tag:blogger.com,1999:blog-43928236944547955192024-03-14T01:14:35.616-07:00Inside 1031An attorney-authored blog on like-kind exchange strategies and "insider" tips and trends amongst commercial real estate industry players executing 1031 exchanges. Reverse Exchanges, Improvement Exchanges, and Similar Advanced Exchange Strategies are discussed.James Brennanhttp://www.blogger.com/profile/05832322317888999210noreply@blogger.comBlogger61125tag:blogger.com,1999:blog-4392823694454795519.post-33290377178746937362010-05-25T12:56:00.000-07:002010-05-25T13:07:30.325-07:00This Blog Has Moved to a New Location<a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiFWj8NKv8yhE7HZwtHebOIILpRaRsPpncNu3i6UCUFa1zAkseoRWghlERMTl3mwirMu_8TI8DzcF1Q-KCK68jCpnp8pJF0jFoNaXIMH1D9-ch0VihA5Kfr_reUCyaSlKnv5ORrG2EVzAsh/s1600/moving6pf.jpg"><img style="display: block; margin: 0px auto 10px; text-align: center; cursor: pointer; width: 359px; height: 400px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiFWj8NKv8yhE7HZwtHebOIILpRaRsPpncNu3i6UCUFa1zAkseoRWghlERMTl3mwirMu_8TI8DzcF1Q-KCK68jCpnp8pJF0jFoNaXIMH1D9-ch0VihA5Kfr_reUCyaSlKnv5ORrG2EVzAsh/s400/moving6pf.jpg" alt="" id="BLOGGER_PHOTO_ID_5475301199577695330" border="0" /></a><br />The Inside 1031 blog previously hosted at this domain has been moved to the following location:<br /><br /><a href="http://www.1031exchangesolutionsgroup.com/blog-1031esgroup.php">www.inside1031.com</a><br /><br />All previous blogs entries are hosted there and please continue to visit for all the latest 1031 exchange information and analysis.<div class="blogger-post-footer">James Brennan Esq., LL.M.
Managing Director/Corporate Counsel
ES Group
11150 Sunset Hills Road
Suite 300
Reston, VA 20190
Direct 703.801.4178
Fax 703.663.9889
jbrennan@1031esgroup.com
http://www.linkedin.com/in/1031exchange
www.1031esgroup.com</div>James Brennanhttp://www.blogger.com/profile/05832322317888999210noreply@blogger.com0tag:blogger.com,1999:blog-4392823694454795519.post-34353485957551564642010-05-12T10:13:00.000-07:002010-05-12T10:16:46.862-07:00How Net Lease Zeros Add Up to Big Tax Savings<a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjHRuLKkj1ouMrSNW1eFl6QRa9kETwl1hqE7Rgy1qcqGw7zx_lAq3C3uqThyavJ5Ah3Am4agbXgsLTRU_2wJNTezT16dH40wYfIcHW1gOUUFw-ymdU0Jr9_7VG_-NfxOViHovQVdRdwo1qw/s1600/zero.jpg"><img style="display: block; margin: 0px auto 10px; text-align: center; cursor: pointer; width: 400px; height: 267px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjHRuLKkj1ouMrSNW1eFl6QRa9kETwl1hqE7Rgy1qcqGw7zx_lAq3C3uqThyavJ5Ah3Am4agbXgsLTRU_2wJNTezT16dH40wYfIcHW1gOUUFw-ymdU0Jr9_7VG_-NfxOViHovQVdRdwo1qw/s400/zero.jpg" alt="" id="BLOGGER_PHOTO_ID_5470433603512988274" border="0" /></a><br />Simply speaking a zero transaction is the acquisition of a property using a highly leveraged loan (loan to value usually 88% plus) with all rental income dedicated towards debt service, thus producing “zero income” for the property owner. One of the vehicle’s applications is to defer tax liabilities incurred in a commercial foreclosure.<br /><br /><span style="font-weight: bold;">The Problem </span><br /><br />Though it is not widely known, the foreclosure of a commercial property is often a taxable event. How the IRS computes the tax depends on whether the property was financed with a recourse or non-recourse loan. In the case of a recourse loan, tax liability is calculated by taking the difference between a property’s fair market value and its adjusted basis. The tax liability of a non-recourse loan (which the remainder of this piece will be dealing with) is calculated by taking the difference between a property’s outstanding mortgage balance and the property’s adjusted tax basis.<br /><br />The key element which catches investors off guard is that “outstanding mortgage balance” includes any loan taken out during a refinancing of the property.<br /><br />For example:<br /><br />Let’s say you bought a property for $5M (your cost basis) which subsequently has been depreciated to an adjusted tax basis of $3M. Let’s also say you refinanced this property during an upsurge in the market and pulled out $8M of equity. If this transaction was foreclosed upon (without any action to defer tax liabilities), you would face a taxable gain of $5M, i.e. the $8M in outstanding mortgage amount minus the $3M in adjusted tax basis. <br /><br />Thus, investors who think returning the keys to the bank absolves them of all monetary concern involved in a commercial foreclosure are gravely mistaken. The IRS views any money pulled from a property via loan refinancing to be taxable gain, even though the property is foreclosed upon.<br /><br /><span style="font-weight: bold;">The Solution</span><br /><br />With proper scheduling and use of the 1031 exchange, the situation above can be avoided through the purchase of a “zero income” property. The reason a zero income property can be so beneficial is due to its highly leveraged nature and its ability to defer a taxable gain through a 1031 transaction. A portion of the money an investor would have otherwise paid to the IRS can be used instead to acquire the zero income property through the 1031 exchange.<br /><br />For this transaction to work a few things usually need to be in place:<br /><br />• Due to the rules of the 1031 exchange, the replacement “zero income” property has to be of equal or more value than the original property. In this case the value the client needs to trade equal or up to is the value of the outstanding mortgage being forgiven.<br /><br />• Furthermore all 1031 exchange procedures must be followed including preparing exchange agreements, identifying replacement property and closing within 180 days.<br /><br />• The investor must carefully select the zero income replacement property. The primary characteristics will be a triple net lease (NNN) and an investment grade tenant (usually rated by independent agencies such as S&P or Moody’s). These properties are considered extremely stable real estate investments and are normally the only ones capable of being financed with the highly leveraged loan needed in a zero transaction.<br /><br />• A “deed in lieu of foreclosure” must be obtained to allow for the appropriate transfer of the original property to the bank. Creditors generally prefer a deed in lieu of foreclosure because it terminates the debtor’s equity of redemption and is quicker, less expensive and less unwieldy than a traditional foreclosure.<br /><br />In order for the transaction to flow smoothly, it will have to be properly organized and scheduled on an individual basis. It should be noted that a zero transaction is not possible without outside assistance of at least a Qualified Intermediary and qualified professional tax and accounting advice. If done properly, this strategy can be an invaluable tool for investors caught in a foreclosure situation.<br /><br />Here is how our previous example would be impacted by a zero transaction:<br /><br />Assuming a tax rate of 25% (Federal capital gains rates, Federal recapture rates and states taxes), the $5M in gain would cost $1.25M in taxes. If instead, a zero transaction was pursued, the investor would need to replace the balance of the debt, $8M. By exchanging into a zero income property for approximately 10% of the $8M debt amount replaced ($800,000), there would be a $450,000 savings ($1.25M-$800,000) and the investor would own NNN property with a very high credit tenant.<div class="blogger-post-footer">James Brennan Esq., LL.M.
Managing Director/Corporate Counsel
ES Group
11150 Sunset Hills Road
Suite 300
Reston, VA 20190
Direct 703.801.4178
Fax 703.663.9889
jbrennan@1031esgroup.com
http://www.linkedin.com/in/1031exchange
www.1031esgroup.com</div>James Brennanhttp://www.blogger.com/profile/05832322317888999210noreply@blogger.com0tag:blogger.com,1999:blog-4392823694454795519.post-33933444167912991042010-04-29T12:50:00.000-07:002010-04-29T12:53:01.682-07:00Navigating Closing Costs and the 1031 Tax Deferred Exchange<a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjfeVWn0mMvnI2zaTAHg2_4tXo45uK_-kKOyVL6-G_fNwg16-M0x1Tizo4H6FRi093_3-s11fuPML6WuZ5dyllQzO73BrVowTq9bWekQvt_9AwbWerEwRA8YXBT5UPBDdyXyURmsHd7nsda/s1600/closing-costs.jpg"><img style="display: block; margin: 0px auto 10px; text-align: center; cursor: pointer; width: 342px; height: 309px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjfeVWn0mMvnI2zaTAHg2_4tXo45uK_-kKOyVL6-G_fNwg16-M0x1Tizo4H6FRi093_3-s11fuPML6WuZ5dyllQzO73BrVowTq9bWekQvt_9AwbWerEwRA8YXBT5UPBDdyXyURmsHd7nsda/s400/closing-costs.jpg" alt="" id="BLOGGER_PHOTO_ID_5465649427993311954" border="0" /></a><br />When entering into a <a href="http://www.1031exchangesolutionsgroup.com/index.php">1031 exchange</a> one often does not consider the <a href="http://www.sellerclosingcost.com/">ancillary costs</a> that come with <a href="http://www.sellerclosingcost.com/">closing the transaction</a>. Often the assumption is made that these costs will be subsidized by the 1031 exchange proceeds. However, while some of these costs certainly can be bankrolled by the tax deferred exchange, some cannot. Knowing how to avoid these expenses being deemed boot can keep your transaction out of hot water.<span style="font-weight: bold;"><br /><br />Covered Costs:</span><br /><br />It is generally acknowledged that “payment of brokerage commissions from exchange proceeds does not create taxable boot.” Thus, payment of these “non-recurring” costs of sale or purchase from the exchange proceeds should not be considered taxable boot. Brokerage commissions are one example of non-recurring costs; however certain other costs are excluded.<br /><br />They are as follows:<br /><br />Real Estate Commissions<br />Recording Fees<br />Direct Legal Fees<br />Title Insurance Premiums<br />Qualified Intermediary Fees<br />Agreed Property Inspections<br />Escrow or Closing Agent Fees<br />Documentary Transfer Fees<br /><br />Note: Expenses have to be customary in the jurisdiction (e.g. 6% listing agreement).<br /><br /><span style="font-weight: bold;">Un-Covered Costs:</span><br /><br />Certain costs are generally not covered and considered taxable boot if they are involved with anything else besides acquisition of the replacement property. The issue most people run into involves getting a new loan on the replacement property. Because the costs for acquiring the new loan are not related to the acquisition of the replacement property (according to the IRS), they are considered taxable boot.<br /><br />These Include:<br /><br />Loan Fees<br />Points<br />Prorated Mortgage Insurance<br /><br />Another issue to consider is that prorated property taxes, insurance payments and rents are considered deductible ongoing expenses. As such, they are not included in the 1031 exchange; however, their payment does not impact the use of the Qualified Intermediary safe harbor.<div class="blogger-post-footer">James Brennan Esq., LL.M.
Managing Director/Corporate Counsel
ES Group
11150 Sunset Hills Road
Suite 300
Reston, VA 20190
Direct 703.801.4178
Fax 703.663.9889
jbrennan@1031esgroup.com
http://www.linkedin.com/in/1031exchange
www.1031esgroup.com</div>James Brennanhttp://www.blogger.com/profile/05832322317888999210noreply@blogger.com0tag:blogger.com,1999:blog-4392823694454795519.post-16915047731379749262010-04-28T10:46:00.000-07:002010-04-28T10:54:37.721-07:00How to Check Your Tax Refund Status<a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh6SXqWoOp8z0q3zigY5oOKfAvbIwkcwwpzQLhLcoC72ek17ZhxcJkT_NGpnGVOnUIw0CzLmEc63izcvQs4ojHt3V6SboqgTWjMqoY9vnx-6OdWShRFRfYEycjAMtD6mCP9JzhhHUVKXD0M/s1600/usa_refund.gif"><img style="float: right; margin: 0pt 0pt 10px 10px; cursor: pointer; width: 200px; height: 132px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh6SXqWoOp8z0q3zigY5oOKfAvbIwkcwwpzQLhLcoC72ek17ZhxcJkT_NGpnGVOnUIw0CzLmEc63izcvQs4ojHt3V6SboqgTWjMqoY9vnx-6OdWShRFRfYEycjAMtD6mCP9JzhhHUVKXD0M/s200/usa_refund.gif" alt="" id="BLOGGER_PHOTO_ID_5465248178177039170" border="0" /></a>If you are a member of the fortunate group currently awaiting a tax refund check, you may be asking yourself “where is my check?” For those who are curious, every state that levies a personal income tax has either a website or hotline which provides taxpayers with the status of their refund. In order to determine whether your refund has been processed, information on your tax reform will need to be provided. Though the requirements differ state by state, you will need to at least provide:<br /><br />1. Social Security Number (or Individual Taxpayer Identification Number)<br />2. Filing Status (Single, Married Filing Joint Return, Married Filing Separate Return, Head of Household, or Qualifying Widow(er))<br />3. Exact Refund Amount Shown on Your Return<br /><br />For more, including full state by state contact information, click <a href="http://taxinfodesk.com/2010/04/how-to-check-tax-refund-status/">here</a>.<div class="blogger-post-footer">James Brennan Esq., LL.M.
Managing Director/Corporate Counsel
ES Group
11150 Sunset Hills Road
Suite 300
Reston, VA 20190
Direct 703.801.4178
Fax 703.663.9889
jbrennan@1031esgroup.com
http://www.linkedin.com/in/1031exchange
www.1031esgroup.com</div>James Brennanhttp://www.blogger.com/profile/05832322317888999210noreply@blogger.com0tag:blogger.com,1999:blog-4392823694454795519.post-6544104197858918002010-04-22T10:49:00.000-07:002010-04-22T12:00:17.836-07:00How Your CPA May Cost You 5, 6, or 7 Figures<a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiJb_grlGaFhqsXSGh2-0635_NI7LntVg9av7wFzmMzyWD3K-utHudpYUU6sEXZZ5vuFvRf-o4TQs6csbo0a3TuwArUJad4kuN9m_XiWYVZ6EA9MKZ9aViAcSrkAcdwlFauuEB25iJb7PY3/s1600/frustrated.gif"><img style="float: right; margin: 0pt 0pt 10px 10px; cursor: pointer; width: 200px; height: 160px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiJb_grlGaFhqsXSGh2-0635_NI7LntVg9av7wFzmMzyWD3K-utHudpYUU6sEXZZ5vuFvRf-o4TQs6csbo0a3TuwArUJad4kuN9m_XiWYVZ6EA9MKZ9aViAcSrkAcdwlFauuEB25iJb7PY3/s200/frustrated.gif" alt="" id="BLOGGER_PHOTO_ID_5463036457075680162" border="0" /></a>When you think of <a href="http://www.1031exchangesolutionsgroup.com/index.php">tax planning</a> you think of someone who looks forward to helping you navigate your facts, circumstances and decisions, minimizing the tax liabilities of your investments and business operations. Unfortunately, many CPAs that advise clients look backward, reacting to the year’s events and shaking their heads that you have large tax implications as a result of the business decisions that you have made. This blog addresses those sinister CPAs and their even more sinister sisters- the CPA that confidently advises you – to make bad decisions!<br />Here are three common examples of how CPAs directly or indirectly impeded successful client tax deferral. <br /><br /><span style="font-weight: bold;">1. Over-focusing on Federal Capital Gains Tax Liability. </span><br /><br />The major issue we see in this environment is client’s thinking they are potentially cashing out in a 15% capital gains environment. The client’s indicate, “I may as well cash out now rather than later, because capital gains is going up.” While this point is well-taken, clients are not appreciating the three taxes they defer via <a href="http://www.1031exchangesolutionsgroup.com/index.php">1031 exchange</a>: (1) Federal Capital Gains taxes (15%, soon to be 20%); (2) State Level Capital Gains (ranging from 0-9%); (3) Depreciation Recapture Tax (25-50% depending on straight-line or accelerated depreciation). These three taxes always add up to more than 15% unless you are selling non-depreciable property (land) in a no-state tax jurisdiction like Texas. However, if you have property in high state tax jurisdictions like NJ, NY, DC, or MD, you will want to drill down and determine your actual proposed tax liability before opting to cash out. A cocktail conversation with a CPA about capital gains should not suffice.<br /><span style="font-weight: bold;">2. Simplifying the Personal Use Issues.</span><br /><br />Beware of CPAs that speak in general rules. Any <a href="http://www.1031exchangesolutionsgroup.com/index.php">tax attorney</a> or CPA that is wise usually answers questions with, “it depends”. We had a classic case of oversimplification last year when a client wanted to sell a North Carolina beach house. Under the taxpayer’s property settlement agreement with his ex-wife, he let her use it 5 weeks out of the year. Five CPAs gave oral advice to the client to cash out as the ex-wife’s use of the property constituted imputed personal use to the taxpayer. Thankfully, the business owner, stubborn and determined to get the accurate answer, asked us for our suggestions. We promptly referred the client (one week before settlement) to a regional <a href="http://www.1031exchangesolutionsgroup.com/index.php">1031 exchange</a> tax attorney superstar that issued a tax opinion for $1,500.00 indicating the ex-wife’s use was analogous to a creditor and that the property settlement agreement stipulations were not the equivalent of letting your brother or sister stay at your vacation property. Therefore the 47 out of 52 weeks of being held out for rent plus the ex-wife’s activity did not squelch the deal. Thankfully, the client deferred hundreds of thousands of dollars of gain and tax liability.<br /><br /><span style="font-weight: bold;">3. Not Adequately Understanding 1031 Tax Basis Issues.</span><br /><br />This is where the horror stories come into play. While the prior two categories are a function of CPAs not being familiar with the details of tax deferral, this scenario is egregious beyond belief. A local tax preparer with a history in tax preparation at a major chain that employs more seasonal tax preparers than any other company (hint, hint) was indicating to at least twenty clients per year (he was a good marketer) to cash out of the relinquished property because 1031 exchanges used CARRYOVER basis and you will not get any benefit from new cash or new debt. For those of you who know the rules, you should fall out of your chair here. <a href="http://www.1031exchangesolutionsgroup.com/index.php">1031 exchange</a> uses SUBSTITUTED basis giving taxpayers credit for new cash or debt if they trade up in value. If a tax preparer tells you to simply sell and buy instead of exchange, seek a second and third opinion. The tax preparer was relying on the Form 8824 instructions for his understandings and he rationalized his advice by stating that it was “ambiguous” what replacement property basis would be. This tax preparer had no accounting training, just two summers in a strip mall preparing returns. He filed over 200 returns per year.<div class="blogger-post-footer">James Brennan Esq., LL.M.
Managing Director/Corporate Counsel
ES Group
11150 Sunset Hills Road
Suite 300
Reston, VA 20190
Direct 703.801.4178
Fax 703.663.9889
jbrennan@1031esgroup.com
http://www.linkedin.com/in/1031exchange
www.1031esgroup.com</div>James Brennanhttp://www.blogger.com/profile/05832322317888999210noreply@blogger.com0tag:blogger.com,1999:blog-4392823694454795519.post-69312220231822706482010-04-15T08:19:00.000-07:002010-04-15T08:36:00.986-07:00April 15th May Cut Short Your 1031 & 8824 Info<a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEivVn1FGUZubc7fmhFPUh2xV_siK2rUbngT_u6BCrpe1OnuR8XpCpkILz8prOBvQE_ogh_P8aB3DJMlSNrnHohIgWAnWfN7GW7nudnhD4-eIr63_Sp2rI924ZmO5cPAiggc-YdvCR70LVdt/s1600/clock_ticking.jpg"><img style="float: right; margin: 0pt 0pt 10px 10px; cursor: pointer; width: 200px; height: 149px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEivVn1FGUZubc7fmhFPUh2xV_siK2rUbngT_u6BCrpe1OnuR8XpCpkILz8prOBvQE_ogh_P8aB3DJMlSNrnHohIgWAnWfN7GW7nudnhD4-eIr63_Sp2rI924ZmO5cPAiggc-YdvCR70LVdt/s200/clock_ticking.jpg" alt="" id="BLOGGER_PHOTO_ID_5460387158155446466" border="0" /></a>1031 exchanges include a 180 day exchange period unless you started your exchange in the previous year, say 2009, and April 15th cuts short your 180 period. If this is the case you must file for an extension to get the full 180 days.<br /><br />NOTE: All 1031 exchanges must be filed on IRS Form 8824. For Form 8824 and applicable instructions, click <a href="http://taxinfodesk.com/2009/09/1031-transactions/">here</a>.<div class="blogger-post-footer">James Brennan Esq., LL.M.
Managing Director/Corporate Counsel
ES Group
11150 Sunset Hills Road
Suite 300
Reston, VA 20190
Direct 703.801.4178
Fax 703.663.9889
jbrennan@1031esgroup.com
http://www.linkedin.com/in/1031exchange
www.1031esgroup.com</div>James Brennanhttp://www.blogger.com/profile/05832322317888999210noreply@blogger.com0tag:blogger.com,1999:blog-4392823694454795519.post-51862597219701569962010-04-09T09:28:00.000-07:002010-04-09T09:32:21.930-07:00US Apartment Uptick = Net Lease Impact<a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgl1qiOHkJfSgVeK6pP75w2704T0_xKOU9cNmyUeZ-gNkDlFdIqGRxTtGXg9gGMGmKVbPsLSOdb_wYxwP0eMR47Op4BxZ9SaUN9DmEeIIHlHM38s37hAeyOzRohJx0ArQrGM5tXdmRXz2eQ/s1600/newtons-cradle.jpg"><img style="display: block; margin: 0px auto 10px; text-align: center; cursor: pointer; width: 320px; height: 240px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgl1qiOHkJfSgVeK6pP75w2704T0_xKOU9cNmyUeZ-gNkDlFdIqGRxTtGXg9gGMGmKVbPsLSOdb_wYxwP0eMR47Op4BxZ9SaUN9DmEeIIHlHM38s37hAeyOzRohJx0ArQrGM5tXdmRXz2eQ/s400/newtons-cradle.jpg" alt="" id="BLOGGER_PHOTO_ID_5458176413031850770" border="0" /></a><br />It has been recently <a href="http://www.reuters.com/article/idUSN0515282820100406?type=marketsNews">reported</a> that the US apartment market may have reached bottom and be poised for a rebound. Apartment vacancy rates have stopped rising and rents even showed a modest increase in the first quarter. As life is pumped back into this market, 1031 exchanges could subsequently rise. Apartment investors heavily utilized 1031 exchanges to move from active to passive assets (such as net leases) in the past. Will this trend repeat?<br /><br />To gain insight, we have solicited the help of James Brennan Esq., LL.M., Managing Director and Corporate Counsel of <a href="http://www.1031esgroup.com/">Exchange Solutions Group</a>, one of the foremost experts of 1031 exchanges.<br /><br /><span style="font-weight: bold;">1. With the possible return to health of the U.S. apartment market, do you expect to see increased 1031 tax exchange action? </span><br /><br />The Baby Boom generation flocked to real estate as an investment class, particularly multifamily. With Baby Boom private investors aging and looking to make life decisions regarding retirement, relocation, and estate planning, and all of those activities are distinguishable from the active process of “adding value” to apartment complexes through sweat equity and property management. Many of those B and C investors are looking to get out of active management. After living through this cycle, they want out more now than ever.<br /><br /><span style="font-weight: bold;">2. What makes apartment owners keen to move from an active to passive asset? </span><br /><br />Passive triple net leases are net insurance, net utilities, and net taxes to the tenant. Apartment owners that have built a net worth over $5 million are looking to create annuity-like income for their heirs who often are not in the real estate business. These family patriarchs and matriarchs are not looking to burden their heirs who often are busy professionals in metropolitan areas with decisions regarding leasing up property or fixing the roof. Triple net leases provide credit-rated tenants with predictable cashflow.<br /><br /><span style="font-weight: bold;">3. How popular are net leases for those exchanging out of apartments? </span><br /><br />Net leases are not only used by multifamily baby-boomers but also multifamily “financial engineers”. While multifamily financing is often favorable from agencies like Fannie and Freddie many borrowers are in troubled financial shape with distressed assets. These assets often don’t pass muster to be financed or refinanced with agency debt. These investors can 1031 exchange either with low equity or after conducting a deed-in-lieu 1031 into a net lease. Once in the net lease asset, the equity can be unlocked fairly easily through either credit-tenant-lease paydown readvance or through a standard refinance. These strategies allow multifamily borrowers to get an asset banks trust more with a credit rating.<br /><br /><span style="font-weight: bold;">4. What is the psychographic profile of a typical investor who executes this strategy? </span><br /><br />Apartment developers are often drivers or family stewards. These decision-makers have built wealth from the ground up often not in a traditional white-collar methodology. These hard-driving decision-makers have provided for their family, and also probably have setup life insurance trusts to allow for estate planning liquidity. Triple net leases go well with this concept of transitioning wealth to the next generation without many opportunities for losing value by the heirs. The family stewards have built wealth and are now simply trying to preserve it.<br /><br /><span style="font-weight: bold;">5. Are there any aspects of this strategy conducive to estate planning techniques? </span><br /><br />In an effort to defer capital gains while family stewards are still living the patriarch or matriarch often engages in a like-kind exchange to transition between apartment assets and net lease assets. In a like-kind exchange you can trade into multiple replacement properties. Therefore, if you have three children and you sold your apartment complex for $15 million, you can buy three $5 million dollar net lease assets that produce income that can be divided up amongst the heirs. This avoids management by the one heir that may be more real estate savvy.<br /><br />Equally as important, the credit-rated aspect of net leases allows trust officers and advisors to sleep at night knowing that they made defendable decisions on behalf of the trust. Therefore, if a real estate trust officer is transitioning from apartment assets, net lease income streams are fiduciary friendly.<div class="blogger-post-footer">James Brennan Esq., LL.M.
Managing Director/Corporate Counsel
ES Group
11150 Sunset Hills Road
Suite 300
Reston, VA 20190
Direct 703.801.4178
Fax 703.663.9889
jbrennan@1031esgroup.com
http://www.linkedin.com/in/1031exchange
www.1031esgroup.com</div>James Brennanhttp://www.blogger.com/profile/05832322317888999210noreply@blogger.com0tag:blogger.com,1999:blog-4392823694454795519.post-68587301565778512742010-03-31T09:29:00.000-07:002010-03-31T09:56:03.946-07:00How to Defer Capital Gains Tax Liability on a Commercial ForeclosureUnsuspecting commercial investors are driving to the bank to turn in their keys on projects that did not workout as planned and waking up the following year with an unexpected tax headache. The discharge of the loan can result in a capital gains tax liability. Not only did the clients lose whatever equity they had in the property, but they also face capital gains tax liability for simply how they transferred the property to the bank!<br /><br />Individuals confuse the property’s tax impacts with the property’s economics. However, these two calculations are different. For tax purposes gain or loss equals the difference between the transfer price to the bank and the adjusted basis. Thus, if you bought a property in 1987 for 700k (your cost basis) and it has been depreciated and now has an adjusted basis of $400K, and it is foreclosed with a 950k loan, this transfer without a <a href="http://www.1031esgroup.com/index.php">1031 exchange</a> results in a taxable gain of $550K, i.e. $950k transfer price minus the $400K adjusted basis.<br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgwqsNqYvyiPQkzWhYuWYs821WMhVdjEuaN4HXYJrSFBSUHD6tZ9N3iHi7VOou_s7S_P_v3xmJ3JMPwXShSE0mudgBvViVvC_3J4L2hyphenhyphen9dWAm_oJKESczsMzq612hGv_JGH33vRfYEW7VDL/s1600/exchange-process.jpg"><img style="display: block; margin: 0px auto 10px; text-align: center; cursor: pointer; width: 363px; height: 228px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgwqsNqYvyiPQkzWhYuWYs821WMhVdjEuaN4HXYJrSFBSUHD6tZ9N3iHi7VOou_s7S_P_v3xmJ3JMPwXShSE0mudgBvViVvC_3J4L2hyphenhyphen9dWAm_oJKESczsMzq612hGv_JGH33vRfYEW7VDL/s400/exchange-process.jpg" alt="" id="BLOGGER_PHOTO_ID_5454836760167339842" border="0" /></a>Drilling down, the amount of gain for tax purposes depends on whether or not the debt is recourse or nonrecourse. With nonrecourse debt, the taxpayer is charged with gain equal to the difference between the outstanding mortgage amount and the adjusted basis. Thus, the taxable gain equals loan amount minus adjusted basis. To clarify, for nonrecourse debt fair market value of the property is not taken into consideration1 In Commissioner v. Tufts, the Court pointed out that taxpayers receive value when they are relieved of a nonrecourse debt obligation.<br /><br />For this problem, there is a solution. Exchange Solutions Group designs solutions for property owners facing foreclosure and related imputed gains. By purchasing another property of equal or greater value to the transfer price on the foreclosed property, a like-kind exchange can be used to delay the capital gain. The cash that would have been used to pay the tax liability can alternatively be redeployed into an asset rather than simply used to pay an expense.<br /><br />To execute this strategy all 1031 exchange procedures need to be followed including preparing exchange agreements, identifying replacement propert(ies), and closing within 180 days. Recall, that even if you are unsuccessful and end up with a “failed exchange” in the next year, you can elect installment sale treatment and push the tax liability to the following tax year, if you structured this as part of a 1031 exchange. To conclude, this market will undoubtedly have challenges but it is how we deal with adversity that defines us!<div class="blogger-post-footer">James Brennan Esq., LL.M.
Managing Director/Corporate Counsel
ES Group
11150 Sunset Hills Road
Suite 300
Reston, VA 20190
Direct 703.801.4178
Fax 703.663.9889
jbrennan@1031esgroup.com
http://www.linkedin.com/in/1031exchange
www.1031esgroup.com</div>James Brennanhttp://www.blogger.com/profile/05832322317888999210noreply@blogger.com0tag:blogger.com,1999:blog-4392823694454795519.post-59390690843421849992010-03-25T10:37:00.000-07:002010-03-25T10:41:44.511-07:00QI Default? Rev. Proc. 2010-14 can help<a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEixQN7ORPfqeKs7-XnfVc1kFnpoc1IuMchYYCPn-ZH1cuQncNHDIHZXNN19r_MYsoz_6g28Inpp_kwovRKdOHYaH2QquuNELhgddxsztAo72153vb8QonIvP-2NQdxuhhDK818czKNQbgc-/s1600/Help.jpg"><img style="float: right; margin: 0pt 0pt 10px 10px; cursor: pointer; width: 200px; height: 199px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEixQN7ORPfqeKs7-XnfVc1kFnpoc1IuMchYYCPn-ZH1cuQncNHDIHZXNN19r_MYsoz_6g28Inpp_kwovRKdOHYaH2QquuNELhgddxsztAo72153vb8QonIvP-2NQdxuhhDK818czKNQbgc-/s200/Help.jpg" alt="" id="BLOGGER_PHOTO_ID_5452627955322066130" border="0" /></a>For those who saw their exchange funds evaporate due to a QI declaring bankruptcy, yet still owed taxes on capital gains, Rev. Proc. 2010-14 may provide a much needed solution. Previously, taxpayers who fell victim to a QI default, were obligated to recognize the “gain triggered upon transfer of relinquished property in the tax year in which the transfer occurred.” Rev. Proc. 2010-14 ensures that if an exchange falls apart due to a QI bankruptcy, “gain is deferred until the tax year net liability relief exceeds basis and/or payments attributable to relinquished property are received as a result of the bankruptcy or receivership proceeding.” This applies retroactively to all exchanges past January 1, 2009.<br /><br />In order for taxpayers to utilize Rev. Proc. 2010-14, they must meet four requirements:<br /><br /><ol><li>Transfer (or be deemed to transfer) relinquished property to a QI in accordance with §1031(k)-1(g)(4) (the QI safe harbor);<span style="font-weight: bold;"></span></li><li><span style="font-weight: bold;"></span>Properly identify replacement property within the 45 day identification period (unless the QI default occurs during that period);</li><li>Fail to complete the like-kind exchange solely due to a QI that becomes subject to a bankruptcy or receivership proceeding; and</li><li>Do not have actual or constructive receipt of proceeds from sale of relinquished property (other than liability relief) prior to QI’s bankruptcy or receivership proceeding.<br /></li></ol><br />For those who qualify, this development could mean substantial money and time saved. It is unfortunate many were hurt by the recklessness which took hold of the 1031 exchange industry (LandAmerica comes to mind) but steps like Rev. Proc. 2010-14 go a long way in providing some solace now and enhanced protection in the future.<div class="blogger-post-footer">James Brennan Esq., LL.M.
Managing Director/Corporate Counsel
ES Group
11150 Sunset Hills Road
Suite 300
Reston, VA 20190
Direct 703.801.4178
Fax 703.663.9889
jbrennan@1031esgroup.com
http://www.linkedin.com/in/1031exchange
www.1031esgroup.com</div>James Brennanhttp://www.blogger.com/profile/05832322317888999210noreply@blogger.com0tag:blogger.com,1999:blog-4392823694454795519.post-87206820774083729422010-03-19T08:32:00.000-07:002010-03-19T08:34:20.211-07:00Want to 1031 into a Property You Already Own?<a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgb4HJyg2P7x6KU6dZubxGeW6OlxZR2Z7e5ZWeancfRWfRCFNeuI1qgEXYHVkFLQQA5JYT6X1Gwwakj4-Wu5rL-pBNToG1sJxENR6atAiYxw4iqsbszIf3wiwIEPW69wRMIwOviGA9OjMjE/s1600-h/buy-sell-exchange-photo.jpg"><img style="float: right; margin: 0pt 0pt 10px 10px; cursor: pointer; width: 200px; height: 150px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgb4HJyg2P7x6KU6dZubxGeW6OlxZR2Z7e5ZWeancfRWfRCFNeuI1qgEXYHVkFLQQA5JYT6X1Gwwakj4-Wu5rL-pBNToG1sJxENR6atAiYxw4iqsbszIf3wiwIEPW69wRMIwOviGA9OjMjE/s200/buy-sell-exchange-photo.jpg" alt="" id="BLOGGER_PHOTO_ID_5450368578790859666" border="0" /></a>There are times when an investor may want to sell one of his properties and invest its proceeds in another he owns. In the past the IRS forbade 1031 exchanges in such cases, however, today there are means around it. It is known as an “advanced built to suit” transaction and though it has never been explicitly supported by the IRS, it has been upheld by private letter rulings.<br /><br />The difference between the advanced build to suit transaction and a typical tax deferred exchange (or one with a build to suit component) is the type of property designated as replacement property. In a build to suit tax exchange, the replacement property is owned by a third party, with Exchange Accommodation Titleholder (EAT) obtaining the replacement property’s title, which it holds while the property undergoes its improvements. In the advanced build to suit transaction, the taxpayer is attempting to transfer funds into property already owned by him. However, Rev. Proc. 2004-51 places restrictions on using replacement property owned by the taxpayer within 6 months of the exchange. Thus, the taxpayer is unable to <a href="http://www.exeter1031.com/article_property_already_owned_by_taxpayer.aspx">accept either</a> “assignment of the LLC or direct deeding of the Replacement Property after the improvements have been made directly.”<br /><br />In order to complete this arrangement, the taxpayer must enter into a 1031 like-kind exchange agreement with a QI, after which he enters into QEAA and Construction Management Agreement with the EAT. He would then send cash or agree to a loan with the EAT, allowing the EAT to purchase replacement property and carryout the improvements. The EAT then acquires title to the replacement property and sets it up in a LLC. The EAT also has authority to appoint a Taxpayer General Contractor under the Construction Management Agreement, who acts as Fund Control, making disbursements as construction commences. After 180 days, the QI will direct the EAT to transfer the replacement property directly to the taxpayer, this is accomplished by handing over control of the LLC to the taxpayer.<br /><br />If completed correctly, with the right guidance and supervision, this transaction allows investors to greatly improve their own properties and consolidate their holdings. This flexibility can be extremely beneficial during recessions or other economic downtimes, when ancillary properties become less valuable and the need to improve core ones increases. Thus, the advanced built to suit exchange gives investors another tool to use in the marketplace.<div class="blogger-post-footer">James Brennan Esq., LL.M.
Managing Director/Corporate Counsel
ES Group
11150 Sunset Hills Road
Suite 300
Reston, VA 20190
Direct 703.801.4178
Fax 703.663.9889
jbrennan@1031esgroup.com
http://www.linkedin.com/in/1031exchange
www.1031esgroup.com</div>James Brennanhttp://www.blogger.com/profile/05832322317888999210noreply@blogger.com0tag:blogger.com,1999:blog-4392823694454795519.post-16747444281514217462010-03-15T13:05:00.000-07:002010-03-15T13:06:48.014-07:00Syndication Offers New Financing Opportunites<a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi20otr2uBJtQWdUduLPStoU1khTYEOPLSF-HKIgoUuqwSLgp3kA-XMrZtMwx55Z_XA1Un9m_2u84t0HUZNAP2Z0Q2vlurghzCkhhnu9vbHvz5q3r6IcCj7F3fszr3Olr0MyFlKtHRv17SL/s1600-h/fish.jpg"><img style="display: block; margin: 0px auto 10px; text-align: center; cursor: pointer; width: 400px; height: 265px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi20otr2uBJtQWdUduLPStoU1khTYEOPLSF-HKIgoUuqwSLgp3kA-XMrZtMwx55Z_XA1Un9m_2u84t0HUZNAP2Z0Q2vlurghzCkhhnu9vbHvz5q3r6IcCj7F3fszr3Olr0MyFlKtHRv17SL/s400/fish.jpg" alt="" id="BLOGGER_PHOTO_ID_5448954561969322882" border="0" /></a><br /><span style="color:black;">Though it may seem unlikely, there is an area of commercial real estate which is actually flowering. Headed by companies such as Passco, Inland, and American Realty Capital, “syndication” is becoming a widely popular financing and investment vehicle. Syndication takes advantage of Delaware Statutory Trusts (DSTs) and Tenant in Common (TICs) agreements by combining and funneling many small individual investments into a large commercial asset. In today’s market, where it is impossible for one investor to utilize the high loan to value ratios of the past and unlikely one would have enough cash to purchase a high value property outright, syndication offers a convenient financing alternative.<span style=""><br /><br />For more, view my full article <a href="http://currents.westlawbusiness.com/Articles/2010/03/20100304_0025.aspx?src=WBSignon">here</a>.</span></span><div class="blogger-post-footer">James Brennan Esq., LL.M.
Managing Director/Corporate Counsel
ES Group
11150 Sunset Hills Road
Suite 300
Reston, VA 20190
Direct 703.801.4178
Fax 703.663.9889
jbrennan@1031esgroup.com
http://www.linkedin.com/in/1031exchange
www.1031esgroup.com</div>James Brennanhttp://www.blogger.com/profile/05832322317888999210noreply@blogger.com0tag:blogger.com,1999:blog-4392823694454795519.post-78105490425807491482010-03-03T09:01:00.000-08:002010-03-03T10:27:00.329-08:00The Estate Tax Reanimated<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjH2_Mvq6dXJUgc3EULqhQJXqmnRgP7pT51yRJ7zR2R-9-f3NlSaNZV404t_MvxNEEhfxsHFIfHMzdOJS5SA7Zn1Ys-XCo2e5rIsjix5d_B2Pr-F9JiQd1mqsCI9sk4Zi2tjyK4X4BM4Xye/s1600-h/Frankenstein.jpg"><img id="BLOGGER_PHOTO_ID_5444475475473856306" style="FLOAT: right; MARGIN: 0px 0px 10px 10px; WIDTH: 169px; CURSOR: hand; HEIGHT: 200px" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjH2_Mvq6dXJUgc3EULqhQJXqmnRgP7pT51yRJ7zR2R-9-f3NlSaNZV404t_MvxNEEhfxsHFIfHMzdOJS5SA7Zn1Ys-XCo2e5rIsjix5d_B2Pr-F9JiQd1mqsCI9sk4Zi2tjyK4X4BM4Xye/s200/Frankenstein.jpg" border="0" /></a>Many know that the estate tax expired in 2010; however, unless you are fortunate enough to die this year, this expiration will mean nothing. What most stakeholders are banking on is lawmaking that may never happen. Without replacement legislation, the estate tax will make a vigorous return in 2011 and while many know this, the extent of the reanimated tax is not so widely reported. In 2009 the estate tax was 45% for all assets greater than $3.5 million (per spouse); in 2011, if left unaltered, it will be 55% for all assets over $1 million (per spouse).<br /><br />The thinking was with such a hike in place, it would be politically impossible to let it stand, forcing either the abolition or continuation of the tax at its 2009 rate. This was done well before the auto bailouts, the bank bailouts, cash for clunkers, the stimulus package (or packages) and possibly healthcare. Today it seems realistically impossible not to raise taxes somehow. Thus, sitting idly by and letting the estate tax simply increase on its own is a political windfall.<br /><br />Needless to say, the reduction of the amount excludable to $1 million and the increased rate of 55% will affect many people. It will no longer be a tax on rich estates in excess of $3.5 million; this will impact a large swath of upper middle class families. Many, who previously wouldn’t have considered themselves rich, will find the IRS has a much different opinion. Two effects of this plan become immediately clear, 1.) the IRS will be very busy; and, 2.) estate tax planners will be very busy. If legislators act, the exemption may be increased to pre 2010 levels (between $3-4 million); however, we are currently in a no man’s land for estate tax planning.<br /><br />For the many who are concerned, <a href="http://www.forbes.com/2010/02/23/estate-tax-state-trust-gift-personal-finance-plan-for-2011.html">here</a> are some strategies which can be utilized to avoid the estate tax.<br /><div></div><div class="blogger-post-footer">James Brennan Esq., LL.M.
Managing Director/Corporate Counsel
ES Group
11150 Sunset Hills Road
Suite 300
Reston, VA 20190
Direct 703.801.4178
Fax 703.663.9889
jbrennan@1031esgroup.com
http://www.linkedin.com/in/1031exchange
www.1031esgroup.com</div>James Brennanhttp://www.blogger.com/profile/05832322317888999210noreply@blogger.com0tag:blogger.com,1999:blog-4392823694454795519.post-89728426845087998612010-02-26T11:36:00.000-08:002010-02-26T12:49:46.649-08:00Alert: HB 417 Facilitators Act Established in Virginia<p><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgqSvsf82_7poEnYjIVFL7gXPzFF37gk47CK8eNxDvVpPIXppgAU_6NlGsVXdp7oHkUsUMGiGk_9G_2mXV_qJGUz6BGBJmV8t9wY2qGQrjZSaFgoAVCzqHyjUvjkusmDFlUsCzO018h5DYM/s1600-h/legislation.jpg"><img id="BLOGGER_PHOTO_ID_5442655060877371314" style="FLOAT: right; MARGIN: 0px 0px 10px 10px; WIDTH: 175px; CURSOR: hand; HEIGHT: 200px" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgqSvsf82_7poEnYjIVFL7gXPzFF37gk47CK8eNxDvVpPIXppgAU_6NlGsVXdp7oHkUsUMGiGk_9G_2mXV_qJGUz6BGBJmV8t9wY2qGQrjZSaFgoAVCzqHyjUvjkusmDFlUsCzO018h5DYM/s200/legislation.jpg" border="0" /></a> In response to the recent wave of 1031 exchange fraud, highlighted by the Landamerica case, Virginia has enacted a law which it hopes will better protect the integrity of 1031 transactions. Key to the new bill is the establishment of the three requirements, all of which are already standard practices at ES Group: </p><ul><li>“Exchange facilitators are required to notify exchange clients of change in control of the exchange facilitator”<br /></li><li>Maintain exchange funds in separately identified accounts or in a qualified escrow or qualified trust” <br /></li><li>“Maintain errors and omissions insurance or deposit cash or letters of credit; and to account for moneys and property” </li></ul><p>Language is also inserted prohibiting exchange facilitators from participating in various forms of fraud as well as the establishment of a max civil penalty of $2,500 for any infraction.<br /><br />Click <a href="https://leg1.state.va.us/cgi-bin/legp504.exe?101+sum+HB417">here</a> for the full bill. </p><div class="blogger-post-footer">James Brennan Esq., LL.M.
Managing Director/Corporate Counsel
ES Group
11150 Sunset Hills Road
Suite 300
Reston, VA 20190
Direct 703.801.4178
Fax 703.663.9889
jbrennan@1031esgroup.com
http://www.linkedin.com/in/1031exchange
www.1031esgroup.com</div>James Brennanhttp://www.blogger.com/profile/05832322317888999210noreply@blogger.com0tag:blogger.com,1999:blog-4392823694454795519.post-37196933675422551832010-02-18T06:39:00.000-08:002010-02-18T06:51:09.363-08:00Declaration of IRS Form 8824<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiMEGuXdfaqfqCOcrhmhjsPLkv3vzJD7N_XIsBAfjVeLAb9dxf6QPJs67UNbf0TbHTFLjx_rmg8RoPCIjjyligxhofjvo_YmaRfpOBBcdnfdU3c66dJaLfmT61uQK9Yi6AYU0GtW7yewpnu/s1600-h/quill.jpg"><img id="BLOGGER_PHOTO_ID_5439595553697261826" style="FLOAT: right; MARGIN: 0px 0px 10px 10px; WIDTH: 182px; CURSOR: hand; HEIGHT: 200px" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiMEGuXdfaqfqCOcrhmhjsPLkv3vzJD7N_XIsBAfjVeLAb9dxf6QPJs67UNbf0TbHTFLjx_rmg8RoPCIjjyligxhofjvo_YmaRfpOBBcdnfdU3c66dJaLfmT61uQK9Yi6AYU0GtW7yewpnu/s200/quill.jpg" border="0" /></a><br /><div>When in the course of the 1031 tax exchange, it becomes necessary for one party (that of the exchanger) to notify the federal government of its activities, IRS Form 8824 is required. Its purpose is two fold: 1). Ensure the IRS is notified of the exchange in the tax year “in which the first relinquished property is transferred” and 2.) Ensure a “substituted” rather than a “transferred (or carry over)” basis is recorded by the IRS. This second point is of extreme importance as it redefines the taxable basis of the replacement property.<br /><br />There are two types of basis encountered in the common tax terminology, “substituted basis” and “carryover (or transferred basis)”. In a carryover basis, the basis the property will hold is based on the previously transferred property and cannot be affected by any new capital investment. So if Thomas exchanges a property with a $100K basis, $400K in capital gains and $100K in new capital for one of $600K, the IRS will see the new property has having a basis of $100K.<br /><br />This perception is incorrect. Section 1031 only embraces a “substituted basis”.<br /><br />In a “substituted basis” any extra capital invested is added to the previous basis. So in the above example, Thomas would end up with a basis of $200K (the original $100K basis plus the $100K of new capital). This can drastically affect depreciation schedules, altering investment planning and potentially allowing clients to put more money in their pockets.<br /><br />It is unfortunate that the misconception of a “carryover” basis has become widespread in the 1031 tax exchange community because it hinders further investment. If one was given the choice of investing in two properties both with the same basis but one which required an extra $100K of capital investment, the cheaper alternative would almost invariably be chosen. However, if one knew that $100K in extra capital would create a $100K in depreciable basis, they may be more likely to choose the larger investment. The substituted basis is a rare tool provided by the IRS to encourage investment but in order to function one must know about it. </div><div class="blogger-post-footer">James Brennan Esq., LL.M.
Managing Director/Corporate Counsel
ES Group
11150 Sunset Hills Road
Suite 300
Reston, VA 20190
Direct 703.801.4178
Fax 703.663.9889
jbrennan@1031esgroup.com
http://www.linkedin.com/in/1031exchange
www.1031esgroup.com</div>James Brennanhttp://www.blogger.com/profile/05832322317888999210noreply@blogger.com0tag:blogger.com,1999:blog-4392823694454795519.post-83654756607858390722010-01-29T12:39:00.000-08:002010-01-29T12:59:36.042-08:00Development: Roth IRA Offers New Opportunities<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjDci6jN6PUP2vhzYOm0rO7RVrxNMGvq-86VZS7NDgzRzyg-T_Mvja9GyvGNRwRLtN4OYxFFEKhcivUws6rcq00BbnwmtjvKO523d7RPCpAlY4YhESfWr-_gZ86IM1TbAMBofLpmtVr8SoJ/s1600-h/opportunity.png"><img id="BLOGGER_PHOTO_ID_5432268221657289922" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 400px; CURSOR: hand; HEIGHT: 284px; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjDci6jN6PUP2vhzYOm0rO7RVrxNMGvq-86VZS7NDgzRzyg-T_Mvja9GyvGNRwRLtN4OYxFFEKhcivUws6rcq00BbnwmtjvKO523d7RPCpAlY4YhESfWr-_gZ86IM1TbAMBofLpmtVr8SoJ/s400/opportunity.png" border="0" /></a><br /><div>Starting in 2010, the existing income test for converting a traditional IRA to a Roth IRA that kept many commercial real estate investors from ever contemplating a Roth IRA no longer applies. Singles making more than $95K and couples making more than $150K are now eligible for this tax friendly program. As a result, the regulators have offered commercial real estate investors a great tax strategy going forward. </div><br /><div>Conversions that occur in 2010 will be able to split the tax liability. Why does this apply to commercial real estate? Investors now have the ability to invest excess money in a property by themselves (if they have the capital) or do so with a group a fellow investors, similar to a TIC. Unfortunately, this knowledge gap stops many advisors and their clients from taking advantage of the opportunity to own commercial real estate.</div><br /><div>Roth IRAs are powerful tools. Withdrawals are generally tax-free, but not always and not without certain stipulations (i.e., tax free when the account has been opened for at least 5 years for principal withdrawals and the owner's age is at least 59½ for withdrawals on the growth portion above principal). An advantage of the Roth IRA over a traditional IRA is that there are fewer withdrawal restrictions and requirements. Transactions inside the Roth IRA account (including capital gains, dividends, and interest) do not incur a current tax liability.</div><br /><div>For the IRS’s official word, click <a href="http://www.irs.gov/publications/p590/ch02.html#en_US_publink1000230961">here</a>. </div><br /><div>The limitations of self-directed IRAs are often (i) the amount of money people have in IRA accounts is limited and (ii) the treatment of debt inside an IRA is less attractive triggering an additional tax. </div><br /><div>Therefore, many investors are left with a decent amount of money $200,000-$2,000,000 that they have willing to allocate into real estate. If you do not like to flip residential properties, you often self-select yourself out of this self-directed investment. However, there are two important opportunities investors often miss:</div><br /><div>1) The ability to combine 1031 proceeds with Self-Directed IRA proceeds and bifurcate a purchase; and,</div><br /><div>2) The ability to syndicate investors and buy one larger commercial asset with tenant-in-common ownership (often 2, 3, or 4 partners).</div><br /><div>Note: For those of you needing background on these two strategies, you can find applicable FAQ’s <a href="http://www.1031esgroup.com/faqs.html">here</a>. </div><br /><div>If investors plan carefully, they can now open a tax friendly Roth IRA and acquire commercial real estate while its prices remain low. One can never be sure how long opportunities like this will last, as they are subject to the legislation of Capitol Hill and whims of the IRS. However, for those acting now, benefits can surely be had. </div><div class="blogger-post-footer">James Brennan Esq., LL.M.
Managing Director/Corporate Counsel
ES Group
11150 Sunset Hills Road
Suite 300
Reston, VA 20190
Direct 703.801.4178
Fax 703.663.9889
jbrennan@1031esgroup.com
http://www.linkedin.com/in/1031exchange
www.1031esgroup.com</div>James Brennanhttp://www.blogger.com/profile/05832322317888999210noreply@blogger.com0tag:blogger.com,1999:blog-4392823694454795519.post-21692447027110396962010-01-22T06:30:00.000-08:002010-01-22T08:47:45.681-08:00The 1031 Tax Exchange Market – Clinical Updates & Prognosis<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiRYLhCy2DleYMS9RC-arB-WvWCEnpxpY-FEaupcFfPZ5oUTw9AqpW00iMwRf8R58ly8UZ-pd4E-j9PO-y0pAaGFy2G3uvc_IcWY0vGo9C16a1B3BfudMs9mdgykuF_uFAZnZ2q4NfOQbUj/s1600-h/analysis2.jpg"><img id="BLOGGER_PHOTO_ID_5429573361623412738" style="FLOAT: right; MARGIN: 0px 0px 10px 10px; WIDTH: 200px; CURSOR: hand; HEIGHT: 145px" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiRYLhCy2DleYMS9RC-arB-WvWCEnpxpY-FEaupcFfPZ5oUTw9AqpW00iMwRf8R58ly8UZ-pd4E-j9PO-y0pAaGFy2G3uvc_IcWY0vGo9C16a1B3BfudMs9mdgykuF_uFAZnZ2q4NfOQbUj/s200/analysis2.jpg" border="0" /></a><br /><br /><p>Back in November, I was interviewed for the December <a href="http://www.1031esgroup.com/exchange-toolbox/industry_expert_articles/KeepingDealsMoving-01152010.pdf">issue</a> of Shopping Center Business, in a segment entitled “1031 Slowdown”. It was an appropriate title at the time, for 1031’s had indeed decreased, however, today this may not be such an accurate description. Since January 1st ES Group and our partners have seen both a spike in exchange activity of multifamily/retail investments valued between $1-20 million and an increase in conversations with prospective clients. Investment sales in many segments, including multifamily, office and retail are breathing new life into the 1031 exchange market. Many are attributing the spike to newly available commercial loan money.<br /><br />To bring people up to date on what we are seeing currently, I have composed a list regarding recent trends below: </p><ul><li>Increase in proposed 1031 QI legislation at the State Level (is actually on the table today, Jan. 21, 2010) </li><li>Increase in commercial sales with credit (BBB+) tenants of $1-20 million. </li><li>Increase in financing for buyers of relinquished property $1-10 million.</li><li>Increase in residential rental sales in high employment areas with FHA financing as catalyst. </li><li>Neutral activity in residential rental in beach communities and low employment areas. </li><li>Neutral activity in institutional commercial sales ($30 million +) </li><li>Increase in purchase of royalty interests.</li><li>Increase in aircraft sales and exchanges. </li><li>Increase in securitized debt for commercial buildings ($5 million +) </li><li>Decrease in interest rates paid by banks on 1031 deposits since 12 months ago. </li><li>Decrease in number of QI’s since 24 months ago (300 in 2006, 75 in 2010).<br /></li></ul><p>What does all of this anecdotal information translate to with regards to our future? First of all, it supports the self-correcting nature of our regulatory system, legal system, and capital markets. After LandAmerica went bankrupt, VA is passing Qualified Intermediary regulations. After the CMBS market was deemed broken, Wall Street bankers and attorneys have built and rebuilt replacements. Finally, investors have shifted their attention towards risks like the creditworthiness of tenants, which was taken for granted earlier in the cycle.<br /><br /></p><div class="blogger-post-footer">James Brennan Esq., LL.M.
Managing Director/Corporate Counsel
ES Group
11150 Sunset Hills Road
Suite 300
Reston, VA 20190
Direct 703.801.4178
Fax 703.663.9889
jbrennan@1031esgroup.com
http://www.linkedin.com/in/1031exchange
www.1031esgroup.com</div>James Brennanhttp://www.blogger.com/profile/05832322317888999210noreply@blogger.com0tag:blogger.com,1999:blog-4392823694454795519.post-25145484359879891582010-01-13T11:40:00.000-08:002010-01-13T12:45:31.549-08:00Hidden Dangers of Partnerships and the 1031 Exchange<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiRrT3rd-BTb7ziGyNxi6jw0TuRKpSy4v6zgHC5aZ_A-JCarV9Bigd70mNSqaHhBFgsOki_aAI8zC4BIuPt77kugCldObPlgS5qLiK8PRpP0uxBrH4D6QUY1mfVvFmo1JciEngwB0bgEkui/s1600-h/SeaMine.jpg"><img id="BLOGGER_PHOTO_ID_5426327045644748690" style="FLOAT: right; MARGIN: 0px 0px 10px 10px; WIDTH: 200px; CURSOR: hand; HEIGHT: 152px" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiRrT3rd-BTb7ziGyNxi6jw0TuRKpSy4v6zgHC5aZ_A-JCarV9Bigd70mNSqaHhBFgsOki_aAI8zC4BIuPt77kugCldObPlgS5qLiK8PRpP0uxBrH4D6QUY1mfVvFmo1JciEngwB0bgEkui/s200/SeaMine.jpg" border="0" /></a><br /><div>The Section 1031 “like-kind” exchange is a legal tool utilized by many investors to upgrade their real estate holdings while deferring taxation. Theoretically, investors can exchange properties indefinitely without incurring capital gains tax. However, complications can arise when these investments are made by partnerships. It is almost inevitable that somewhere along the process, a partner will want to “cash out” their investment. This can expose the entire partnership to substantial tax liabilities.<br /><br />If in order to satisfy the exiting partner, the partnership’s property is sold and proceeds distributed, the remaining investors will be subject to substantial taxation on any gains. Simple strategies, such as “buying out” the exiting member or specially allocating the gain, also subject the partners to taxation. However, several options are available to a partnership facing dissolution. These include the “drop and swap”, the “swap and drop”, the “split-off”, and the installment note. With appropriate planning a transaction can be structured that satisfies both parties.<br /><br />For partnerships that have seen their dissolution ahead of time, the “drop and swap” can be of great use. In this scenario the partnership makes a tax-free distribution of the investment property’s title to the individual investors. Once the individuals possess title, each investor may “cash out” or make a like-kind exchange. The key to executing this strategy is ensuring compliance with Section 1031’s “held for investment” requirement, thus this strategy requires considerable foresight.<br /><br />If investors do not recognize the tax issue until just before the property is disposed, a “swap and drop” may be effective. This strategy resembles the “drop and swap” but is ordered differently. Here the partnership executes a like-kind exchange, waits to avoid IRS treatment as a “step transaction”, and then drops title to the individual partners or refinances the new property to acquire cash to redeem the leaving partner.<br /><br />Alternatively, a “split-off” strategy may be effective. In a split-off, the partnership distributes tenancy in common title to the exiting partner only, then the partnership makes an exchange in its name. Since the partnership keeps title in its name, the split-off provides title continuity, satisfying the “held for investment” requirement and allowing the leaving partner to cash out or exchange their interest.<br /><br />Finally, the investors may sell the original property for cash and an installment note. In this approach the partnership distributes the exiting partner an installment note equal to his interest while the remaining investors receive cash. The remaining partners use the cash to exchange into a new property and the exiting partner only recognizes gain as note payments are received.<br /><br />The like-kind exchange provides real estate investors with a valuable wealth-building tool. But if the partnership dissolves, serious tax issues arise. Fortunately, with proper planning these risks can be minimized and transactions can be structured that maximize returns for all the partners.</div><div> </div><div>Aaron M. Gregory, JD/MBA Contributed to this Article.</div><div class="blogger-post-footer">James Brennan Esq., LL.M.
Managing Director/Corporate Counsel
ES Group
11150 Sunset Hills Road
Suite 300
Reston, VA 20190
Direct 703.801.4178
Fax 703.663.9889
jbrennan@1031esgroup.com
http://www.linkedin.com/in/1031exchange
www.1031esgroup.com</div>James Brennanhttp://www.blogger.com/profile/05832322317888999210noreply@blogger.com0tag:blogger.com,1999:blog-4392823694454795519.post-69715565158694203202010-01-07T11:51:00.000-08:002010-01-07T12:43:31.679-08:00Interview: Telly Fathaly<strong>For this weeks blog I interviewed Telly Fathaly, Vice President at <a href="http://www.sterlingrealestatecapital.com/">Sterling Real Estate Capital</a>. </strong><br /><strong></strong><br /><strong>1.) Hi Telly can you tell us a little about yourself and Sterling?</strong><br /><br />Thank you for this platform to communicate with your readers. Sterling Real Estate Capital, LLC is a Private Equity Advisory Firm that specializes in raising cash for Commercial Real Estate transactions. We serve as an intermediary between high net worth / institutional investors and operators / owners of Commercial Real Estate. Our team has an extensive industry background with principal, private equity, brokerage and Wall Street experience. We have a diversified and updated base of investment contacts and relationships that provide us with insight into the rapidly evolving attitudes and appetites of the Private Equity landscape.<br /><br /><strong>2.) What opportunities currently exist in the commercial real estate space?</strong><br /><br />From our perspective the top opportunity we’re seeing is the ability for qualified operators to establish Programmatic JV partnerships with institutional investors outside the traditional fund construct. This is a departure from the last cycle where fund managers held more operating control over money being deployed by institutional groups. Whether we’re speaking about separate accounts, pledge funds or a more standard programmatic JV arrangement, the benefits to the operator can be significant. Most of the groups we work with are able to more effectively attract deals and concentrate on execution rather than scramble to raise money for individual opportunities. They’re able to jump out in front of problems and issues ahead of time, allowing for the benefit of playing offense in a market beginning to provide real opportunities for groups that are correctly capitalized.<br /><br /><strong>3) How do commercial brokers work in cooperation with Sterling?<br /></strong><br />Commercial Brokers are an essential part of our success and it has always been important for us to incentivize client and deal referrals to facilitate continued relationships. Our reputation in this regard is outstanding and we can provide clarity as to broker participation very early in our process.<br /><br /><strong>4) What is your "sweet-spot" of transactions?</strong><br /><br />Our “sweet spot” consists of a specific type of organization rather than a particular transaction. Our top clients and prospects all have one thing in common, an ability to grow and improve as the realties of our industry continue to manifest. We’re looking for the companies that have what it takes to survive and thrive and help provide them with the cash that will fuel their growth. There’s a window of change and opportunity opening for an undetermined period of time right now. The groups able to solve their problems and get organized will be able to step up to a new level over the next couple of years. We’re already seeing it happen.<br /><br /><strong>5) What asset classes do you like in 2010?<br /></strong><br />Investors don’t seem to be as particularly focused on asset classes as much as they are on asset specific factors. We’ve seen two types of approaches emerge. The first is a more familiar return driven short-term play. This usually consists of solid real estate in A locations where some sort of circumstance has provided a chance to acquire at an attractive basis. The second is a renewed emphasis on more fundamental strategies of longer investment periods and increased attention to equity yield from cash flow. This is a departure from LP’s who were previously focused on value generation exclusively being quantified by IRR. Here the investors, mostly high net worth family offices, are buying cash flow at a discount and expecting a premium to account for the risks of Real Estate.<br /><br /><strong>6) What are Institutional Investors Looking for from Operators in 2010?<br /></strong><br />Institutional Investors are looking for experienced operators with expertise in a specific product type and / or geographic area. Equity co-investment and “alignment of interests” has become a key consideration with debt capacity and ability to provide guarantees if necessary. Finally, operators should have a good network for originating off market transactions and provide investors with compelling and unique opportunities.<br /><br />Please feel free to call or write with any questions or feedback.<br /><br />Email: <a title="blocked::mailto:telly@sterlingrealestatecapital.com" href="mailto:telly@sterlingrealestatecapital.com">telly@sterlingrealestatecapital.com</a><br /><br />Phone: (404) 995-1504.<div class="blogger-post-footer">James Brennan Esq., LL.M.
Managing Director/Corporate Counsel
ES Group
11150 Sunset Hills Road
Suite 300
Reston, VA 20190
Direct 703.801.4178
Fax 703.663.9889
jbrennan@1031esgroup.com
http://www.linkedin.com/in/1031exchange
www.1031esgroup.com</div>James Brennanhttp://www.blogger.com/profile/05832322317888999210noreply@blogger.com0tag:blogger.com,1999:blog-4392823694454795519.post-33388424078550713902010-01-02T12:09:00.000-08:002010-01-02T12:21:25.181-08:00Making Sure Your Goals are SMARTWhile this blog covers commercial real estate, investment real estate, and building wealth via like-kind exchange, I would like to take the New Year as an excuse to cover goal-setting in all aspects of your professional and personal life. As New Years Resolutions are set you resolve to take on a commitment that will last you at least a few months. With the fact that many people set unrealistic resolutions for themselves, you should take heed of a standard life coach saying- "the most important promises are the ones we make to ourselves." Seriously, if you can not trust yourself, you lose faith in yourself (equals low self-esteem) and you lose faith in the words and promises of those around you (equally bad). That being said, when setting your yearly goals, make sure they are SMART (to be defined next).<br /><br />Make sure that your goals are SMART. SMART is an acronym that sports psychologists use to define good goals which are Specific, Measurable, Attainable, Realistic, and Time-anchored. A specific goal answers the questions of who, what, where, when, how (e.g. "Finish the Local 5K on August 22 in less than 21 minutes"). Goals that are measurable let you know when the goal has been achieved and it's time to set new goals (e.g. "Weigh 166 pounds before July 4"). Attainable goals take into account the process you will take to get there (e.g. "Do one hour of exercise, six days a week"). Realistic goals are those which challenge you, but are not impossible. For example, if Betty's training is going well in the first few weeks, it would not be realistic for her to inflate her goal to "Run a sub-three-hour marathon" when her previous best time was 4:15. Time-anchored goals give you a specific end date that is neither so near that you don't have time to reach your goal, nor so far that you lose interest in your goal.<br /><br />These sports-oriented goals can be crossed-over to your professional life very easily. For job changers it can be, make 3 informational interviews by May 1st with senior executives. For disorganized, busy folks it can be keep inbox to under 50 emails for two months or until March 1, 2010. For the salesmen and saleswomen of the world who have to go through the "No's to get to the <span class="blsp-spelling-error" id="SPELLING_ERROR_0">Yes's</span>", you can state a weekly goal of 30 cold calls per month with 2 appointments with qualified leads.<br /><br /><br />So go out there and make promises to yourself that you can keep!<div class="blogger-post-footer">James Brennan Esq., LL.M.
Managing Director/Corporate Counsel
ES Group
11150 Sunset Hills Road
Suite 300
Reston, VA 20190
Direct 703.801.4178
Fax 703.663.9889
jbrennan@1031esgroup.com
http://www.linkedin.com/in/1031exchange
www.1031esgroup.com</div>James Brennanhttp://www.blogger.com/profile/05832322317888999210noreply@blogger.com0tag:blogger.com,1999:blog-4392823694454795519.post-18210549287243286592009-12-23T12:09:00.000-08:002009-12-23T13:13:02.587-08:001031 Exchange Case Study Update- Oil and Gas<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiJiPReHnvbOgB1SCqUiHH9rSA9FvUSP_fJiRLKpaQFeWYEFGXAu7NpZMlthhTNDMniRis9JhTc8vK9VQXXH0HtqL2zCCsZ-xWQIwovfOjTCWsfD4kWSd9mRqsmQnGDJqv7DNKsOKQ5alPA/s1600-h/Oilwell.gif"><img id="BLOGGER_PHOTO_ID_5418542111758715010" style="FLOAT: right; MARGIN: 0px 0px 10px 10px; WIDTH: 246px; CURSOR: hand; HEIGHT: 320px" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiJiPReHnvbOgB1SCqUiHH9rSA9FvUSP_fJiRLKpaQFeWYEFGXAu7NpZMlthhTNDMniRis9JhTc8vK9VQXXH0HtqL2zCCsZ-xWQIwovfOjTCWsfD4kWSd9mRqsmQnGDJqv7DNKsOKQ5alPA/s320/Oilwell.gif" border="0" /></a><br /><div><strong>The Benefits of Oil and Gas Royalties</strong>:</div><br /><div></div><br /><div>In the past three months Exchange Solutions Group has been witness to a most interesting and ingenious trend. A group of savvy local real estate investors, who owned fully depreciated rental property (Adjusted Basis of practically Zero), desired to defer Capital Gains but lacked the optimism to reinvest locally in rental real estate. To solve this problem, these investors bought oil and gas royalty interests that qualify for 1031 exchange treatment (yes, royalties are "like-kind" with rental real estate). These investments were cash flow rich and chock-full of depletion (depreciation's equivalent in the mineral interest world). Thus, in one fell swoop, investors were able to defer their Capital Gains taxes, obtain property with strong cash flows, AND inherit fresh, tax deductable depletion schedules.<br /><br />The lesson to be learned is that creativity can be a key component of a successful 1031 exchange. Who says you have to trade office space for other office space, or land for land? No one! Under the correct structuring, the 1031 tax exchange can be quite flexible and fit many needs. </div><br /><div><br />For more information about Oil & Gas Royalties and the 1031 Exchange, click <a href="http://www.oilgas1031.com/">here</a>. </div><div class="blogger-post-footer">James Brennan Esq., LL.M.
Managing Director/Corporate Counsel
ES Group
11150 Sunset Hills Road
Suite 300
Reston, VA 20190
Direct 703.801.4178
Fax 703.663.9889
jbrennan@1031esgroup.com
http://www.linkedin.com/in/1031exchange
www.1031esgroup.com</div>James Brennanhttp://www.blogger.com/profile/05832322317888999210noreply@blogger.com0tag:blogger.com,1999:blog-4392823694454795519.post-67417120836472891572009-12-18T13:30:00.000-08:002009-12-18T13:50:48.034-08:00General Growth Bankruptcy: Real Estate’s Foundations are Shaking<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgddU_3PL2JXvOnD8ceGpZyoAL8Azi0SH7_Rgb_O8gJqLuvW8lxvZSPYOeMcIRPb4dK061LC-NqfmMzegv97Fh1a-Y4XcDWtCsf773Ny0W0q_rS0-SMdkKr-H5juR7p51RXT2dkzs8vyS9A/s1600-h/Niigata_kawagishi_aprtment.jpg"><img id="BLOGGER_PHOTO_ID_5416695813299318130" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 400px; CURSOR: hand; HEIGHT: 272px; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgddU_3PL2JXvOnD8ceGpZyoAL8Azi0SH7_Rgb_O8gJqLuvW8lxvZSPYOeMcIRPb4dK061LC-NqfmMzegv97Fh1a-Y4XcDWtCsf773Ny0W0q_rS0-SMdkKr-H5juR7p51RXT2dkzs8vyS9A/s400/Niigata_kawagishi_aprtment.jpg" border="0" /></a><br /><div><a href="http://currents.westlawbusiness.com/Redirect.aspx??cid=&src=&url=http://business.westlaw.com/find/default.wl?rs=ZBNL0008&findtype=bcf&db=WLB-CMPNYBCSRBD&cite=CIK(0000895648)&vr=2.0&mt=WLBDueDiligence">General Growth</a>’s bankruptcy shakes the foundations of the commercial real estate market, and the financing documents that hold it up. The bankruptcy plot touches on a wide range of issues, from the sacredness of corporate entities to director independence to the prevalence of Delaware entities. The GGP plot, thus far, ends at a place that is a happy one for developers and a cautionary one for lenders. Before getting into the specifics, it’s worth noting the overall impact: commercial real estate and its financing structures will never be quite the same.</div><br /><div><br />As background, complex entity structuring pervades the commercial real estate market, from large mall owners such as <a href="http://currents.westlawbusiness.com/Redirect.aspx??cid=&src=&url=http://business.westlaw.com/find/default.wl?rs=ZBNL0009&findtype=bcf&db=WLB-CMPNYBCSRBD&cite=CIK(0001063761)&vr=2.0&mt=WLBDueDiligence">Simon Property Group</a> and General Growth to more regional investor-developer types, such as Tishman Speyer and the Bonaventure Group. Motivating this are both structuring factors and financing drivers.</div><br /><div></div><br /><div>From a structuring perspective, commercial real estate holding companies typically have asset organizational charts as complex as an ultra-modern family tree, with different sets of parents, abundant offspring, and multiple sets of grandparents. This structure originates in the need for 3 things: investment facilitation; capital structure layering; and liability reduction. A note as to the latter: liability-shy real estate developers work to mitigate environmental, financial and other legal liability via LLC formations intended to protect the mother-ship or personal family financials from each property’s unique set of risks. </div><br /><div></div><br /><div>For my entire article click <a href="http://currents.westlawbusiness.com/Articles/2009/12/20091215_0023.aspx?cid=&src=">here</a>. </div><div class="blogger-post-footer">James Brennan Esq., LL.M.
Managing Director/Corporate Counsel
ES Group
11150 Sunset Hills Road
Suite 300
Reston, VA 20190
Direct 703.801.4178
Fax 703.663.9889
jbrennan@1031esgroup.com
http://www.linkedin.com/in/1031exchange
www.1031esgroup.com</div>James Brennanhttp://www.blogger.com/profile/05832322317888999210noreply@blogger.com0tag:blogger.com,1999:blog-4392823694454795519.post-55009622484527315432009-12-04T12:47:00.000-08:002009-12-10T13:58:11.739-08:00The Death of the Estate Tax?<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj2o5jZcvUzXv1xhouh3c-OwdLrwb5iVDolU8hVCc1ZOa-3tz9Ug-bmgd9r3t5WYKprr0PuwlTKhsby8G-cn0CVk8yqbgl3zKFWa_OMEPN1VMWwFtJm6Lqrb94db3qm9uETtOLoAFiAejwy/s1600-h/deathtax2.jpg"><img id="BLOGGER_PHOTO_ID_5411491036547802194" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 400px; CURSOR: hand; HEIGHT: 272px; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj2o5jZcvUzXv1xhouh3c-OwdLrwb5iVDolU8hVCc1ZOa-3tz9Ug-bmgd9r3t5WYKprr0PuwlTKhsby8G-cn0CVk8yqbgl3zKFWa_OMEPN1VMWwFtJm6Lqrb94db3qm9uETtOLoAFiAejwy/s400/deathtax2.jpg" border="0" /></a><br /><div><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEglhaN_LSUalxBmtW0oLOgzVGV4AaT1toV1L77M8cSzBbih1cqZZ4k333cqlJ8J7TaSbDN337bBvXe2mv3y5dmOKITlxMIfG-xnOMSSfC_J2FQsjPf8gy1EAofRAhe-GWpVnlOKmeyzYTrd/s1600-h/deathtax2.jpg"></a>The Estate Tax (or Death Tax), which levies a 45% top tax rate on couples estates valued over $7 million and individuals over $3.5 million, is slated to <a href="http://www.bloomberg.com/apps/news?pid=20601087&sid=aKsvsMlTDdbQ&pos=9">expire</a> on Dec. 31st. However, it is also scheduled, like a beheaded hydra, to <a href="http://www.washingtonpost.com/wp-dyn/content/article/2009/12/02/AR2009120203470.html">reappear</a> with more ferocity in 2011, with top rates of 55% for estates valued over $1 million. This makes 2010 a weird twilight zone because it will effectively be without an estate tax. Assuming people don’t view this as a can’t miss opportunity to dispose of their parents, there could still be affects on investors and their estates.<br /><br />Many expect some sort of resolution in the near future as the uncertainty which would be caused through the tax’s expiration would cause much confusion. People would like to know what to plan for, rather than going into the future somewhat blind. However, the debate on just what the resolution will be is currently becoming more contentious. Many on the right favor either imposing an estate tax with rates lower than those currently or abolishing it all together. Those on the left tend to favor higher rates or keeping the status quo. One possibility currently making the rounds is that congress will pass a law keeping the tax at current levels around March and apply it retroactively to the previous months. As it stands right now, the House has just passed a law which would extend the current rates but this has not yet been ratified by the Senate.<br /><br />If the tax should expire, the estate tax would be replaced by a capital gains tax on all but the first $1.3 million in inherited assets. Heirs who sell those assets would pay between 15 to 28 percent in taxes on any appreciation in value those assets observed from the date they were acquired. Whether or not this situation is more preferable to that of the estate tax most likely depends on the wide range of situations investors may find themselves in. In anycase, it seems the fates of many depend on the political machine in Washington and its eventual decision.<br /><br />Note: A little known fact is that one of the largest supporters of the estate tax is none other than the life insurance lobby. Why? Because they make a lot of money through selling life insurance policies which provide liquidity for those dealing with estate taxes.<br /><br /><br /><div></div></div><div class="blogger-post-footer">James Brennan Esq., LL.M.
Managing Director/Corporate Counsel
ES Group
11150 Sunset Hills Road
Suite 300
Reston, VA 20190
Direct 703.801.4178
Fax 703.663.9889
jbrennan@1031esgroup.com
http://www.linkedin.com/in/1031exchange
www.1031esgroup.com</div>James Brennanhttp://www.blogger.com/profile/05832322317888999210noreply@blogger.com0tag:blogger.com,1999:blog-4392823694454795519.post-47906296149202710412009-11-23T06:34:00.000-08:002009-11-23T08:26:26.089-08:00Easy Money Can Lead to Uneasy 1031 Exchanges<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhwyll8yOHuoPkCeyRWMVf6wYcvjS41tju6sCQHz2qgzj5O78kjhiAanZpwgTntafOTUvWTcUNAwiLDu0Shu4mFiEFqAmVG1CaL6zDE3zNadS__8uGB9z5BXOBBsgOk8Lf8Ftor8c7Dvs0w/s1600/easymoney_500.jpg"><img id="BLOGGER_PHOTO_ID_5407307936710892562" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 400px; CURSOR: hand; HEIGHT: 370px; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhwyll8yOHuoPkCeyRWMVf6wYcvjS41tju6sCQHz2qgzj5O78kjhiAanZpwgTntafOTUvWTcUNAwiLDu0Shu4mFiEFqAmVG1CaL6zDE3zNadS__8uGB9z5BXOBBsgOk8Lf8Ftor8c7Dvs0w/s400/easymoney_500.jpg" border="0" /></a><br />Do you know what a <a href="http://www.1031esgroup.com/exchange-toolbox/code_regs_rulings/irs-code/concise-overview-of-sections.html">1031 exchange</a> is? Many investors think they have a handle on it. Unfortunately, often they know enough to appreciate the sentiment but not enough to navigate its many nuances. As investors learn the hard way, one false step can lead to millions of dollars forfeited in <a href="http://www.1031esgroup.com/exchange-toolbox/industry_expert_articles/Making-the-Best-of-a-bad-situation.pdf">failed 1031 exchanges</a>.<br /><br />For starters, a 1031 exchange is a transaction whereby investors are allowed to sell one property and obtain another without paying capital gains tax. But if you went on that definition alone, you would most likely find yourself in violation of the IRS code, because like all things involved the IRS, there are layers. A key element, often missed, is that to be eligible the property must be held “for productive use” (i.e. not for purposes of reselling). This is catching more people lately because in our current economic climate there is a desire to buy now when prices are low and then quickly flip the property.<br /><br />A 1031 exchange is not for the “<a href="http://www.1031esgroup.com/exchange-toolbox/code_regs_rulings/irs-code/concise-overview-of-sections.html">intent to resell</a>”; the IRS has been very clear about this and will invalidate your exchange if it sees that as the true purpose. Furthermore, even if you complete the exchange and then dispose of your new property immediately after, the IRS will retroactively declare your 1031 exchange defunct because the new property was not held for qualified purposes. In short the mantra is intent. There are some common rules of thumb, such as if you hold the property for a year and a day or two tax years you are perceived to be “less aggressive” amongst most groups of tax advisors. But no where does the IRS or congress say this, it is just a general understanding that has evolved. The only way to be “100% buttoned-up” is to contact a CPA or tax attorney before proceeding with any aspect of the exchange and evaluate your unique facts and circumstances. In the end it is important to remember you have to be an investor, not a <a href="http://www.1031esgroup.com/exchange-toolbox/code_regs_rulings/irs-private-letter-rulings/irs-private-letter-rulings-2007-01008.html">dealer</a>, to reap the rewards of a 1031 like-kind exchange.<div class="blogger-post-footer">James Brennan Esq., LL.M.
Managing Director/Corporate Counsel
ES Group
11150 Sunset Hills Road
Suite 300
Reston, VA 20190
Direct 703.801.4178
Fax 703.663.9889
jbrennan@1031esgroup.com
http://www.linkedin.com/in/1031exchange
www.1031esgroup.com</div>James Brennanhttp://www.blogger.com/profile/05832322317888999210noreply@blogger.com0tag:blogger.com,1999:blog-4392823694454795519.post-86297421538185736782009-11-20T07:53:00.000-08:002009-11-23T08:40:07.697-08:00The 1031 Exchange in Relation to Vehicles<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhu-AxEw4Xsr3vlVfRoPJZDhGeAWKeb3s-lmGsc77hGVpd6CPbgfYOBaB53dcszIOs1Os6PmULIyEj9KCfAmlbldr6L27lLShL0maAz64Wa989Db7avTa9-odKADqigdG7qJ6lpQa9yLgE4/s1600/cessna.jpg"><img id="BLOGGER_PHOTO_ID_5406218695897507154" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 400px; CURSOR: hand; HEIGHT: 203px; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhu-AxEw4Xsr3vlVfRoPJZDhGeAWKeb3s-lmGsc77hGVpd6CPbgfYOBaB53dcszIOs1Os6PmULIyEj9KCfAmlbldr6L27lLShL0maAz64Wa989Db7avTa9-odKADqigdG7qJ6lpQa9yLgE4/s400/cessna.jpg" border="0" /></a><br /><div>It is widely known that <a href="http://www.1031esgroup.com/faqs.html">1031 exchanges</a> apply to different property types, such as office to multifamily or even raw land to oil wells. However there is usually some uncertainty about using a 1031 exchange in the case of vehicles, such as airplanes or boats. The rule of thumb in these circumstances is that 1031 exchanges are acceptable but only within the <a href="http://www.1031esgroup.com/exchange-toolbox/code_regs_rulings/dept-treasury-regulations/Section_1.1031_of_the_Treasury_Regulations.pdf">same asset class</a>. You can trade an airplane for another airplane but not for a boat.<br /><br />The reasons for exchanging vehicles are slightly less intuitive than those for exchanging real estate assets. The usual purpose behind the 1031 exchange is to defer the tax you incur on appreciation in value in the underlying real estate. Vehicles represent another story, as they rarely appreciate in value. Instead, 1031 exchanges are primarily used with regard to vehicles in order to avoid “<a href="http://www.blogger.com/www.1031esgroup.com/exchange-toolbox/cost.../1031-Recapture.ppt">depreciation recapture</a>”.<br /><br />In order to illustrate this point with more clarity, here is an example:<br /><br />Three smaller trainer Cessna aircrafts from the 1980s were exchanged for a new Cessna. When you buy a plane for 500k, you depreciate it over 5 years to offset its business income. When you get to year 6 your adjusted basis is zero so if you sell you trigger "depreciation recapture" a tax on your 5 years of depreciation. If you buy a plane of equal or greater to 500k, you will defer these gains. Most people "trade up" to get new basis by the amount of the trade up. So in my example you can buy a 650k plane and have 150k "fresh basis".<br /><br />So here we can see how the 1031 exchange can be of great value to those who own fully depreciated vehicles. This is an important point to remember, as it is often is forgotten, costing many to waste valuable resources on unnecessary taxes. </div><div class="blogger-post-footer">James Brennan Esq., LL.M.
Managing Director/Corporate Counsel
ES Group
11150 Sunset Hills Road
Suite 300
Reston, VA 20190
Direct 703.801.4178
Fax 703.663.9889
jbrennan@1031esgroup.com
http://www.linkedin.com/in/1031exchange
www.1031esgroup.com</div>James Brennanhttp://www.blogger.com/profile/05832322317888999210noreply@blogger.com0tag:blogger.com,1999:blog-4392823694454795519.post-2300306431069733962009-11-13T13:09:00.000-08:002009-11-23T08:46:53.788-08:00LandAmerica Settlement Leaves Guidance on How to Handle Proceeds<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgnsjb2Q55YueVgyxjyGMxlmBv9sz_G5oyshPca1c5zqaTOzoekEL5PCvEyjuk96DcHUbTpQA-uK1w-utiuBVzL422e71KHqBxxRccFBwlUjzJjRf3QpUebTpgat6L7aW4DJiObLvM-OEaM/s1600-h/guide.gif"><img id="BLOGGER_PHOTO_ID_5403698852204321314" style="FLOAT: right; MARGIN: 0px 0px 10px 10px; WIDTH: 277px; CURSOR: hand; HEIGHT: 278px" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgnsjb2Q55YueVgyxjyGMxlmBv9sz_G5oyshPca1c5zqaTOzoekEL5PCvEyjuk96DcHUbTpQA-uK1w-utiuBVzL422e71KHqBxxRccFBwlUjzJjRf3QpUebTpgat6L7aW4DJiObLvM-OEaM/s320/guide.gif" border="0" /></a><br /><div>Imagine waking up one morning and getting a call from your bank informing you that for every dollar you had, you now have quarters. In other words, there is only 25% of your cash left. This horrible scenario is now dawning over many former LandAmerica 1031 exchange customers and they may have <a href="http://www.richmondbizsense.com/2009/10/20/landamerica-settlement-hard-swallow-for-former-customers/">little choice</a> but to accept.<br /><br />Close to 350 former LandAmerica customers had until November 10 to vote on a plan which would have split the proceeds of a bankruptcy ruling according to the type of 1031 <a href="http://www.1031esgroup.com/exchange-toolbox/code_regs_rulings/irs-private-letter-rulings/irs-private-letter-rulings-2005-50005.html">exchange agreement</a> they had in place (A U.S. trustee has filed an <a href="http://www2.timesdispatch.com/rtd/business/local/article/B-LAND13_20091112-221408/305397/">objection</a> to the ruling which has delayed proceedings). Customers who set up non-segregated plans would have received only $0.25 for every dollar held, those with segregated accounts would have received $0.70, and those who specified their funds be held in an <a href="http://www.1031esgroup.com/exchange-toolbox/code_regs_rulings/irs-private-letter-rulings/irs-private-letter-rulings-2006-31012.html">escrow account</a> would have received $0.97.<br /><br />The reason this tragedy came about was that those customers in LandAmerica without segregated accounts essentially had their money commingled with other customers’ exchange assets. This cash was then used for investment purposes, in this case, auction rate securities which eventually were frozen. As unimaginable as it may seem, this sort of account process is commonplace among many large corporations who facilitate 1031 exchanges. Once your money is handed to them, unless you have asked the question or direct the <a href="http://www.1031esgroup.com/exchange-toolbox/code_regs_rulings/irs-news/irs-notice-2004-0230.html">QI</a> yourself, your cash is dumped into the communal pool of assets. More importantly, you have the worry that the exchange group does not have any knowledge of where the money is held. Your money may be wired to “Treasury Services” such as what happened at LandAmerica.<br /><br />What has emerged from this case is that you can obtain the same protection for you assets by having the appropriate contract language in place and making sure your proceeds are in separately identified accounts (which <a href="http://www.1031esgroup.com/aboutus.html">ES Group</a> uses 100% of the time). Had this been done, LandAmerica customers would have been able to obtain higher recoveries. Of course, hindsight is always 20/20 and this provides little consolation to those who have seen their wealth disappear. Cases like LandAmerica demonstrate who you do business with and how you do it, is of paramount importance.<br /><br />At Exchange Solutions Group, we have always ensured our customers’ investments were safe through allowing customers to identify their own bank in which their money will be held. Though it may seem obvious, this option is not available at most other 1031 exchange corporations. By allowing customers to choose their own bank we allow them to introduce a third party (a banker) who is separate from the exchange and can ensure their investments are alone in a separately identified account. The essence of the 1031 exchange is to defer capital gains taxes and continue your investment; this becomes a failed strategy if it’s derailed by poor corporate decision making, or alternatively not knowing what pitfalls to lookout for! </div><div class="blogger-post-footer">James Brennan Esq., LL.M.
Managing Director/Corporate Counsel
ES Group
11150 Sunset Hills Road
Suite 300
Reston, VA 20190
Direct 703.801.4178
Fax 703.663.9889
jbrennan@1031esgroup.com
http://www.linkedin.com/in/1031exchange
www.1031esgroup.com</div>James Brennanhttp://www.blogger.com/profile/05832322317888999210noreply@blogger.com0