| about the Author |
 Alison has 25 years of professional experience providing both public and private real estate companies with a wide range of tax compliance and tax planning services, including entity structuring, land banking services, and transactional structuring. She works closely with her clients during periods of significant change in their businesses, providing support for buy/sell agreements, and other important strategic matters. Alison regularly consults with clients in highly specialized areas such as like-kind exchanges and Section 382 issues (net operating losses).
In addition to her expertise in real estate, Alison has also developed a focus in the manufacturing, distribution, and technology industries. She serves as the National Director for HEIN & ASSOCIATES LLP’s Technology practice area and is a regular speaker on changes in tax laws affecting business. She considers that her clients’ success is a measure of her own.
Prior to joining HEIN & ASSOCIATES LLP in 1989, Alison was a Tax Supervisor for Laventhol & Horwath in their Denver office. She is currently a member of the Colorado Software and Internet Association (CSIA), American Institute of Certified Public Accountants (AICPA), past Chair and Vice Chair of the Colorado Society of Certified Public Accountants (CSCPA) State Taxation Committee, the Highlands Ranch Chamber of Commerce, and serves on the board of the Denver Metro YMCA. Alison obtained her bachelor of science in accounting and her masters in professional accountancy from the University of Utah.
Alison can be reached at 303.298.9600 or adunnebecke@heincpa.com.
|
Additional Newsletters
www.heincpa.com
|
|
Developments Target Tax-Free Exchange
By Alison Dunnebecke, CPA, Tax Partner
The tax-free exchange provisions of Code Section 1031 are consistently the most active area for new real estate developments. Even with the legislative developments we have reported elsewhere in this newsletter, a number of tax-free exchange items merit highlighting.
- Related Party Rules. If the required property identification and replacement period requirements are met, an investor is not required to recognize gain on the exchange of real property held for productive use in a trade or business or for investment. Parties to deferred exchanges may use a qualified intermediary to facilitate a tax-free like-kind exchange. However, gain on an exchange between related persons must generally be recognized if either the property transferred or the property received is disposed of within two years after the exchange. Also, a disposition within the two-year period will not trigger the negative related party result if it is established to the satisfaction of the Internal Revenue Service (IRS) that neither the original transaction nor the later disposition had the avoidance of tax as one of its principal purposes.
In a new case, in a series of planned transactions, an individual, "T," transferred property #1 to a qualified intermediary, "TGE." TGE then sold the property to an unrelated third party. TGE used the sale proceeds, plus some additional cash from T, to purchase like-kind replacement property #2 for T from an individual, "X." TGE then transferred property #2 to T in order to complete the alleged tax-free exchange.
In another series of planned transactions, T transferred real property #3 to TGE which sold it to an unrelated party. TGE used the sales proceeds from property #3, plus some cash from T, to purchase like-kind replacement property #4 from X. T owned 62.5% of the shares of X so the two companies were “related” for purposes of the related party rules.
Both the Tax Court and the Ninth Circuit analyzed the complex facts and concluded that the result of all of these steps was economically equivalent to a direct exchange of properties between T and X (with cash boot from T to X), followed by the sales of the properties by X to unrelated third parties. The imposition of a qualified intermediary could not obscure this result.
- Bankrupt intermediary. The IRS has issued a Private Letter Ruling holding that the IRS cannot save a deferred like-kind exchange if the qualified intermediary holding cash for the seller goes bankrupt, noting that, by statute, the time to complete the deal cannot be extended. The gain on the property sold is taxed if the bankrupt escrow intermediary company fails to acquire the replacement realty and transfer it to the seller within 180 days of the first sale. The fact that the problem was due to no fault of the seller is not relevant.
Note that the seller can claim a loss deduction for any sales proceeds forfeited because of the intermediary’s bankruptcy. However, the loss deduction is not available until the amount of the loss is fixed — the year when the bankruptcy case is closed. In most cases, a loss deduction will be available in a tax year after the seller pays the tax on the sale.
- Purchase of a residence. A frequent question in the Section 1031 area is whether an individual may purchase a residence as his/her replacement property and then live in it? The answer is a qualified, yes.
Initially, Section 1031 permits an individual to roll the taxable gain from the sale of an old investment property over to new property. The key here is the term "investment" as the property must be held for investment purposes. As an example, if you were to sell raw land and purchase a rental house, Section 1031 permits you to roll the gain on the land over to the house. If you have done what we have described (rolled land into a house), and you decide you want to reside in the house, you are permitted to do so as long as there is no question that you bought the rental house for investment purposes at the time of its purchase. Thus, if you move into the home immediately, you clearly did not purchase the house for investment purposes; you purchased it for use as a residence. To qualify as investment property you must rent it, or seriously try to rent it, for at least a year and a day (unless the house is a vacation or second home in which case there are special rues that extend the time period to two years).
Note that over a period of time, the house could move from residence status to rental status and back again. This is a "substance over form" area of the tax law that may work to the investor’s advantage.
Other articles in this newsletter:
Cost Capitalization Rules – To Deduct or Capitalize
New Legislation Affects Homebuyer Tax Credit Rules
|
1st Quarter, 2010
