Concepts and Mechanics of Exchanges - v14 (Course Id 2360)

Taxes - Taxes for Course Id 2360

While tax reform visions have changed the tax on profits realized from the disposition of real estate, investors still seek escape hatches from the capital gain tax. Tax-deferred exchanges permit the disposition of property often with the taxpayer receiving significant cash but without the payment of any tax. Functionally, an exchange is a bridge over the normally taxable event of moving from one property to another. This course alerts the practitioner to the different planning opportunities that surround exchanging. Participants will be able to identify, analyze, and handle effectively the complex tax problems that arise under 1031. This understanding will be directly applied to the structuring and audit survival of multi-party and delayed exchanges.

NASBA QAS - Text - NASBA Registry - IRS Enrolled Agents - 2360

As a result of studying each assignment, you should be able to meet the objectives listed below each assignment.

       At the start of Chapter 1, participants should identify the following topics for study:

* TCJA, ERTA & TEFRA
* Tax Reform Act of 1986
* Reform Act of 1997, Budget Act of 1998 & 2003 Bush Tax Act
* Tax Reform of 1986 & Revenue Act of 1987
* Disposition of Installment Note
* Stepped-Up Basis on Death
* Related Parties
* Security Issues
* Exchange Benefits

1. Identify factors that determine the popularity of exchanging and specify tax law changes influencing exchange popularity and the impact of current capital gains rates.
2. Recognize the differences between exchanges and installment sales and the cost benefits of each, identify several advantages given to exchanging by recent legislation and specify continuing problems that can arise with an installment sale that can act as an impetus for using an exchange.
3. Specify multiple tax benefits of exchanges and the advantages they create over installment sales.

       At the start of Chapter 2, participants should identify the following topics for study:

* Code language
* Section 1031 as an exception to the general rule of taxation
* Concept of tax deferral
* Rationale
* Continuity of investment
* Administrative convenience
* IRS position
* Mandatory application

1. Recognize the requirements of §1031 contained in the Code and identify §1031 as an exception to the general rule of taxation under §1001;
2. Specify instances where the IRS may assert an unintended mandatory application of §1031.

       At the start of Chapter 3, participants should identify the following topics for study:

* Qualified transaction – exchange v. sales
* Held for productive use or investment
* Change in property’s character
* State of mind concept
* Same taxpayer requirement
* Former statutory exclusions from §1031
* Real property restriction
* Like-kind property
* Former like-kind requirement for personal property
* Multiple asset exchanges
* Real v. personal property

1. Differentiate like-kind exchanges from sales and specify the impact of a party’s intent.
2. Identify excluded property types from qualified types by determining the meaning of “held for productive use in a trade or business” and specifying the impact of holding time.
3. Recognize the focused application of section 1031 as it applies to exchange parties and mixed-use property.
4. Specify the statutory exclusions from §1031 and the types of property specifically excepted.
5. Recognize the allowance of only real property ask qualified property in §1031 exchanges and as a consequence the importance of the definition of real property.

       At the start of Chapter 4, participants should identify the following topics for study:

* Partial tax-deferral
* Examples of boot
* Realized gain
* Recognized gain
* Limitation on recognition of gain under §1031
* The definition of “boot”

1. Identify “boot” and like-kind property specifying boot's potential impact on nonrecognition and list examples of boot.
2. Determine taxable "boot," specify the differences between realized gain and recognized gain recalling the limitation on recognition of gain under §1031.

       At the start of Chapter 5, participants should identify the following topics for study:

* Property boot
* Mortgage boot
* Debt relief
* Liability or notes created during the exchange
* Netting boot – the rules of offset
* Property boot given offsets any boot received
* Mortgage boot given offsets mortgage boot received
* Mortgage boot given does not offset property boot received
* R.R. 72-456 & commissions
* Net taxability of gain

1. Determine mortgage boot and property boot identifying whether a taxpayer has given or received boot in an exchange and the related tax consequences.
2. Identify the offset rules used to determine net boot and recognize the treatment of closing costs according to R.R. 72-456.

       At the start of Chapter 6, participants should identify the following topics for study:

* Losses on like-kind property
* Losses on non-like-kind property

1. Identify the categories of property received in an exchange and which category is permitted to recognize loss.

       At the start of Chapter 7, participants should identify the following topics for study:

* Adjustments to basis
* Allocation of basis
* Anti-churning rules

1. Identify the general carryover basis rule to calculate a taxpayer’s basis in acquired property, and determine the lingering effect of the anti-churning basis rule.

       At the start of Chapter 8, participants should identify the following topics for study:

* ERTA
* TRA ’86 & OBRA ‘93
* IRS depreciation guidance
* Land v. improvements
* Section 1245 & Section 1250
* Recapture property
* Recapture exceptions prior to ERTA
* Issues after ERTA
* Allocation of basis when recapture applies
* Investment credit recapture

1. Identify property depreciation recovery periods for property used in a trade or business or held for production of income and determine carryover basis in an exchange for acquired property.
2. Recognize the distinction between land and depreciable improvements, and identify the recapture provisions and their impact on gain that would otherwise be recognized.

       At the start of Chapter 9, participants should identify the following topics for study:

* Holding period
* Treatment of gain or loss
* Treatment of installment sales prior to 1980
* Treatment of installment sales after 1980
* Exchanges between related parties
* Two-year limitation
* Sections 267, 707, 453 and 1239
* Leverage
* Splitting partners
* Reporting an exchange

1. Specify the holding period of acquired property and identify the character of gain or loss recognized in an exchange.
2. Recognize the danger of exchanges between related parties and determine how §§267, 707, 453, and 1239 work together with §1031.
3. Specify ways to cash out one or more partners as part of an exchange by a partnership and choose the proper tax forms to report an exchange.

       At the start of Chapter 10, participants should identify the following topics for study:

* Meeting the napkin test
* Components
* Figures for computation
* Economic balance & “evening out”
* Examples of balancing multiple-party exchanges
* Locating boot
* Finding exchange property
* Refinancing
* “Coleman” solution
* Wrap-around mortgage

1. Recognize a simple test for clients to analyze if an exchange is completely tax-deferred and identify the basic computation figures necessary when balancing an exchange.
2. Determine how to balance multiple party exchanges using the “in and out test”, eveners, and the trade-up rule.

       At the start of Chapter 11, participants should identify the following topics for study:

* Two-party exchanges and variation
* Three-property-plus exchanges and variation
* Three-party “Alderson” exchange and variations
* Three-party “Baird Publishing” exchange and variations
* Four-party “Coupe” exchange
* Four-party “Mercantile Trust” exchange

1. Identify the mechanics of a two-party and three-party "Alderson" exchange including related variations involving the cash out of a party.
2. Determine the transactional flow of a traditional three-party exchange including variations to the format and recall procedural guidelines to ensure mechanics comply with §1031 provisions.
3. Determine the elements of a three-party “Baird Publishing” exchange, specify variations, and identify categories of four-party exchanges.

       At the start of Chapter 12, participants should identify the following topics for study:

* Delayed exchange v. delayed close
* Previously used formats
* Starker case
* TRA ‘84
* Format & structure
* Security for performance – use & control of cash
* Delayed (deferred) exchange regulations
* Identification requirements
* Actual & constructive receipt rule
* Delayed exchange agreement

1. Recall the evolution of delayed exchanges from the Starker case to their present use and the popularity of delayed exchanges, and specify current requirements and restrictions.
2. Recognize the requirements of the final regulations for delayed exchanges by identifying qualifying transactions, permitted intermediaries, tax treatment of interest, and use of escrow and trust accounts.

       At the start of Chapter 13, participants should identify the following topics for study:

* Warehousing
* Reverse exchanges – R.P. 2000-37
* R.P. 2004-51
* The pot method
* Escrow

1. Identify the purpose and format of longtime exchange techniques called “warehousing” and “pot method.”

       At the start of Chapter 14, participants should identify the following topics for study:

* Roles of accommodators
* Sale & lease-back

1. Identify the differences among an accommodator, strawman, and an intermediary, determine how using such parties can facilitate exchanging, and recognize a sale and lease-back transaction and associated exchange complications.

Chapter 1 - Introduction - §1031

Taxes & History of Exchange Popularity

ERTA & TEFRA

Tax Reform Act of 1986

Later Tax Legislation

Existing Capital Gains Rates

Impact & Summary

Exchanging vs. Installment Sales

Tax Reform Act of 1986

Revenue Act of 1987

Continuing Installment Sale Problems

Taxable Disposition of Installment Notes

Disallowed Stepped-up Basis on Death

Related Party Restrictions

Security of Collateral Issues

Exchange Benefits

Chapter 2 - Section 1031 & Its Function

Current §1031 - A Product of the ‘80s & ‘90s

Code Language

Section 1031 as an Exception to General Rule of Taxation

Concept of Tax Deferral

History of Provision

Legislative Rationale

Continuity of Investment

Administrative Convenience

IRS Position

Mandatory Application

Chapter 3 - Statutory Requirements and Definitions

Qualified Transaction - Exchanges v. Sales

Definition of an Exchange

Contractual Interdependence Test

Integrated Plan Test

Caselaw

Intent of the Parties

Held for Productive Use or Investment

Definition

Productive Use

Retired Property

Investment Purpose

Use by Relatives

Vacation Homes

Moore Decision

R.P. 2008-16

Change in Property’s Character

Conversion of Personal Use Property

Time

Pre-Existing Plans & Contracts

Acquisition Purpose

State of Mind Concept

Focused Analysis - Taxpayer-By-Taxpayer Application

Combining Qualifying Use

The Ghost of Long Dead Section 1034

Same Taxpayer Requirement

Caselaw & Ruling Developments

Magneson

Bolker

LTR 199911033

Property Exclusions & Restrictions Under §1031

Real Property Only Restriction - §1031(a)(1)

Disallowance of  Real Property Held Primarily for Sale - §1031(a)(2)

Question of Intent to Hold Primarily for Sale

Dealer Status vs. Dealer Transaction

Other Securities or Evidences of Indebtedness or Interest

Stock In Trade or Other Property Held Primarily For Sale

Stocks, Bonds, or Notes

Other Securities or Evidences of Indebtedness or Interest

Interests in a Partnership

Existing Partnerships

Final Regulations

Certificates of Trust or Beneficiary Interests

Choses in Action

Like-Kind Property

Nature or Quality of Property

Personal Property - Repealed

Requirements for Personal Property - Prior to 2018

Like-Kind Requirement for Personal Property

Like-Kind Personal Property - Identical

Like Class Personal Property - General Asset or Product Class

Real (Allowed) v. Personal Property (Denied)

Real Property Defined for Like-Kind Exchanges

Inherently Permanent Structures: Buildings and Machinery

Inherently Permanent Structures: Structural Components

Unsevered Natural Products are Real Property

Intangible Assets as Real Property

Incidental Personal Property and Qualified Intermediaries

State Law

Non-property

Specialty Like-Kind Rules

Chapter 4 - The Concept of “Boot”

Partial Tax-Deferral

Examples of Boot

Realized and Recognized Gain

Realized Gain

Recognized Gain

Limitation on Recognition of Gain under §1031

The Definition of “Boot”

Chapter 5 - The Rules of “Boot”

Property Boot and Mortgage Boot

Property Boot

Mortgage Boot

Debt Relief

Debt Relief Is the Equivalent of Cash

Liability or Notes Created During the Exchange

Netting “Boot” - The Rules of Offset

Property Boot Given Offsets Any Boot Received

Mortgage Boot Given Offsets Mortgage Boot Received

Adjustments to Mortgages During Exchange

LTR 9853028

Mortgage Boot Given Does Not Offset Property Boot Received

Biggs Case

Behrens Case

R. R. 72-456 & Commissions

Non-Deductible Closing Costs

Permissible Trade Down

Affect on Basis

Net Taxability of Gain

Comment on Alternative Offset Rules

Chapter 6 - Losses in an Exchange

Like-Kind Property

Non-Like-Kind Property Given

Chapter 7 - Basis on Tax-Deferred Exchange

Adjustments to Basis

Allocation of Basis

Anti-Churning Rules – Going, Going Almost Gone

Under ERTA

Under TRA ‘86

Effect

Property Placed in Service Prior to 1981

Property Placed in Service from 1981 Through 1986

Chapter 8 - Depreciation, Cost Recovery, Macrs, and Recapture

Depreciation Eras – ERTA, ACRS, & MACRS

IRS Depreciation Guidance - Notice 2000-4 & Regs

Regulations

Land vs. Improvements

New Allocation on Exchange

Recapture of Depreciation

Section 1245

Section 1250

Recapture Property

Exchange Impact

Recapture Exceptions Prior To ERTA

§1250(d) Exception

§1245 (b) Exception

Issues after ERTA

Issue Disappears Under MACRs

Allocation of Basis When Recapture Applies

Chapter 9 - Miscellaneous Exchange Aspects

Holding Period

Strict View

Treatment of Gain or Loss

Installment Sales Reporting

Treatment Prior to 1980

Current Treatment

Formula

Definitions

Exchanges Between Related Parties

Two-Year Limitation

Related Parties - §267(b)

Special Holding Period Rule

Disposition

Avoidance Exception to §1031

Sections 267, 707, 453, & 1239

Leverage

Splitting Partners

Reporting an Exchange

Schedule D & Form 4797

Form 8824

Accommodators

Chapter 10 - Exchange Mechanics

Analysis

Meeting the Napkin Test

Components

Figures for Computation

Economic Balance & “Evening Out”

Balancing Multiple Party Exchanges

Examples of Balancing Multiple Party Exchanges

Locating Boot

Finding Exchange Property

Trade-Up Rule

Exchange Groups

Refinancing

“Coleman” Solution

Wrap-Around Mortgage

Tax-Free “Cash Out”

Chapter 11 - Types of Simultaneous Exchanges

Two-Party Exchanges

Variation #1 On Two-party Exchanges

Three-Property-Plus Exchanges

Variation on Three-Property Exchange

Three-Party “Alderson” Exchange

Variation #1 on Three-Party “Alderson” Exchange

Variation #2 on a Three-Party “Alderson” Exchange

Variation #3 on Three-Party “Alderson” Exchange

Variation #4 on Three-Party “Alderson” Exchange

Three-Party “Baird Publishing” Exchange

Variation #1 on Three-Party “Baird Publishing” Exchange

Variation #2 on Three-Party “Baird Publishing” Exchange

Four-Party Exchanges

Four-Party “Coupe” Exchange

Four-Party “Mercantile Trust” Exchange

Chapter 12 - Non Simultaneous Delayed Exchanges

Delayed Exchange vs. Delayed Close

Chaos Factor

Perspective

Old Simultaneous Formats

The Current Rock Star - Delayed Exchanging

Care in Execution

Starker Case

Facts

Starker II

Holding

Analysis

Codification of Delayed Exchanges

45-Day Rule

Method of Identification

180-Day Rule

Pre-existing Exchanges

Holdover Issues after Codification

Format & Structure

“Starker” Trust

Intermediary Format

Acceptance of Notes on Exchangor’s Property

Security for Performance - Use and Control of Cash

Performance Deed of Trust

Third-Party Guarantee or Letter of Credit

Impound

Interest

Encumbered Property & Immediate Mortgage Relief

Open Transaction Theory

“Sale-in-Lieu” Provision

Delayed (Deferred) Exchange Regulations

Final Regulations

Deferred (Delayed) Exchange Definition

“Reverse-Starker” Transactions

Identification Requirements

Identification & Exchange Periods

Application of §7503

Method of Identification

Property Description

Incidental Property - 15% Rule

Revocation

Substantial Receipt

Multiple Replacement Properties

Actual & Constructive Receipt Rule

Four Safe Harbors

Safe Harbor #1 - Security

Safe Harbor #2 - Escrow Accounts & Trusts

Disqualified Person

Who Is An Agent?

Safe Harbor #3 - Qualified Intermediary

Who Is A Qualified Intermediary?

Direct Deeding

Assignment

Simultaneous Exchanges

Safe Harbor #4 - Interest

Interest Reporting - §468B(g)

Restrictions On Rights to Money & Other Property - “g(6)” Limitations

Outside Transfers of Money or Other Property

Delayed Exchange Agreement

Chapter 13 - Warehousing & Pot Method

Warehousing

Reverse Exchanges - R.P. 2000-37

R.P. 2004-51

The Pot Method

Escrow

Chapter 14 - Accommodators & Intermediaries

Sale & Lease-Back

Appendix A - Calculation Sheets

Glossary