Maryland 1031 Non-Resident Pitfall

Like-Kind Exchanges are fairly identical state-by-state. However, locally, in Maryland we have a big pitfall to watch out for when conducting a 1031 Exchange. When your seller is a Non-Resident of Maryland (does not personally call Maryland their domicile) and they plan to conduct a like-kind exchange upon the sale of a Maryland property, the client must file an exemption form with the Maryland State Comptroller at least 21 days in advance of the relinquished property settlement.

While this may seem trivial, I have seen this one item derail both portfolio sales of one billion dollars and Baltimore row house sales for $50,000.

To obtain an exemption certificate, nonresident exchangors must submit by mail to the Comptroller of Maryland, twenty-one days in advance of settlement, Maryland Form MW506AE, Application for Certificate of Full or Partial Exemption. The Comptroller’s Office will then issue the taxpayer their certificate.

If a nonresident taxpayer has income from a Maryland property (even if there is a net loss), they need to file a Maryland Form 505, Maryland Nonresidential Income Tax Return, annually. If the Form 505 has not been filed for previous years, the Comptroller’s office may reject the application for exemption as there is no Maryland record that the property was held for business or rental purposes to qualify for the IRC Section 1031 exemption.

No tax will be collected if the seller certifies the property was their principal residence in accordance with the federal rules in IRC Section 121.

If an individual or a corporation has paid withholding tax at settlement in excess of the amount owed, they may file an Application for Tentative Refund of Withholding on Sales of Real Property by Nonresidents (Maryland Form MW506NRS). The request for refund may be filed with the Comptroller after 60 days have elapsed from the date the tax was paid to the Clerk of the Court or Department of Assessments and Taxation.

Here is a link to the form:
http://forms.marylandtaxes.com/current_forms/MW506AE.pdf.

Call with any questions.

As always, for your clients seeking a Qualified Intermediary, don't hesitate to reach out and schedule a free in-person consultation in the DC area.

Sincerely,

James Brennan Esq.,LL.M.
Exchange Solutions Group, LLC
Principal/Corporate Counsel
11150 Sunset Hills Road, Suite 300
Reston, VA 20190
Direct 703.801.4178
Fax 703.663.9889

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Hot Off the Press! Net Lease Advisor First Quarter 2009

www.calkain.com/news/newsletter/2009/2009Q1Newsletter.pdf

ES group was featured in the First Quarter edition of the Net Lease Advisor. Please give us feedback on our business model as we are constantly refining our value proposition!

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A Week in the Life of a QI

First, what's a QI right?

Those two letters keep me employed. Functioning as a qualified intermediary is actually not a complicated process. However, educating clients on how to execute a 1031 exchange is a difficult undertaking. Most clients, attorneys, CPAs grasp the concept of capital gains. However, rolling out a marketing plan on alternative ways to redploy capital in a tax-efficient way is difficult.

This week was a good example of a cross-section of my activities:

I conducted a realtor seminar for McEnearney Real Estate in Washington, DC. McEnearney has long been a dominant player in Washington DC's Alexandria submarket. However, they recently opened a DC office and actually converted many agents from Long and Foster and Randall Hagner in that region.

Every 1031 seminar I have been to in years besides my own has a slide like this:

Now when looking at this slide can you figure out what a QI or 1031 is? Does it remind you of an Earth Science diagram from middle school?


I have always simply described the process with a diagram of the "Old Property" Closing and the "New Property" Closing and showed the QI in-between the two. Usually that diagram suffices for the average person's understanding that we are literally the go-between, middleman, and they don't call us"intermediary" for nothing!


After the seminar at McEnearney, I taught a 1.5 hour Continuing Ed seminar at the Southern Maryland Association of Realtors. SMAR (as they are endearingly called) has a great platform with updated classes. I was impressed that 2/3 of the room had already done a 1031 in the past. Carolyn Guy, the moderator, had actually conducted a Reverse Exchange. This is where you Buy the New Property before you Sell your Old Property. It is fairly complex as you have to create an EAT (Exchange Accomodating Titleholder) to hold title to the New Property while you sell your Old Property.

Wednesday night turned to fun with the ICSC crowd. Jay Steele of Hirschler Fleischler was kind enough to take 14 of us out to eat at Washington, DC's Caucus Room. It was DC's Restaraunt Week so the place was packed; however, we had a private room. With our room filled with brokers, engineers, and attorneys was filled with the current war stories on operating in this unprecedented time. Thankfully, Jon Hipp of Calkain was still able to lighten the mood with his story of attending the Super Bowl and riding around Tampa in a Lamborghini in 2009. Obviously, there are bright spots in the Economy!


This morning I attended a great event by Accelerent. The event had hundreds of people. I was invited by John McManus of Virginia Commerce. The keynote speaker was Cynthia Cooper.

Ms. Cooper shared an awe-inspiring tale of how she dealt with the ethical dilemma of uncovering fraud in a corporate environment and blowing the whistle on her employee counterparts after discovering accounting fictions. This was a great tale of ethical dilemmas we all face.

Overall, these highlights set the tone. Under all this outbound stuff we still had to actually conduct business and service our clients. Its a tough juggling act sometimes. So I better go return some calls!

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Athens, GA, and Reynolds Plantation

Just arrived back from a 3 day excursion to Georgia visiting the city, its University, and nearby Reynolds Plantation on Lake Oconee. The area is home to many rental properties and second homes for affluent Atlanta residents. So many 1031s are done here that the Board of Realtors site has a link to "1031 Tax Exchange". Unfortunately they have no content now (February 16th) but I just emailed them to rectify their void in the marketplace!



Athens, Georgia, is home to the University of Georgia. In commercial real estate, Georgia's Terry School of Business is one of the top ranked programs for specializations in both Real Estate and Insurance.



The University has seen its academic reputation rise exponentially since Georgia's Hope scholarship program was started in 1993. The merit-based scholarship allows any resident of the state of Georgia to attend any public college in the state without paying tuition, provided they maintain a 3.0 GPA. The arch on the right, however, supposedly has a curse that if you walk under it as a Freshman you may not graduate in four years.


During our visit, we watched a very close basketball game between the Florida Gators and the Georgia Bulldogs. The game had a very surprising outcome for most locals. The Georgia basketball team managed to avoid a winless conference season by knocking off Florida 88-86 in front of a lively squad of 'Dawgs. We proceeded to grab dinner at East West Bistro in Downtown Athens. After dinner, we slept, ran a 5k, and moved on to Lake Oconee.

The Reynolds plantation offered many real estate opportunities. Houses for sale crossed most demographics with some homes like this one being pretty much out of 99% of the population's' wallet:







The History of the Reynolds Plantation from the Reynolds marketing collateral is:





"Reynolds Plantation is part of what was once known as "Cracker's Neck," a highly favored section of Greene County (named for Revolutionary War hero General Nathaniel Greene). After a period of decline, approximately 7,000 acres of Cracker's Neck were reclaimed by Mercer Reynolds Sr., who built a hunting retreat named "Linger Longer." A Greene County native, Reynolds was a highly successful businessman and inventor, earning a patent for his process of solidifying cottonseed oil. Although he moved to Chattanooga in the 1920s, he maintained ties to the area, often returning to Linger Longer to hunt, fish and relax.



During this same period, James Madison Reynolds, Sr., Mercer's cousin, was assembling land in the area for timber production. By the late 1930s the combined land holdings of the Reynolds family approximated 10,000 acres, which were left in a trust. In 1985, the trust was released to his grandchildren.



The owners of Reynolds Plantation began working to determine the best use of the land that their family had owned for so many years. As development of Reynolds Plantation continues, members of the Reynolds family remain intensely mindful of the historical value of the land and the need to preserve, and enhance, its natural beauty and legacy."


We stayed at the Ritz-Carlton Lodge. My wife had surprised me with massages after a 5k race we ran. The massage was terrific and I have learned that I need to stretch my IT band and calves better according to the wonderful and talented Ms. Vicki.


The takeaways from the trip: college students have the best life ever and a close second are the residents of Reynolds Plantation. Overall, I suggest a visit to both!






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Charm City and Retail Real Estate

I just returned from a visit to Charm City Baltimore to attend a commercial real estate happy hour focusing on retail real estate. For any of you who aren't familiar with retail real estate, think of your local mall or strip mall-- these brokers and developers build and tenant these buildings. I attended the meeting with a colleague, Jeff Bogart, of Calkain Cos. Jeff was eager as well to see how Baltimore compared to the DC market. We both were invited to the event by Eastern Construction's marketing exec, Teralynn Lueben.

International Council of Shopping Centers is the trade association representing this segment of the commercial real estate market. If you would like to learn more about this market segment you should attend one of their Regional or National dealmaking conferences. I have attended DC, NY, and the National convention in Las Vegas.

Back to Baltimore- I never have really had dealings with Baltimore's retail broker population. I have conducted office 1031 exchanges and residential investment property transactions; however, Baltimore retail is new to me.

What really blew my mind about the trip is Baltimore's "newer section of town", Harbor East.

Harbor East is described on Baltimore's city website as "(a)n entirely transformed and swiftly emerging neighborhood located between the Inner Harbor and Fell's Point, Harbor East is becoming the place for modern cuisine. Sophisticated fine dining is without a doubt Harbor East's forte. Witha new arts-theater and endless restaurants to choose from, it is Baltimore's latest neighborhood to gain insatiable interest from both locals and visitors alike."

The event we attended was at James Joycce, an Irish bar in this section of town. After visiting Flemings and Oceanaire. we strolled over and met the crowd.

Dan Klein and Geoff Mackler were two of the gentlemen I had the good fortune of meeting while attending the function. Dan has the unique perspective of being an owner and conducting leasing himself. I was impressed with his comprehensive knowledge of investment sales and leasing. Geoff, as well, seems to be a driving force in Baltimore real estate.

I made plans with several brokers to meet next week at ICSC. We shall see how things develop, but overall the scene looks promising for 1031 activity.

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