National Association of Tax Professionals Section 1031, Would Section 1031, Would You Like to Sell or You Like to Sell or Exchange? Exchange? Presented by Presented by Larry Gray, CPA Larry Gray, CPA June 28, 2005 THE SALE n Capital Gain Capital Gain n 1231 Gain/Loss 1231 Gain/Loss n 1245 Recapture 1245 Recapture n 1250 Recapture/ 1250 Recapture/Unrecapture Unrecapture 1031 EXCHANGE (NO GAIN) n Exchange of Property Used Exchange of Property Used n Trade/Business or Investment Trade/Business or Investment n Like Like-Kind Property Kind Property n Trade/Business or Investment Trade/Business or Investment ALL OKAY n Trade/Business for Trade/Business Trade/Business for Trade/Business n Trade/Business for Investment Trade/Business for Investment n Investment for Trade/Business Investment for Trade/Business n Investment for Investment Investment for Investment ADVANTAGES n Potential 100% Tax Deferred Potential 100% Tax Deferred n Property May Be More Marketable Property May Be More Marketable n Change in Business/Investment Change in Business/Investment Strategy Strategy n Less Cash Required Less Cash Required n Continuously Invested Continuously Invested DISADVANTAGES n More Complicated More Complicated n Property Must Be Like Property Must Be Like-Kind/Class Kind/Class n Strict Time Requirements Strict Time Requirements n Lower Depreciable Basis Lower Depreciable Basis KEY ISSUES OF IRC 1031 n Boot Boot n Timing Issue Timing Issue n Like Like-Kind Property Issue Kind Property Issue n Dollar Issue Dollar Issue BOOT (GAIN) n Receipt of Cash Receipt of Cash n Other Unlike Other Unlike-Kind Property Kind Property n Debt Relief Debt Relief n Notes Received Notes Received TIMING OF EXCHANGE n Simultaneous Exchange Simultaneous Exchange n Deferred Exchange Deferred Exchange n Reverse Exchange Reverse Exchange SIMULTANEOUS EXCHANGE n Exchange of Properties Takes Exchange of Properties Takes Place at the Same Time; Place at the Same Time; Simultaneously Simultaneously n Example: Trade Example: Trade-In Your Truck In Your Truck for Another Truck for Another Truck u Give Boot of $5,000 Give Boot of $5,000 u Finance $2,500 of $5,000 Finance $2,500 of $5,000 DEFERRED EXCHANGE n Qualified Intermediary Qualified Intermediary n Identification Rules Identification Rules uIdentify Property Within 45 Identify Property Within 45 Days of Closing Transferred Days of Closing Transferred Property Property n Timing Requirements Timing Requirements u180 days 180 days n 3 Properties 3 Properties DEFERRED EXCHANGE n Property Sold $100,000 Property Sold $100,000 n Basis of Property Sold $40,000 Basis of Property Sold $40,000 n Possible Replacement Property Possible Replacement Property Values: $25,000; $70,000; Values: $25,000; $70,000; $110,000 $110,000 LIKE-KIND PROPERTY ISSUES n Depreciable Tangible Personal Depreciable Tangible Personal Property Property n Real Property Real Property n Intangible Personal Property Intangible Personal Property and Non and Non-Depreciable Personal Depreciable Personal Property Property EXCLUSIONS FROM 1031 n Stock in Trade or Other Property Stock in Trade or Other Property Held Primarily for Sale Held Primarily for Sale n Stocks, Bonds, or Notes Stocks, Bonds, or Notes n Interests in a Partnership Interests in a Partnership n Goodwill (Intangible) Goodwill (Intangible) DEPRECIABLE TANGIBLE PERSONAL PROPERTY n Like Like-Kind Means Like Kind Means Like-Class Class n General Asset Classes General Asset Classes n Product Classes Product Classes REAL PROPERTY n Real Property Exchanged for Real Property Exchanged for Other Real Property Other Real Property n Easy to Qualify Easy to Qualify n Exception Exception – Real Property in Real Property in U.S. Exchanged for Real U.S. Exchanged for Real Property Outside U.S. Property Outside U.S. n May Fall Under Section 1245 May Fall Under Section 1245 Property Property INTANGIBLE OR NON-DEPRECIABLE PERSONAL PROPERTY n Intangible Has No Physical Intangible Has No Physical Value Value n Qualify if Properties Are of Like Qualify if Properties Are of Like- Kind Kind n Like Like-Kind Based on Character Kind Based on Character or Nature or Nature n Examples Examples DOLLAR ISSUE n How Much Do I Have to Spend? How Much Do I Have to Spend? n Can I Have Less Debt? Can I Have Less Debt? n What is My Basis? What is My Basis? n Part Gain, Part Sale? Part Gain, Part Sale? MULTIPLE PROPERTIES n Separate the Properties Separate the Properties Transferred and Received Transferred and Received n Offset All Liabilities Offset All Liabilities n Apply Section 1031 Rules Apply Section 1031 Rules n Determine Basis of Each Determine Basis of Each Exchange Exchange REPORTING - 8824 n Part 1: Information on Exchange Part 1: Information on Exchange n Part 2: Related Party Information Part 2: Related Party Information n Part 3: Gain/Loss and Basis Part 3: Gain/Loss and Basis n Part 4: Deferral of Gain Part 4: Deferral of Gain OTHER ISSUES n Related Party Related Party n Reverse Exchange Reverse Exchange n 179 Expensing 179 Expensing n Change in Tax Law Change in Tax Law PLANNING DECISION n Future Future n Retirement Retirement n Death Death n Changes in Life Changes in Life n Cash Flow Cash Flow