While tax reform provisions 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.
Learning Objectives
- Identify factors that determine the popularity of exchanging, specify tax law changes influencing exchange popularity noting the impact of current capital gains rates, recognize the capital gain rate "baskets" and determine the tax treatment of assets in each category.
- Specify instances where the IRS may assert an unintended mandatory application of 1031.
- Specify the elements 1031 noting how these elements conceptually differentiate a like-kind exchange from a sale.
- Identify "boot" and like-kind property noting boot's potential impact on nonrecognition and list several examples of boot.
- Determine mortgage boot and property boot identifying whether a taxpayer has given or received boot in an exchange noting the related tax consequences.
- Identify the categories of property received in an exchange into noting which category is permitted to recognize loss, recognize how avoiding 1031 can allow clients to potentially increase recognizable losses, and determine the tax treatment of non-recognized losses under 1031.
- Identify the general carryover basis rule to calculate a taxpayer's basis in acquired property by determining its application and specifying the related allocation of basis to multiple properties and boot in an exchange.
- Identify property depreciation under 167 particularly as it applies to property used in a taxpayer's trade or business or held for the production of income noting the impact of ERTA, TRA '86 and OBRA '93, determine the changes made by Notice 2000-4, and cite the depreciation requirements of later regulations affecting recovery periods and depreciation methods.
- Specify the holding period of acquired property, identify the character of gain or loss recognized in an exchange, and recall the evolution of the installment sale method noting current rules related to exchanges and determine the formula for gain recognized using gross profit, selling price and total contract price under 453.
- Recognize a simple test that permits clients and their advisors to determine if an exchange is completely tax-deferred noting the components of the this test, identify the basic computation figures necessary to economically balance an exchange, and specify methods of evening out to insure that all parties get the same value as they give.
- Identify the mechanics of a two-party and three-party exchange including related variations involving the cash out of a party.
- Identify the distinctions between delayed exchanges and delayed closes particularly as to simultaneity, recall the evolution of delayed exchange requirements from the Starker case through the restrictive TRA '84 time limits to the present noting the popularity of delayed exchanges and specify unresolved issues for delayed exchanges.
- Identify the purpose a longtime exchange technique called "warehousing," specify the procedural aspects of reverse exchanges under R.P. 2000-37 noting variables impacting its application, recognize the "pot" method recalling the procedural role of "strawmen," and determine the role of exchange escrows.
- Identify the differences between an accommodator and an intermediary, determine how using such parties can facilitate exchanging by avoiding certain holding problems, multiple parties and properties, and transfer difficulties, and recognize a sale and lease-back transaction noting associated exchange complications.
Major Topics
- Introduction
- 1031
- Section 1031 & Its Function
- Statutory Requirements & Definitions
- The Concept of "Boot"
- The Rules of "Boot"
- Losses
- Basis on Tax-Deferred Exchange
- Depreciation, Cost Recovery, MACRS & Recapture
- Miscellaneous Aspects
- Mechanics
- Types of Exchanges
- Delayed Exchanges
- Warehousing & Pot Method
- Accommodators & Intermediaries
