<h2>Potential Threats to Section 1031</h2>

<p>Last fall, former Chairman Senator Baucus (D-WY) of the Senate Finance Committee, submitted a draft tax reform proposal that discussed the possibility of eliminating 1031 exchanges. Taxable gains on personal property exchanges were to be mostly absorbed by the introduction of a pooling method for asset depreciation similar to Canada’s. Like-kind exchanges of real property were completely eliminated in the Baucus draft.</p>

<p>Earlier this year, Representative Dave Camp (R-MI), Chairman of the House Ways and Means Committee, followed up with his own ideas outlining comprehensive tax reform with the goal of reducing corporate tax rates to 25%.&nbsp; This too proposed complete elimination of section 1031 from the Internal Revenue Code by January, 2015.</p>

<p>Quickly to follow we saw President Obama’s 2015 budget proposal limiting the amount of deferral for capital gains to $1 million per taxable year.</p>

<h2>So, what does this mean? &nbsp;</h2>

<p>In my opinion, 1031 tax deferred exchanges are not going away this year nor will they be eliminated in the next several years.&nbsp; Why?&nbsp; Well let’s look at the drivers responsible for tax reform.&nbsp;</p>

<ul>
<li><strong>Senate Finance Committee: Uncertainty in Leadership</strong><br />
Before the end of 2013, but after Baucus submitted his proposed tax reform papers, Senator Baucus&nbsp;announced that he would not be running for re-election in 2015.&nbsp; Senator Wyden (D-OR) stepped into the role as Chairman of the Senate Finance Committee and quickly let the other members know he would introduce his own ideas that may or may not represent Senator Baucus’ proposal.&nbsp; A lot will depend on the upcoming elections this November. Should the Republicans retake the Senate, leadership of the Committee will switch and a new agenda most likely will be introduced.<br />
&nbsp;</li>
<li><strong>House Ways &amp; Means Committee: Lacking Broad Support</strong><br />
Introduction of Camp’s tax reform came without broad support.&nbsp; Not only did Camp fail to gain support from his own committee members, the House also has very little interest in moving on a Bill that possibly would upset so many constituents.&nbsp; U.S. businesses who participated in good faith along with elected Representatives by providing ideas that could drive comprehensive tax reform were all surprised when Camp, unilaterally, moved the draft proposal out of Committee.&nbsp; Representative Camp announced earlier this year that he too will not be seeking reelection, however, he committed to keep working on tax reform.<br />
&nbsp;</li>
<li><strong>White House: Possible Lame Duck Situation</strong><br />
There is a strong possibility that the Republicans gain control of both the House and Senate this coming November. Should the Senate change control, it won’t be enough to push reform through without bipartisan support.&nbsp; Additionally, should President Obama wish to move on his agenda, he too is going to need significant support from the other side of the aisle.</li>
</ul>

<p>Remember, a bill must first be introduced to the floor of the House by approval of the Committee, then voted on by Members of the House.&nbsp; The same process is performed by the Senate.&nbsp; Should both separate Bills receive enough votes to pass, then the House and Senate must reconcile a Bill to present to the President, who has the authority to sign OR veto at his discretion.&nbsp;</p>

<p>Tax reform is difficult.&nbsp; Comprehensive tax reform is monumental.&nbsp; We have a Congress who finds it arduous to agree on almost anything presented before them.&nbsp;&nbsp;1031 like-kind exchanges, whether simultaneous or deferred, most likely, will not be on the chopping block come November of 2014.&nbsp; Nor do I think LKEs will be legislated away in the next few years – at least without a fight.&nbsp; Too many employers, associations, service industries, congressmen and women, recognize 1031s are a vital tool in the US economy.</p>

<h2>Internal Revenue Code Section 1031</h2>

<p>The ability to do an exchange of like-kind property and to receive tax deferral on the gain has been provided for in <a aria-label="Internal Revenue Code Section 1031" href="/resources/internal-revenue-code-section-1031" title="Internal Revenue Code Section 1031">Internal Revenue Code (IRC) Section 1031</a> since 1921.&nbsp; The primary reason behind Section 1031 is that if a taxpayer, who is known as an exchanger, is vested with a parcel of real estate and receives different real estate in a trade, and no cash, there is a continuity of the real estate holding.&nbsp; The gain on the sale of the first property, the “Relinquished Property” is deferred until the acquired property, the “Replacement Property” is sold without a further exchange.&nbsp; It was generally understood that the very definition of “exchange” meant that the transfer of the relinquished property and the acquisition of the replacement property had to take place simultaneously.&nbsp; Also, the taxpayer had to receive the replacement property from the same person to whom the taxpayer sold the relinquished property.&nbsp; As a result, exchanges were not often done.</p>

<h2>The Starker Decision</h2>

<p>This notion that an exchange had to be simultaneous was set aside in 1983 in a landmark legal decision, Starker vs. U.S. In that case the parties had agreed that the buyer would acquire Starker’s property up front but would allow Starker up to five years to find replacement property for the buyer to acquire and transfer back to Starker.&nbsp; The court held in favor of Starker and this began the era of doing exchanges on a delayed basis, often referred to as Starker exchanges or Starker trusts.&nbsp; In 1984, in response to the Starker decision, Congress added language to Section 1031 requiring that an exchange of relinquished property for replacement property had to be concluded within 180 days, allowing for these delayed exchanges.</p>

<h2>1991 Treasury Department Regulations</h2>

<p>During the course of several years after the Starker decision, due to a large amount of uncertainty about how to accomplish an exchange, the Treasury Department issued regulations in 1991 to address many of the unanswered questions (see <a aria-label="IRS Regulations section 1031" href="/resources/internal-revenue-service-regulations-irc-ss1031" title="IRS Regulations section 1031">Internal Revenue Service Regulations: IRC§1031</a>). A portion of those regulations dealt with exchanges of real estate.&nbsp; Key provisions of the regulations provided a means for a taxpayer to sell relinquished property to a buyer of choice and to receive replacement property in exchange from a seller of choice, <em>without requiring the taxpayer’s buyer to participate or cooperate in the exchange transaction</em>.&nbsp; This was accomplished by the use of an “intermediary” to facilitate the exchange.&nbsp; The intermediary acquires the relinquished property from the taxpayer, transfers it to the buyer and within 180 days, acquires replacement property from the seller and transfers it to the taxpayer.&nbsp; The taxpayer is deemed to have completed an exchange with its intermediary.&nbsp; Under the regulations, certain persons or entities who are the agent of the taxpayer cannot act as Intermediary, but all other persons or entities are “qualified” to act as Intermediary and these persons are referred to as a "qualified intermediary", commonly referred to as a QI.&nbsp;</p>

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

<p>A QI is a necessity for delayed exchanges and the use of one allows the taxpayer to fall into a “safe harbor” as to the structure of the transaction.&nbsp; The regulations are purposely liberal on the mechanics of transferring the relinquished property to the QI and how to receive title to the replacement property back from the QI.&nbsp; One such permitted method, which is the industry standard, is to “assign rights” in the sale and purchase contracts to the QI.&nbsp; <em>For tax purposes</em>, the QI’s right to receive the property resulting from the assignment of rights is the same as if the QI took title from the taxpayer on the relinquished property and transferred title to the taxpayer on the replacement property.&nbsp; The taxpayer can still “direct deed” the property to the buyer and receive a deed from the seller.&nbsp; There are a few other requirements as well to meet this safe harbor.</p>

<p>A second problem was also addressed by the regulations. Prior to the regulations, to the extent that the taxpayer received and held the sale proceeds until being used for the purchase of the replacement property, the taxpayer was deemed to have a taxable sale, regardless if replacement property was bought within the 180 day time period.&nbsp; For a variety of reasons, the other option, like in the Starker case, allowing the buyer to hold those proceeds until the taxpayer needed to have them applied to the purchase of the replacement property was a risky proposition.&nbsp; So the regulations provided an additional “safe harbor” by allowing the QI to hold the funds or for the funds to be held in an escrow or trust account by a QI affiliate or by a third party.&nbsp; So a proper exchange then and now looks something like this:</p>

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<h2>&nbsp;</h2>

<h2>Current Requirements of a 1031 Exchange</h2>

<p>The 1991 regulations still cover how to complete an exchange to this day.&nbsp; Based upon the foregoing, documents such as the following are common to exchanges using a Qualified Intermediary:</p>

<ul>
<li>Tax Deferred Exchange Agreement</li>
<li>Assignment of Contract Rights to Sell Relinquished Property</li>
<li>Identification Notice from taxpayer to QI within 45 days of the sale of the Relinquished Property designating up to three properties the taxpayer may elect to acquire (additional designation rules may be applicable)</li>
<li>Assignment of Contract Rights to Acquire the Replacement Property</li>
</ul>

<h2>Summary</h2>

<p>Not only have tax deferred exchanges been permissible by the IRS since 1921, the ability to effectuate an exchange has been made much easier as a result of the decision in the Starker case and the regulations that followed.&nbsp; Those regulations, among other things, provide safe harbors for engaging the services of a QI with whom the taxpayer completes the exchange and for parties to hold the funds outside the control of the taxpayer.&nbsp; The 1031 exchange procedures are very form oriented and as long as the taxpayer, with the help of its QI, strictly follows the procedures, tax deferral upon the sale of real estate can be realized.</p>

<p>Despite the fact that like-kind exchanges (LKEs) have been an established part of tax law since 1921, there are still a number of misconceptions in the marketplace about what they are and how they work.</p>

<p>The 1031 Code is specific concerning most aspects of the law and Accruit is always standing ready with accurate, detailed information regarding any questions you may have about 1031 exchanges. If you hear something that you’re not sure about or would like more details on an LKE issue, call Accruit at 1-866-397-1031.</p>

<p>In the meantime, we’ve prepared this brief, which addresses many common 1031 exchange misconceptions.</p>

<h3>A 1031 exchange requires that you swap property simultaneously.</h3>

<p>There is no requirement that you must exchange property simultaneously. In the most common case, the "single" or "forward delayed" exchange, property is sold and replacement property is purchased within 180 days following the sale of the relinquished property. There is also a "reverse exchange," where the replacement property is purchased before the sale of the relinquished property.</p>

<h3>You must purchase the same type of property to meet "like-kind" rules for a 1031 exchange.</h3>

<p>Any real estate property is "like-kind" to all other real estate under 1031 guidelines. Therefore, a mall property can be like-kind to a resort property and a high-rise apartment can be like-kind to a vacant piece of land. Your Accruit representative can provide you with the guidelines you need to determine specifically what asset types are like-kind for your situation.</p>

<h3>I can use my attorney, CPA, realtor or my equipment dealer as a Qualified Intermediary.</h3>

<p>A "qualified intermediary" (QI) provides Safe Harbor protection for 1031 exchanges, and this entity must be a "disinterested third party" who has not acted as your agent in any way. You can't use a lawyer with whom you've had an attorney-client relationship in the preceding two years, nor can your CPA serve as the QI if he or she has prepared your tax return within the last two years. An equipment dealer who sells you equipment is not a disinterested party as described in the tax code, so they can't be your QI, either.</p>

<p>If you don't employ a qualified intermediary, your exchange may be disqualified by the IRS. It's also important that you are utilizing an appropriate QI when executing an exchange through an auction house. The auctioneer isn't legally a disinterested party if they assisted you in your sale; they are by definition the agent for the buyer and/or the seller.</p>

<h3>Any complications with the sale of real property or a business asset can extend the 180-day rule.</h3>

<p>In general, there are no provisions to extend the 45-day or the 180-day rules. Nor can you extend the deadline because your 180th day is on a Sunday. In that case, you must finish the exchange on the previous Friday, even though this falls before the 180-day deadline.</p>

<p>A singular exception is when a presidential order extends these deadlines in cases of regional or national emergencies. A good example would be a natural disaster, like a major hurricane or widespread flooding.</p>

<h3>Once I have done a 1031 exchange, I never have to pay my taxes.</h3>

<p>A 1031 exchange is a tax deferral strategy, which means taxes are deferred for an undetermined period of time. Through continued 1031 planning, it may be possible to turn this tax deferral into long-term or indefinite tax deferral.</p>

<p>There are also occasions under the law when a deceased person leaves property to another family member and the heirs may avoid capital gains completely. It is important to consult with a tax attorney or CPA to determine the application of the tax code in these instances.</p>

<h3>Vacant land doesn't qualify for a 1031 exchange.</h3>

<p>A 1031 exchange involves real property for real property and vacant land certainly qualifies under this description. If, for some reason, you believe your situation represents an unusual exception, you're encouraged to consult with your tax advisor for clarification.</p>

<h3>A 1031 exchange&nbsp;defers all tax liability.</h3>

<p>Any cash not spent on the purchase of a replacement property during an exchange (which is called "boot") is fully taxable, regardless of your adjusted basis on the property. You may have to pay tax regardless of the 1031 exchange.</p>

<h3>The 1031 exchange is a tax loophole.</h3>

<p>LKEs have been a part of the Internal Revenue Code since 1921. They're a legal tax deferral strategy specifically crafted to aid businesses in expansion and to stimulate sales and purchases of real estate and tangible business assets. Section 1031 is not a loophole, a dodge or a way around the law - it is the law. It's the same as the standard deduction you claim for a dependent child or the depreciation deduction you take in your business each year.</p>

<h3>A 1031 exchange is just too good to be true.</h3>

<p>This myth is the most frustrating of them all. In our business we often encounter those who believe that if it sounds too good to be true, then it probably is. We respect prudent caution, but in this case the suspicion emanates from a failure to understand what a 1031 exchange actually is and does.</p>

<p>Yes, LKEs sound really good, and the black-letter fact of the law is that they are true.</p>

<p><em>A message from our President &amp; CEO, Brent Abrahm:&nbsp;</em> As I have communicated over the last nine months, repeal of 1031 like-kind exchanges is a topic of discussion in Washington DC as part of overall tax reform. As co-chair of the Federation of Exchange Accommodator's (FEA’s) Government Affairs Committee, we are making great progress in one-on-one discussions with our Congressmen and women. Our arguments for retaining 1031s are solid and are being heard. Based upon 90 plus years of strong tax policy supporting the continuation of IRC § 1031, members of Congress are beginning to understand that<strong> taxing cash flow is NOT good tax policy</strong>.</p>
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<p>In the last nine months, Accruit team members have flown out to DC on four separate trips, have held over 50 meetings and have personally donated to our industry’s PAC and to several representatives that sit on the Senate Finance Committee and House Ways &amp; Means Committee.</p>

<p><strong>Now the industry needs your support.</strong> In the attached <a href="/sites/default/files/PR%20Web%20Post.pdf" target="_blank">FEA Press Release</a>, you will note that our association has launched <a href="http://www.1031taxreform.com&quot; target="_blank">www.1031taxreform.com</a&gt;. This website is a very quick and efficient method to communicate directly with your local representatives. On the site, there is already a prepared brief letter outlining the benefits of 1031s, but feel free to modify as you see fit. I encourage you to reach out and let your representatives know <strong>repealing 1031 is NOT an option</strong>.</p>

<p>In addition, the FEA is very close to finalizing our engagement of an outside firm to prepare a comprehensive impact study on the repeal of 1031 to our economy. This study is not cheap, but we feel it is critical as we make our case that 1031s are vital to our economy. I can assure you that Accruit’s clients who enjoy this deferral related to business asset exchanges as well as real estate, will continue to be well represented in both DC and the economic impact study.</p>

<p>On July 23, I will be in DC for another round of meetings with select members as well as coordinating our second 1031 coalition roundtable. This is going to be a long battle if we do not make a significant impact today. Please take a moment to reach out to your representative on <a href="http://www.1031taxreform.com&quot; target="_blank">www.1031taxreform.com</a&gt;. <strong>This will take less than 5 minutes.</strong></p>

<p>Accruit CEO Brent Abrahm is one of Denver's People on the Move, according to the Denver Business Journal. A recent article highlights Abrahm's appointment to the Board of Directors for <a href="http://coloradosucceeds.org&quot; target="_blank">Colorado Succeeds</a>, a non-profit, non-partisan coalition of business leaders committed to improving the state's education system for workforce development and economic growth.</p>

<p>"It is critical that students are equipped with the knowledge and skills to succeed in today's rapidly changing marketplace. As Accruit continues to grow, we understand how imperative it is that Colorado’s graduating students are workforce-ready and can compete on an international level”, said Abrahm, when asked about why he accepted an appointment to the board of directors of Colorado Succeeds.</p>

<p>Brent Abrahm is CEO, Co-Founder and Director of Accruit, an Inspira Financial solution, a company that specializes in facilitating 1031 Exchanges, offering Managed Service and patented workflow technology, Exchange Manager Pro^TM.&nbsp;</p>

<p>View the <a aria-label="Denver Business Journal post" href="http://www.bizjournals.com/denver/potmsearch/detail/submission/2810861/…; title="Denver Business Journal post">Denver Business Journal pos</a>t.</p>

<ul>
<li>This seminar will provide an overview of the evolution of Section 1031 of the Internal Revenue Code and regulations, basic 1031 exchange concepts and recurring problem areas in exchange transactions. The presentation will also include a discussion of reverse property exchanges and the special issues inherent in those transactions, The focus will be on property exchanges in the agricultural business sector and will conclude with a summary of the current treatment of Section 1031 exchanges as part of the pending Congressional and Administration Tax Reform proposals.</li>
</ul>

<p>For more information or to register to attend the 90-minute live webinar,&nbsp;&nbsp;click to view&nbsp;the event flyer:</p>
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