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. Chapter 1 Introduction – 1031
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
Learning Objectives
After reading Chapter 1, participants will be able to:
1. Identify factors that determine the popularity of exchanging, specify tax law changes influencing exchange popularity and the impact of current capital gains rates, recognize the capital gain rate “baskets” and determine the tax treatment of assets in each category.
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 and determine issues that can be resolved or facilitated by using a like-kind exchange.
Chapter 2 Section 1031 & Its Function
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
Learning Objectives
After reading Chapter 2, participants will be able to:
1. Determine the conceptual changes made to 1031 by the TRA 84, TRA 86, the Revenue Act of 1987, and the RRA 90 and specify the current provisions of 1031 by:
a. Identifying the differences in 1031 from the general rule of taxation under 1001.
b. Recalling its legislative evolution; and
c. Recognizing the original Congressional rationale of 1031 contained in the concepts of continuity of investment and administrative convenience.
2. Specify instances where the IRS may assert an unintended mandatory application of 1031.
Chapter 3 Statutory Requirements & Definitions
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 propertys 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
Learning Objectives
After reading Chapter 3, participants will be able to:
1. Specify the elements 1031 and how these elements conceptually differentiate a like-kind exchange from a sale.
2. Identify excluded property types from qualified property types by determining the meaning of the phrases held for productive use in a trade or business, productive use, and investment purpose specifying the impact of time and taxpayer intent.
3. Recognize the state of mind issues in the concept held for productive use in trade or business or for investment and how qualifying use can ease qualification, determine the differences between 1031 and old 1034, and cite the same taxpayer requirement and its unsettled caselaw.
4. Specify the former statutory exclusions from 1031 and the types of property that were specifically excepted.
5. Identify the like-kind requirement as it impacts real estate and personal property and recognize the former classification systems that permitted clients to exchange like-kind or like-class personal property.
Chapter 4 The Concept of Boot
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
Learning Objectives
After reading Chapter 4, participants will be able to:
1. Identify boot and like-kind property specifying boot’s potential impact on nonrecognition and list several 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 that prevents a taxpayer from being taxed greater than if he had sold the property and recognize taxable boots net effect.
Chapter 5 The Rules of Boot
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
Learning Objectives
After reading Chapter 5, participants will be able to:
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 popular and alternate offset rules used to determine net boot, specify techniques to limit net taxable boot such as adjusting mortgages before an exchange and treating closing costs according to R.R. 72-456, and recognize the taxability of gain rule to reflect netting.
Chapter 6 Losses
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
Learning Objectives
After reading Chapter 6, participants will be able to:
1. Identify the categories of property received in an exchange and
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.
Chapter 7 Basis on Tax-Deferred Exchange
At the start of Chapter 7, participants should identify the following topics for study:
* Adjustments to basis
* Allocation of basis
* Anti-churning rules
Learning Objectives
After reading Chapter 7, participants will be able to:
1. Identify the general carryover basis rule to calculate a taxpayers basis in acquired property by determining its application and specifying the related allocation of basis to multiple properties and boot in an exchange.
Chapter 8 Depreciation, Cost Recovery, MACRS & Recapture
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
Learning Objectives
After reading Chapter 8, participants will be able to:
1. Identify property depreciation under 167 particularly as it applies to property used in a taxpayers trade or business or held for the production of income and the impact of ERTA, TRA 86, OBRA 93, and TCJA, determine the changes made by Notice 2000-4, and cite the depreciation requirements of later regulations affecting recovery periods and depreciation methods.
2. Recognize the distinction between land and depreciable improvements and identify the recapture provisions and their impact on the rate to be applied to all or a portion of the gain that would otherwise be recognized.
Chapter 9 Miscellaneous Aspects
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
Learning Objectives
After reading Chapter 9, participants will be able to:
1. Specify the holding period of acquired property, identify the character of gain or loss recognized in an exchange, recall the evolution of the installment sale method and the current rules related to exchanges and determine the formula for gain recognized using gross profit, selling price and total contract price under 453.
2. Recognize the danger of exchanges between related parties by:
a. Specifying the two-year limitation on such exchanges by;
i. Determining related parties;
ii. Identifying the special holding period rule;
iii. Selecting at least three types of dispositions that will not invalidate the nonrecognition treatment on an original exchange; and
iv. Citing the avoidance exception to 1031; and
b. Identifying how 267, 707, 453, and 1239 work together with 1031.
3. Recognize how leveraging can be useful in a 1031 exchange, 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.
Chapter 10 Mechanics
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
Learning Objectives
After reading Chapter 10, participants will be able to:
1. Recognize a simple test that permits clients and their advisors to determine if an exchange is completely tax-deferred and the components of this test, identify the basic computation figures necessary to economically balance an exchange, and specify methods of evening out to ensure that all parties get the same value as they give.
2. Determine how to balance multiple party exchanges using the in and out test determining net boot, select optimal exchange property to minimize taxable gain, and identify how to use refinancing, the Coleman solution, a wrap-around mortgage, or a tax-free cash out to balance out an exchange.
Chapter 11 Types of Exchanges
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
Learning Objectives
After reading Chapter 11, participants will be able to:
1. Identify the mechanics of a two-party and three-party exchange including related variations involving the cash out of a party.
2. Determine the transactional flow of a traditional three-party Alderson exchange including variations to the format, recognize the respective parties’ tax consequences, and recall procedural guidelines to ensure mechanics comply with 1031 provisions.
3. Determine the elements of a three-party Baird Publishing exchange and an Alderson exchange, specify variations of the Baird Publishing exchange and situations when each is the preferred format to use, identify categories of four-party exchanges, and specify when conditions favor the use of a four-party Coupe exchange or a four-party Mercantile Trust exchange.
Chapter 12 Delayed 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
Learning Objectives
After reading Chapter 12, participants will be able to:
1. 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 and the popularity of delayed exchanges and specify unresolved issues for delayed exchanges.
2. Recognize the requirements of the final regulations for delayed exchanges by:
a. Identifying the effective date for the regulations;
b. Specify the differences between delayed exchanges and reverse-starker transactions;
c. Determining the delayed exchange identification requirements by:
i. Specifying the identification and exchange periods;
ii. Identifying replacement property;
iii. Specifying requirements to revoke the identification of property;
iv. Recognizing the substantial receipt requirement; and
v. Selecting multiple replacement properties according to the requirements of Reg. 1.1031(a)-1(c)(4)(i)(A); and
d. Identifying whether a taxpayer is in actual or constructive receipt of money by recalling the safe harbors that can be used without risk of actual and constructive receipt.
Chapter 13 Warehousing & Pot Method
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
Learning Objectives
After reading Chapter 13, participants will be able to:
1. Identify the purpose of a longtime exchange technique called warehousing, specify the procedural aspects of reverse exchanges under R.P. 2000-37 and variables impacting its application, recognize the pot method recalling the procedural role of strawmen, and determine the role of exchange escrows.
Chapter 14 Accommodators & Intermediaries
At the start of Chapter 14, participants should identify the following topics for study:
* Roles of accommodators
* Sale & lease-back
Learning Objectives
After reading Chapter 14, participants will be able to:
1. 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 and associated exchange complications.