a potential client about doing an Internal Revenue Code (IRC) §1031 tax deferred exchange.&nbsp; The client needed to acquire, or risk losing, the desired replacement property (new property) in Dillon, Colorado. However, the contract with his buyer for the sale of his relinquished property (old property) in Littleton, Colorado was not scheduled to close until November 28, 2014, a month after the date of closing for the new property.&nbsp; The purchase price for the new property was $562,000.&nbsp;</p>

<p>In a normal tax deferred exchange, or “forward exchange,” the taxpayer sells the relinquished property first and uses the exchange proceeds to acquire the replacement property.&nbsp; This situation, in which the taxpayer needs to take ownership of the new property prior to the sale of the old property, i.e. in a reverse sequence, is referred to as a “reverse exchange.”</p>

<h2>The Problem</h2>

<p>The client wanted to do an exchange of his old property for the new property but was unable to find a buyer for his old property prior to the scheduled closing of the new property.&nbsp; Unfortunately, the IRS does not recognize the validity of a “pure reverse exchange,” in which the taxpayer acquires the new property before the sale of the old property.</p>

<h2>The Options</h2>

<p>In response to this common conundrum, the IRS issued <a href="/exchange-library/rev-proc-2000-37-reverse-exchanges">Revenue Procedure (Rev. Proc.) 2000-37</a>&nbsp; to enable taxpayers to effectively buy before selling.&nbsp; There are two approved solutions:</p>

<ol>
<li>The exchange company purchases the taxpayer’s old property and holds it pending the sale of that property to a bona fide third party buyer.&nbsp; This is sometimes referred to as an “exchange first” reverse exchange.</li>
<li>The exchange company to <a href="https://info.accruit.com/reverse-exchange-whitepaper">acquire title to the replacement property and park it on behalf of the taxpayer</a> until the taxpayer sells the old property. This is sometimes known as an “exchange last” reverse exchange.&nbsp;&nbsp;</li>
</ol>

<p>When the exchange company services a routine forward exchange, it acts as a qualified intermediary (QI).&nbsp; When, as in the two options above, an exchange company services a reverse exchange in which it has to take title to a property, the Rev. Proc. refers to this as acting as an exchange accommodation titleholder (EAT). There are several factors for the taxpayer, their advisors and their exchange company to consider when determining whether the old property or the new property is better to park with the EAT. Those considerations may include:</p>

<ul>
<li>What are the relative values of the properties (e.g. the old property may have a value of $100k and the replacement property $1MM)?</li>
<li>Is the old property subject to debt?</li>
<li>Are there any transfer tax considerations in connection with parking either property (there is some authority that <a href="/exchange-library/irs-private-letter-ruling-200148042">parking transactions are exempt from transfer taxes</a>)?</li>
<li>Are there any environmental issues associated with either property?</li>
<li>Are there special financing issues surrounding the replacement property such as a HUD loan, TIF (tax incremental financing), Enterprise Zone, etc.?</li>
</ul>

<p>In an exchange-first reverse exchange, the EAT takes title to the old property and “parks,” or holds title to that property until the taxpayer is able to arrange a sale of that property to a third party buyer.&nbsp; For Section 1031 purposes, this acquisition by the EAT constitutes a “sale” by the taxpayer and this sale allows the taxpayer to restructure the transaction by “selling” the old property before buying the new property.&nbsp;</p>

<p><img alt="Parking the Relinquished Property in a Reverse 1031 Exchange" src="/sites/default/files/files/parking-relinquished-property-2.jpg" style="width:550px; height:319px; margin-left:5px; margin-right:5px; float:right" />Conceptually this is no different than the taxpayer finding a ready, willing and able buyer of the old property who is able to close on the purchase from the taxpayer just prior to the taxpayer’s acquisition of the new property.&nbsp; Since the structure allows a sale before the purchase, the sale and purchase become a standard exchange using a Qualified Intermediary to link the sale to the purchase.&nbsp;&nbsp; Use of the reverse exchange does not remove the need to do a standard forward exchange, rather the reverse exchange requires use of the EAT to acquire the property and use of the QI to affect an exchange of the old property for the new property.</p>

<p>In this type of reverse exchange, the EAT, having acquired the old property from the taxpayer, later becomes the property’s seller to an actual buyer identified by the taxpayer.&nbsp; Under the reverse exchange rules, the taxpayer has 180 days (or less, depending upon the tax return filing date for the year in which the property parking takes place)&nbsp; to arrange a sale to a third party.&nbsp;&nbsp;</p>

<p>At times, the taxpayer is unable to find a buyer within this time period or “parking period.”&nbsp; In this case the reverse exchange expires and the EAT simply transfers the old property back to the taxpayer.&nbsp; When this happens there is no valid exchange by the taxpayer of the old property for the new property. The taxpayer may still wish to do a conventional forward exchange upon the sale of the old property, but a new replacement property would need to be identified and acquired as part of that new forward exchange.</p>

<p>If, when the old property is being parked, it is already under contract, then the sale value is certain.&nbsp; More often than not, it is not under contract, and the taxpayer has to estimate the market value for the sale to the EAT, an estimate which may be higher or lower than the eventual sale price to the third party buyer.&nbsp; The drafters of the Rev. Proc. foresaw the difficulty in exactly pinpointing the sale price in advance of an actual contract with the third party buyer, and the Rev. Proc. allows the taxpayer and EAT to retroactively modify the values used at the time of the property parking to correspond with the actual facts:&nbsp; It is permissible that:</p>

<blockquote>
<p>“the taxpayer and the exchange accommodation titleholder enter into agreements or arrangements providing that any variation in the value of a relinquished property from the estimated value on the date of the exchange accommodation titleholder's receipt of the property be taken into account upon the exchange accommodation titleholder's disposition of the relinquished property through the taxpayer's advance of funds to, or receipt of funds from, the exchange accommodation titleholder."</p>
</blockquote>

<h2>The Solution</h2>

<p>Returning to our client, the old property had the estimated value of $163,000.&nbsp; The new property was under contract for $562,000.&nbsp; In this case, the old property had no debt on it, and the transaction began with a cash loan from the client to the EAT in the amount of $163,000.&nbsp; In the event the old property had debt on it, the EAT could acquire it for the value of the equity and take title subject to the existing debt.&nbsp; In this case, if the old property had had $100k of debt, the property could be sold to the EAT for $63k.&nbsp; Be cognizant of any “due on sale/transfer” provisions in connection with the debt.</p>

<p>This loan was documented by a note and secured by a pledge of the membership interest in the special purpose entitiy that was set up by the EAT, the taxpayer or their attorney to hold title.&nbsp; The sale of the old property to the EAT took place on October 23, 2014.&nbsp; The client directed that the funds be placed in his forward exchange account, and he used those funds towards the purchase of the new property on October 28, 2014.&nbsp;&nbsp;&nbsp; The client borrowed the difference of $399k from a bank lender to reach the total purchase price of $562k.&nbsp;&nbsp;</p>

<p>The old property was sold by the EAT to the third party buyer on November 28, 2014, as originally scheduled.&nbsp; The proceeds of the sale went to pay off the original cash loan from the client to the EAT and the LLC was dissolved.</p>

<p>Relinquished property reverse exchanges are documented as follows:</p>

<ul>
<li>Exchanger Information Form</li>
<li>A Qualified Exchange Accommodation Agreement (the reverse exchange agreement)</li>
<li>Sale contract between the taxpayer as seller and the EAT as buyer</li>
<li>Note from EAT to taxpayer in the amount lent to the EAT</li>
<li>Pledge of membership interest in the special purpose limited liability company used by EAT to take title to the property</li>
<li>Master Lease from the EAT to the client enabling the taxpayer to enter into tenant leases directly with the tenants and to provide property management to remain with the taxpayer</li>
<li>Environmental Indemnity Agreement from taxpayer to EAT</li>
<li>Property liability insurance in the name of the EAT</li>
</ul>

<h2>The Result</h2>

<p>The client used the reverse exchange safe harbor to effectively sell the relinquished property prior to the purchase of the replacement property and achieved tax deferral on the entire gain associated with the relinquished property.</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 two new additions to the company: Chad Schleicher, in the role of business development manager, and Mark Flanagan as digital marketing &amp; sales manager.</p>

<p>Schleicher comes to Accruit from Inland Securities Corporation's Chicago headquarters where he was a broker-dealer relationship manager. Prior to this, Schleicher worked with Cole Capital as a property accountant. He holds a Graduate Accounting Certificate and Bachelor of Science in Business and Finance from the University of Phoenix.</p>

<p>At Accruit, Schleicher is responsible for the creation and execution of business development strategies, the facilitation of ongoing relationships with Accruit's clients and the advancement of new client opportunities. Based in Phoenix, AZ, he manages Accruit's sales in the Southwestern United States territory.</p>

<p>Mark Flanagan joins Accruit with an extensive background in online marketing and digital content strategy, most recently as the manager of web analytics for Active Network. As Accruit's Digital Marketing &amp; Sales Manager, Flanagan manages marketing initiatives, collateral, and campaigns across Accruit's digital channels.</p>

<p>"Chad and Mark are tremendous additions to the team," said Accruit's President and CEO <a href="/users/brent-abrahm">Brent Abrahm</a>.&nbsp; "We continue to see growth across our product lines, and adding deeper experience to both business development and marketing will position us well going forward."&nbsp;&nbsp;</p>

<p>"They were carefully selected for their background and experience, and we're excited to add them to our talented staff," added Chief Operating Officer Karen Kemerling. "Their presence at Accruit will help foster growth in the critical areas of sales and digital marketing. We look forward to their contributions in 2015 and beyond."</p>

<h2>About Accruit</h2>

<p>Denver, Colorado-based Accruit, LLC is the nation's leading provider of qualified intermediary and 1031 like-kind exchange program solutions, serving more than 20 industries. Accruit handles all types of LKEs including real estate, business assets, collectibles, and franchises, facilitating all types of complicated forward, reverse and improvement exchange transactions nationwide.&nbsp; Since 2010, through a joint business relationship, Accruit and PricewaterhouseCoopers (PwC) together provide clients the absolute highest level of expertise in 1031 LKE program management. A year later, Accruit expanded its real estate and franchise exchange offerings through the strategic acquisition of North Star Deferred Exchange LLC, a Chicago-based national provider of QI and Exchange Accommodation Titleholder (EAT) services, in order to provide the exchange industry with one of the broadest service offerings available.</p>

<h2>States Follow Federal Laws on Section 1031 Tax Deferral</h2>

<p>While Internal Revenue Code (IRC) Section 1031 pertains to the deferral of tax on the federal level, the various states in the country generally follow the Fed's lead in this regard.&nbsp; So, if a transaction meets the requirements of IRC Section 1031, the state in which the relinquished property is located will similarly recognize the tax deferral.&nbsp; However, a few states take this matter of deferral a bit further and will only allow taxpayers who trade into replacement property in the state to avoid ongoing reporting.&nbsp; For those states, should a taxpayer acquire out-of-state replacement property, there is a requirement to pay to the state the original amount deferred when the out-of-state replacement property is sold.&nbsp; These state provisions allow the states to reach out into a future transaction and require the tax be paid upon the original transaction.&nbsp; Due to this ability to reach out and pull back the tax deferral, these state requirements are sometimes known as "clawback" provisions.&nbsp; States with clawback provisions include:</p>

<ul>
<li>Oregon</li>
<li>Montana</li>
<li>Massachusetts</li>
<li>California</li>
</ul>

<h2>The State of California and the Proposed Form FTB 3840</h2>

<p><a href="http://www.ftb.ca.gov/forms/drafts/14_3840draft.pdf&quot; target="_blank"><img alt="California Like Kind Exchange Draft Form 3840" src="/sites/default/files/files/california-lke-draft-form-3840.jpg" style="width:320px; height:399px; margin:5px; float:right" /></a>The State of California's Franchise Tax Board (FTB) has recently released a draft of its proposed form FTB 3840, California Like-Kind Exchanges, which would require taxpayers who sell relinquished real property in the State of California and who buy replacement real property out of that state to report annually the subsequent status of the replacement property :</p>

<blockquote>
<p>Form FTB 3840 must be filed for the year in which the exchange is completed and for each subsequent year until the California source deferred gain is recognized.</p>
</blockquote>

<p>This form must also be submitted in the case of a multiple asset exchange that contains both real and personal property located in California for like-kind property located outside of California as described in the form instructions:</p>

<blockquote>
<p>If personal property located in California was exchanged for personal property located outside of California as part of a single exchange that included California real property exchanged for non-California real property, combine each type of like-kind personal property given-up and report such personal property given-up as a separate property.</p>
</blockquote>

<p>So if the status is that the property was sold in a subsequent year, the California tax will be recognized and paid at that time.&nbsp; In the case of a California resident who acquires replacement property out of state, the FTB 3840 is to be attached to the taxpayer's state tax return.&nbsp; For non-resident California state taxpayers, the requirement is for the taxpayer to file the form FTB 3840 as an informational return.&nbsp;</p>

<h2>Sections of the FTB 3840 Form</h2>

<p>Much of the form follows IRS form 8824, which is used to report like-kind exchanges on the federal tax return.&nbsp; The first section of the form seeks information on the like-kind exchange.&nbsp; The second section pertains to reporting recognized gain or (loss) and basis of like-kind property received.&nbsp; There is also some specific reporting required on a schedule to the FTB 3840:</p>

<ul>
<li>Part I - Information of Properties Given Up</li>
<li>Part II – Information on Properties Received</li>
<li>Part III – Information on Allocation of California Source Deferred Gain</li>
</ul>

<h2>Summary</h2>

<p>Although the California form FTB 3840 is only in draft form currently and the State is requesting comments on the form, the state does intend to make it applicable for California like-kind exchanges taking place in 2014.&nbsp; This new filing requirement applies to all taxpayers, regardless of residence status or commercial domicile, who exchange real property located in California for like-kind property located outside of California.&nbsp; Non-California resident taxpayers who find themselves selling relinquished real property located in the State of California while acquiring replacement property outside of the state must keep in mind, and comply with this new reporting requirement.</p>