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Strategic Property
Exchanges, LLC
11353 Reed Hartman Hwy.
Suite 300
Cincinnati, OH 45241
Toll Free: (800) 427-7212
Phone: (513) 412-3481
Fax: (513) 412-3482
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(The following is an excerpt from our 1031 Advisor newsletter located here ) Genuine, Authenticated Artwork can be worth a fortune. The same Artwork that is later declared a forgery can see its value plummet. How do you know if the artwork is genuine? Once you have decided to acquire a particular Artwork, confirm that what is being said about the object is true. Authenticating often consists of verifying the identity of a particular object.
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Posted by Strategic Property Exchanges on Dec 11, 2008
(The following is an excerpt from our 1031 Advisor newsletter located here ) Taking a Break frin the global Credit Crunch, Reverse Exchanges received good news from the Treasury Department last month with a ruling that described how a Reverse Exchange can be used with a (Forward) Deferred Exchange. Example. An investor may decide to sell multiple properties (A, B, and C) in a Section 1031 Exchange in order to purchase another larger property (D). In preparation for the Exchange, the investor may have located the specific larger property and entered into a contract to acquire the property. For example, Property A, Property B and Property C are due to close on September 15, 2008. The new Property D is equal to or greater in price to the combined sale price of Properties A, B and C. The new property D, is scheduled to close on September 30, 2008. However, for some reason, Property C did not close on September 15, 2008. This may have bee due to loan problems, appraisal issues, title defects, or buyer default.
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Posted by Strategic Property Exchanges on Nov 17, 2008
(The following is an excerpt from our 1031 Advisor newsletter located here ) The Problem: The recent credit crisis has uncovered several issues of confidence or trust, which were either not generally known or discussed in choosing an Exchange Company. Good business practice requires the Exchange Companies to act at all times for the sole benefit and interests of their Exchange Clients. In other words, Exchange Companies must not put their personal interests before their duty, and must not profit from their position as fiduciaries. First: Exchange Client Funds: Protected by FDIC limit?
Second: Exchange Client Funds: Protected from additional risks?
Third: Exchange Client Funds: Liquidity?
Fourth: Exchange Client Funds: Investment Risk?
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Posted by Strategic Property Exchanges on Oct 16, 2008
( The following is an excerpt from our Intangible Asset Exchange Advisor newsletter located here ) Except those individuals sleeping under a rock, the rest of the world is becoming more and more familiar with the credit crunch and how it is affecting the economy. What was a key trigger of the credit crunch? One was the collapse of several Investment Banking Firms on Wall Street. How do Investment Banking Firms work? These non-deposit taking financial institutions were permitted to provide loans to borrowers.
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Posted by Strategic Property Exchanges on Oct 07, 2008
( The following is an excerpt from our 1031 Advisor newsletter located here ) I never tire when clients or professional advisors ask a plethora of interesting questions about Section 1031 exchanges. Here are three of my favorites: What is the minimum I must do to have a fully deferred Section 1031 exchange? In order to defer all taxes on an exchange, the owner/exchanger must use all the proceeds from the sale of relinquished property to acquire the replacement property. This includes costs of the sale and fees on the replacement property. Improvements can also be made to the property, as long as they are done prior to the owner receiving the deed. In this case, the Qualified Intermediary is on the deed until all improvements are completed.
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Posted by Strategic Property Exchanges on Sep 25, 2008
( The following is an excerpt from our Collectible Asset Exchange Advisor newsletter located here ) The depression era song, “Happy Days Are Here Again” was composed in 1929, music by Milton Ager and lyrics by Jack Yellen. This song is probably best remembered as the campaign song for Franklin D. Roosevelt’s successful 1932 Presidential campaign. This song suggests an optimistic view of the world in an era when there was little to be optimistic about. The good news is that, despite the “gloom and doom” surrounding the financial markets, the market for artwork and collectibles continues to be strong in the U.S. and overseas. According to Sotheby, a two-day sale of artwork by Damien Hirst on 9/18/08 set a new record £111 million for an auction dedicated to one artist. Sotheby’s stated that the previous record for artwork sales was set in 1993 for 88 pieces of artwork by Picasso, which sold for US$20 million.
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Posted by Strategic Property Exchanges on Sep 25, 2008
( The following is an excerpt from our Intangible Asset Exchange Advisor newsletter located here ) Intangible Property (I.P.) assets can be rightly considered one of the most important assets in commerce today. I.P. assets include assets such as patents, trade secrets, copyrights, trademarks/trade dress, and intangibles that are specified in a contract between the contracting parties. Since these assets are intangible and are, by nature, not capable of being weighed or measured physically, the process of valuation is a little more difficult for the Company owning the asset. Why should we bother to value such elusive assets? The proper management and commercial exploitation of these assets by the Company depend upon the value of these assets to the Company. Valuations are used for a variety of reasons including accounting purposes, financing and securitization, and the purchase or sale of assets or litigation. Each I.P. asset owned by the Company must compete for scarce capital and resources, R&D funding, human resources, and legal, accounting and financial support. I.P. Assets and 1031 Exchanges. In addition, owners of I.P. assets can benefit from the deferral of taxation on the gains from the sale or exploitation of these assets when properly structured as a Section 1031 Exchange. This deferral creates a further competitive advantage for the Company, since 100% of the proceeds can be reinvested in new Intellectual Property assets. This significantly boosts the internal rate of return earned for the Company and its investors on these assets.
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Posted by Strategic Property Exchanges on Sep 10, 2008
( The following is an excerpt from our 1031 Advisor newsletter located here ) Recently, we have handled several exchanges for clients who currently operate or previosly operated as C Corporations. C Corporations is short hand for corporate entities that are taxed separately from their owners. Certain issues come up repeatedly in analyzing the tax impact of property sales. What tax rates will apply to gain from the sale? Should Section 1031 be used to defer taxation? Here is a short primer to take to the beach this summer on these taxable gain issues.
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Posted by Strategic Property Exchanges on Aug 21, 2008
( The following is an excerpt from our Business Asset Exchange Advisor newsletter located here ) Who among us would not jump at the chance to invest in Microsoft—30 years ago! However, wishful thinking aside, we walk along the path to financial success every day, and many opportunities are presented to us. The challenge is whether or not we can see the opportunities for what they are. Tens of millions of dollars in equipment are bought and sold every day of the week. This is a reason for great joy in Washington, DC, because 40% of the sales gains are paid in taxes to the Internal Revenue Service! Aside from the fact that we know that much of this tax money is spent foolishly, each and every one of us has the chance to reduce this flow of taxes to a trickle.
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Posted by Strategic Property Exchanges on Aug 14, 2008
( The following is an excerpt from our Intangible Asset Exchange Advisor newsletter located here ) Substantial and Tangible Knowledge and Guidance. Information can now travel 15,000 miles in an instant. However, the most important part of the journey comes at the last instant when the information reaches the brain of the recipient and the recipient responds to the information. Does this individual have the training and experience to understand the information? This is the question posed by David Brooks in “The Cognitive Age.” Your prosperity is based on your ability to assimilate, absorb, process, and analyze information. This essential truth involves Section 1031 Exchanges everyday. Every day billions of dollars in assets are bought and sold during millions of transactions, each of which is capable of being treated as a tax-deferred Section 1031 Exchange. Some will be, but most will not. That choice is made many times in the absence of information or capacity to understand the choices that can be made.
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Posted by Strategic Property Exchanges on Jul 29, 2008
( The following is an excerpt from our Business Asset Exchange Advisor newsletter located here ) Does this sound too good to be true? Many of your competitors, rental companies, dealers, contractors are already using 1031 Exchanges to sell business assets and defer the payment of taxes on the gain provided they use the proceeds to acquire additional business assets. What does 1031 Exchange mean? 1031 Exchange transactions have been permitted under federal tax law since 1921. [Section] 1031 refers to the particular section in federal tax law. Exchange means any purchase, sale or trade of business assets within 180 days handled by a “Qualified Intermediary.” A Qualified Intermediary (QI) is an individual or entity (1) that is not related to or associated with the Taxpayer; and (2) who is responsible for documenting the transaction under federal tax law.
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Posted by Strategic Property Exchanges on Jul 15, 2008
( The following is an excerpt from our 1031 Advisor newsletter located here ) Over the next six months, we are launching six new monthly newsletters, which deal specifically with Your Unique Exchange Issues. - Business Asset Exchange Advisor – This newsletter deals with such items as planes, trains, automobiles, machinery, equipment, and other business assets. (First publication: July 2008)
- Intangible Asset Exchange Advisor - This newsletter deals specifically with the purchase and sale of intangible business assets, which are now estimated to make up more than 70% of Corporate America’s balance sheets. (First publication: August 2008)
- Collectible Exchange Advisor – This newsletter is for those investors who buy and sell artwork, collectibles, autos and other collectible investment assets. (First publication: September, 2008)
- Reverse Exchange Advisor - This newsletter will allow us to focus exclusively on those issues unique to those exchanges that involve the purchase of property in advance of a sale of assets. (First publication: October, 2008)
- Construction and Improvement Exchange Advisor – This newsletter will focus on the development, construction and improvement of Exchange Properties. (First publication: November, 2008).
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Posted by Strategic Property Exchanges on Jul 15, 2008
( The following is an excerpt from our 1031 Advisor newsletter located here ) Webster’s Dictionary defines guarantee as “an assurance of the quality of a product offered for sale.” A brief search on Google under “guaranteed 1031 Exchanges” yields 1,030,000 hits. Impressive! But what exactly is being guaranteed? Your happiness? No errors? No penalties? No taxes on an improperly handled Exchange? No loss of clients? What is being guaranteed? Many Advisors rely on "guarantees" by 1031 Exchange Companies. However, if mistakes are made or if taxes must be paid after a 1031 exchange, it is the taxpayer/customer who is often left holding the bag.
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Posted by Strategic Property Exchanges on Jun 05, 2008
( The following is an excerpt from our 1031 Advisor newsletter located here ) Recent events in the financial markets highlight the frequent, yet painful, lesson that commonly accepted thinking is not always correct thinking. Exchanges of partnership assets and partnership interests commonly fail to appreciate the inherent tax risks which accompany these types of exchanges.
Assume the following scenario: A Limited Liability Company, which is owned equally by four individuals, sells an appreciated asset. Two of the members/partners want to cash out of their investment. The following is a summary of techniques used by many advisors.
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Posted by Strategic Property Exchanges on May 15, 2008
(The following is an excerpt from our 1031 Advisor newsletter located here ) Some of the best newsletter ideas come from questions that come up from time to time. Recently, I was asked about the IRS rules related to Reverse Exchanges.
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Posted by Strategic Property Exchanges on Apr 25, 2008
Internal Revenue Service
Department of the Treasury
Washington, DC 20224
Number: 200805012
Release Date: 2/1/2008
Index Number: 1031.03-00 Refer Reply To:
CC:ITA:B05
PLR-133610-07
Date:
October 30, 2007
Dear:
This is in response to your request for a private letter ruling dated July 20, 2007. Specifically, you have asked us to rule that the Development Rights described below are like kind, for purposes of § 1031 of the Internal Revenue Code (“Code”), to the fee interest in Property 1 that Taxpayer will, using a QI, sell to a third party. FACTS Taxpayer is a subchapter C corporation that owns Property 1 and Property 2 located in City. Taxpayer uses the cash method of accounting and a calendar taxable year. Taxpayer intends to transfer its fee interest in Property 1 (“Relinquished Property”) to a QI pursuant to an exchange agreement that Taxpayer indicates will meet the deferred like-kind exchange provisions of Treas. Reg. §1.1031(k)-1. QI will sell the RelinquishedProperty to a third-party purchaser in an arm’s-length transaction. QI will use part of the cash proceeds from this sale to purchase Development Rights (“Replacement Property”) from a third-party seller. QI will transfer Development Rights to Taxpayer. Taxpayer will cause Development Rights to be recorded with respect to Property 2, which lies within Special Area of City and, according to Taxpayer, is otherwise eligible for use of Development Rights. Development Rights will permit Taxpayer (or its lessee) to develop Property 2 with greater floor space than would otherwise have been allowed if Property 2 does not have Development Rights. When Development Rights are applied to Property 2, the floor area permitted to be constructed on that property will be increased by the increased floor area carried by Development Rights. Special Area is in that part of City characterized by a disused Line. On Date, the City Council of City approved Ordinances, which include certain zoning text and map amendments that re-zoned the area around Line to create Special Area, a new zoning district. The rezoning was designed to provide opportunities for new residential and commercial development, facilitate the reuse of Line, and enhance the neighborhood’s art district. To encourage the preservation of light and air around Line, Ordinances created Line Corridor, which is a narrow area surrounding Line within Special Area. Ordinances permit the owners of property within Line Corridor, termed the “granting site,” to transfer their Development Rights, equivalent to the base floor ratio for the property, to a designated the “receiving site” within a subarea in Special Area. Under Ordinances, Development Rights are as-of-right and not discretionary, meaning that they exist permanently rather than at the discretion of a city agency or other decision-making authority. Development Rights must be verified by filings with City’s Department of City Planning (“DCP”). DCP may require recording of certain easements as a condition of the transfer of Development Rights on certain properties. Evidence of such filings and DCP approval must be submitted to the City Register before the transfer document can be recorded and indexed against the granting and receiving sites. Certified copies of such filings must be submitted to DCP, and notice of receipt of the certified copies by the DCP is a pre-condition to the issuance of any building permitfor the development or enlargement on a receiving site.
Sections of State Z Tax Statute (and the corresponding sections of State Z regulations), define “real property” to include “every estate or right, legal or equitable, present or future, vested or contingent, in lands, tenements or hereditaments, including buildings, structures and other improvements thereon, which are located in whole or in part within [State Z].” Sections of State Z Tax Statute further define an “interest in real property” to include “title in fee, a leasehold interest, a beneficial interest, an encumbrance, development rights, air space and air rights, or any other interest with the right to use or occupancy of real property or the right to receive rents, profits, or other income derived from real property.” See also Local Ruling, which noted that a transfer of development rights is subject to State Z gains tax as a “transfer of real property.”
State Z General Municipal Law generally defines “development rights” as “the rights granted to a lot or parcel of land under a zoning ordinance or local law respecting permissible use, area, bulk or height of improvements executed thereon. Development rights may be calculated and allocated in accordance with such factors as area, floor area, floor area ratios, height limitations or any other criteria including assessed valuation that will effectively quantify a value for the development right in a manner that will carry out the objectives of this article.” State Z General Municipal Law further defines “Transfer of development rights” to mean “the process by which development rights are passed from one lot or parcel to another.”
Taxpayer represents that it will receive no tax credits or direct incentive of any kind from State Z or City in connection with the subject transaction.
You have requested a ruling that Development Rights are like kind, for purposes of § 1031, to the fee interest in Property 1 that Taxpayer will, using a QI, sell to a third party. LAW AND ANALYSIS Section 1031(a)(1) provides that no gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like kind which is to be held either for productive use in a trade or business or for investment.
Treas. Reg. § 1.1031(a)-1(b) provides, in part, that the words “like kind” refer to the nature or character of the property and not to its grade or quality. One kind or class of property may not be exchanged for property of a different kind or class. The fact that any real estate involved is improved or unimproved is not material, for that fact relates only to the grade or quality of the property and not to its kind or class. Properties to be exchanged tax free under § 1031 must be of the same kind or class. Treas. Reg. § 1.1031(a)-1(c) sets forth examples of properties that will be considered like kind. The most relevant examples pertain to real estate and provide that a taxpayer who is not a dealer in real estate may exchange city real estate for a ranch or farm, a leasehold of a fee with 30 years or more to run for real estate, or improved real estate for unimproved real estate.
Whether property constitutes real or personal property generally is determined under state or local law. See, e.g., Rev. Rul. 77-414, 1977-2 C.B. 299 (Development right in agricultural land constitutes “interest or right” in real property under local law). The types of property rights and interests that constitute interests in real property and may be considered like kind to real property for purposes of § 1031 are broad. For instance, in Rev. Rul. 55-749, 1955-2 C.B. 295, land was exchanged for perpetual water rights, which are considered real property rights under the applicable state law. The ruling holds that the fee interest in the land and the water rights in perpetuity are sufficiently similar to constitute like kind property for § 1031(a) purposes. In addition, Rev. Rul. 72- 549, 1972-2 C.B. 472, holds that an easement and right-of-way, both of which were permanent, granted to an electric power company are properties of like kind to both real property with nominal improvements and real property improved with an apartment building. Similarly, in Rev. Rul. 68-331, 1968-1 C.B. 352, a leasehold interest in a producing oil lease extended until the exhaustion of the deposit that it held for productive use in the taxpayer’s trade or business was exchanged for the fee interest in an improved ranch to be held for the productive use in the taxpayer’s business. The revenue ruling holds that the exchange was an exchange of real property of a like kind under § 1031(a) since both the leasehold interest and the fee interest are continuinginterests in real property. See also Notice 2005-57, 2005-2 C.B. 267, which, in Q&A 8, noted that a tobacco quota is considered an interest in land; and, under Q&A-11, the Owner thereof may defer gain or loss from the termination of a quota by entering into a like-kind exchange pursuant to § 1031 and the regulations thereunder.
In this case, Taxpayer proposes to acquire Development Rights as its replacement property for purposes of § 1031(a) and to transfer such rights to Property 2, which Taxpayer already owns. In Rev. Rul. 68-394, 1968-2 C.B. 338, the Service noted that for purposes of § 1031(a), it is not material that the property acquired by the taxpayer as the replacement property is on property already owned by that taxpayer so long as it is acquired in an arm’s-length transaction. In Rev. Rul. 68-394, land held by the taxpayer for investment was condemned for a state freeway. The taxpayer owned adjacent land that he had leased to a second party to use and develop as a mobile trailer park site.For purposes of replacing the condemned property, the taxpayer used part of the condemnation proceeds to purchase the outstanding leasehold on the adjacent land. The lease still had 45 years to run at the time of purchase. After acquisition of the leasehold, the taxpayer used the land as a mobile trailer park site. The purchase of the outstanding leasehold was an arm’s length transaction. The ruling notes that for purposes of reinvesting condemnation proceeds under § 1033(g) of the Code, Treas. Reg. § 1.1033(g)(1)(a) refers to Treas. Reg. § 1.1031(a)-1 for guidance in determining whether the replacement property is property of like kind. Since, under the § 1031 regulations, the exchange of a leasehold interest in real estate with 30 years or more to run for real estate qualifies as a like kind exchange for purposes of § 1031(a), the ruling holds that the acquisition of a leasehold interest with more than 30 years to run following the condemnation of unimproved real estate would likewise qualify as replacement property of like kind for purposes of § 1033(g), even though the leasehold interest was on property already owned by the taxpayer.For proposes of determining if Taxpayer’s proposed transaction qualifies as a like-kind exchange under § 1031(a), it is thus immaterial that Development Rights to be acquired by Taxpayer will be used merely to enhance the real property already owned by Taxpayer. More important is whether Development Rights constitute interests in real property under the state and local laws of State Z. Although it is unclear whether Development Rights are treated as interests in real property for all purposes of State Z law, it is clear that Sections of State Z Tax Statute and the regulations thereunder cited by Taxpayer do treat Development Rights as an interest in real property.
Moreover, the various sections of the local Ordinances cited by Taxpayer provide that Development Rights are as-of-right and not discretionary, meaning that they exist permanently rather than at the discretion of a city agency or other decision-making authority. As such, these rights appear to be analogous to perpetual rights. Similarly, Taxpayer represents that a deed transfer is similar to the perfecting of Development Rights, which involves an actual transfer of rights from one property to another. For instance, the transfer of Development Rights must be verified by filings with City’s DCP, which may require recording of certain easements as a condition of the transfer of Development Rights on certain properties. Evidence of such filings and DCP approval must be submitted to the City Register before the transfer document can be recorded and indexed against the granting and receiving sites. Certified copies of such filings must be submitted to DCP, and notice of receipt of the certified copies by the DCP is a pre-condition to the issuance of any building permit for the development or enlargement on a receiving site. Also, Development Rights are subject to City and State Z transfer taxes in the same manner as a deed transfer.
Moreover, the various sections of the local Ordinances cited by Taxpayer provide that Development Rights are as-of-right and not discretionary, meaning that they exist permanently rather than at the discretion of a city agency or other decision-making authority. As such, these rights appear to be analogous to perpetual rights. Similarly, Taxpayer represents that a deed transfer is similar to the perfecting of Development Rights, which involves an actual transfer of rights from one property to another. For instance, the transfer of Development Rights must be verified by filings with City’s DCP, which may require recording of certain easements as a condition of the transfer of Development Rights on certain properties. Evidence of such filings and DCP approval must be submitted to the City Register before the transfer document can be recorded and indexed against the granting and receiving sites. Certified copies of such filings must be submitted to DCP, and notice of receipt of the certified copies by the DCP is a pre-condition to the issuance of any building permit for the development or enlargement on a receiving site. Also, Development Rights are subject to City and State Z transfer taxes in the same manner as a deed transfer.
Except as expressly provided herein, no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter. We express no opinion whether the proposed transaction qualifies in all other respects for tax deferral under § 1031 beyond what is expressly stated in the above ruling. Specifically, no opinion is expressed with respect to whether the proposed transaction meets the deferred like-kind exchange requirements of Treas. Reg. § 1.1031(k)-1.
The rulings contained in this letter are based upon information and representations submitted and accompanied by a penalty and perjury statement executed by an appropriate party. While this office has not verified any of the material submitted in support of the request for rulings, it is subject to verification on examination.
This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the Code provides that it may not be used or cited as precedent. In accordance with the Power of Attorney on file with this office, a copy of this letter is being sent to your authorized representative. A copy of this letter must be attached to any income tax return to which it is relevant. Alternatively, taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of the letter ruling. Sincerely, William A. Jackson
Branch Chief, Branch 5 Office of Chief Counsel
(Income Tax & Accounting)
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Posted by Strategic Property Exchanges on Mar 11, 2008
Internal Revenue Service
Department of the Treasury
Washington, DC 20224
Number: 200807005
Release Date: 2/15/2008
Index Number: 1031.00-00 Refer Reply To:
CC:ITA:B05
PLR-123308-07
Date:
November 9, 2007 Dear :
This is in response to your request for a private letter ruling dated May 14, 2007, submitted by your authorized representative. The ruling request concerns whether, for purposes of § 1031(a)(1) of the Internal Revenue Code, Taxpayer’s receipt of 100 percent of the interests of the partners in a partnership that holds real property, by adisregarded entity created by Taxpayer to receive the real property, will be treated as the receipt of property that is like kind to the real property disposed of by Taxpayer under the circumstances set forth below. FACTS Taxpayer is a limited partnership that uses a calendar year accounting period and the accrual method of accounting. Taxpayer is in the rental real estate business and owns Relinquished Property. On Date 1, Taxpayer entered into an agreement of sale for the Relinquished Property with a third party buyer (“Buyer”), whereby Taxpayer agreed to transfer title to the Relinquished Property to Buyer for cash. On Date 2, Taxpayer entered into a deferred exchange agreement with a qualified intermediary (“QI”). Pursuant to this agreement, Taxpayer assigned its right, title and interest in the agreement of sale to the QI and notified Buyer of the assignment. Taxpayer, QI and Buyer entered into an amended exchange agreement and assignment whereby Taxpayer and Buyer amended the agreement of sale to become an agreement of exchange pursuant to which: (1) Taxpayer agreed to transfer Relinquished Property to QI; (2) QI agreed to transfer Relinquished Property to Buyer; (3) Buyer agreed to accept Relinquished Property from QI; and (4) Buyer agreed to transfer the consideration for Relinquished Property to QI. All parties agreed that QI would instruct the settlement agent to prepare a two-party deed for Relinquished Property to be executed by Taxpayer directly to Buyer. At closing on Date 3, Taxpayer executed this deed in favor of Buyer, and QI accepted the sales proceeds from Buyer,which the QI holds in escrow for the purchase of Replacement Property.
Partnership, a limited partnership, owns Replacement Property. In order to acquire Replacement Property, Taxpayer will enter into a purchase agreement with each of the partners to acquire of 100 percent of their interests in Partnership. Taxpayer also will enter into an amended exchange agreement with QI whereby it will assign to QI all of Taxpayer’s right, title and interest, as purchaser, in the purchase agreement with the partners. Taxpayer will inform the partners of this assignment. The parties thus will enter into an amended exchange agreement and assignment pursuant to which: (1) The partners agree to accept consideration for their partnership interests from the QI; (2) QI agrees to transfer such consideration to the partners; (3) The partners agree to transfer 100 percent of their interests in Partnership to QI; and (4) Taxpayer agrees toaccept the Partnership interests from QI.
Taxpayer will form a wholly-owned limited liability company (“LLC”) that Taxpayer represents will be considered a disregarded entity for federal tax purposes. At closing, all proceeds held by the QI will be distributed to the partners. QI will direct the partners to execute an assignment of 100 percent of their interests in Partnership to Taxpayer and LLC, who will become the new limited partner and general partner, respectively, of Partnership. Partnership will continue to operate as a state law partnership after closing.
Taxpayer represents that Relinquished Property and Replacement Property are like kind within the meaning of § 1031 and the regulations thereunder. Taxpayer’s ruling request raises two issues: Issue 1: May Taxpayer defer gain on the sale of Relinquished Property under § 1031 if Taxpayer, through QI, acquires 100 percent of the interests of the partners in Partnership, which owns the Replacement Property. Issue 2: May Taxpayer hold the Replacement Property in a newly-created state law partnership that is disregarded for federal income tax purposes without violating the requirement of § 1031 that the replacement property and relinquished property both must be held by the taxpayer in a trade or business or for investment. LAW AND ANALYSIS Section 1031 permits the deferral of gain or loss on the exchange of like-kind property. Section 1031(a)(1) provides that no gain or loss will be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like kind which is to be held either for productive usein a trade or business or for investment. Section 1031(a)(2)(D) specifically excludes any exchange of “interests in a partnership”from § 1031(a)(1) deferral. Congress passed § 1031(a)(2)(D) in the Deficit Reduction Act of 1984. The accompanying legislative history indicates that Congress viewed partnership interests as similar to stocks, bonds, and other securities that historically were prohibited from § 1031 exchanges in order to prevent taxpayers from taking advantage of like-kind treatment on dispositions of certain appreciated property. Congress also wanted to eliminate the abusive practice where taxpayers exchanged their interests in burned out tax shelter partnerships for interests in other partnerships without having to realize gains. See Supplemental Report of the House Ways and Means Committee, 98th Cong., 2d Sess., H. R. Rep No. 432 (Part 2) at 1232-34 (1984). In situation 2 of Rev. Rul. 99-6, 1999-1 C.B. 432, C and D are equal partners in CD, a limited liability company (LLC) classified as a partnership under § 301.7701-3 of the Procedure and Administration Regulations. C and D sold their entire interests in CD partnership to E, an unrelated person. After the sale, the business is continued by the LLC, which is owned solely by E. Rev. Rul. 99-6 concludes that the CD partnership terminates under § 708(b)(1)(A) when E purchased the entire interests of C and D in the CD partnership. C and D must report gain or loss, if any, resulting from the sale of their partnership interests in accordance with § 741. Although the revenue ruling characterizes C and D as having sold their partnership interests, it classifies E as having acquired all of the former CD partnership’s assets. Thus, when E purchased the entire interests of C and D in CD partnership, CD partnership was deemed to have made a liquidating distribution of its assets to C and D. Immediately following this distribution, E is deemed to acquire, by purchase, all of the former CD partnership’s assets. In situation 1 of Rev. Rul. 2004-77, 2004-2 C.B. 119, X, a domestic corporation, is the sole owner of L, a domestic limited liability company (LLC). L is disregarded as an entity separate from its owner, X. L and X are the only member under local law of P, a state law limited partnership. There are no constructive or beneficial owners of P other than L and X. L and P are eligible entities that do not elect under § 301.7701-3(c) of the Procedure and Administration Regulations to be treated as an association for federal income tax purposes. Under § 301.7701-2(c)(2) of the Procedure and Administration Regulations, L is disregarded as an entity separate from its owner, X. Because L is disregarded as an entity separate from X, X is treated as owning all of the interests in P. P is therefore a domestic entity with only one owner for federal tax purposes that has not made an election to be classified as an association taxable as a corporation. Since P has only one owner for federal tax purposes, P cannot be classified as a partnership under § 7701(a)(2). Rev. Rul. 2004-77 thus holds that if an eligible entity has two members under local law, but one member of the eligible entity is, for federal tax purposes, disregarded as an entity separate from the other member, then the eligible entity cannot be classified as a partnership and is either disregarded as an entity separate from its owner or an association taxable as a corporation. Issue 1: Taxpayer will acquire 100 percent of the partners’ interests in Partnership. Pursuant to Rev. Rul. 99-6, Partnership is considered to have terminated under § 708(b)(1)(A) and made a liquidating distribution of its real property assets to its partners, and Taxpayer is treated as having acquired such real property assets from the partners for federal tax purposes. Since Taxpayer will acquire 100 percent of the partners’ interests in Partnership, Taxpayer is treated as having acquired the real property assets of Partnership rather than as having acquired partnership interests from the partners. Further, this transaction does not constitute an abuse of the type that Congress sought to remedy in the Deficit Reduction Act of 1984, which appears to be aimed at abuses by sellers of partnership interests. We view this transaction as a like-kind exchange under § 1031(a)(1), rather than as an exchange of partnership interests in violation of § 1031(a)(2)(D).
Accordingly, Taxpayer may defer the gain on the sale of Relinquished Property under § 1031 if Taxpayer, through QI, acquires 100 percent of the interests of the partners in Partnership, which owns the Replacement Property. Issue 2: Taxpayer’s formation of LLC to serve as the general partner of Partnership and the continued existence of Partnership as a state law partnership owned by LLC and Taxpayer following the closing of this transaction comply with the requirement that taxpayers hold both the relinquished property and the replacement property for productive use in a trade or business or for investment. Under § 301.7701-2(c)(2) of the Procedure and Administration Regulations, LLC would be disregarded as an entity separate from its owner, Taxpayer. Because LLC is disregarded as an entity separate from Taxpayer, Taxpayer would be treated as owning all of the interests in Partnership following the closing of this transaction. Partnership therefore would become a domestic entity with only one owner, Taxpayer, for federal tax purposes. Since Partnership will have only one owner for federal tax purposes following closing and will not make an election to be treated as an association taxable as a corporation, Partnership cannot be classified as a partnership under § 7701(a)(2) and thus would be considered disregarded as an entity separate from its owner, Taxpayer, even though it continues as a state law limited partnership. See Rev. Rul. 2004-77. For federal tax purposes, Taxpayer would be considered the owner of the real property that constitutes Replacement Property. Accordingly, Taxpayer may hold the Replacement Property in a newly-created state law partnership that is disregarded for federal income tax purposes without violating the requirement of § 1031 that replacement property and relinquished property both must be held by the taxpayer in a trade or business or for investment. CONCLUSION For purposes of § 1031(a)(1), Taxpayer’s receipt of 100 percent of the interests of the partners in a partnership that holds real property, by a disregarded entity created by Taxpayer to receive the real property, will be treated as the receipt of property that islike kind to the real property disposed of by Taxpayer, provided all other requirements of § 1031 are met. CAVEATS Except as expressly provided herein, no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter. Specifically, we express no opinion whether the proposed transaction qualifies in all other respects for tax deferral under § 1031 beyond what is expressly stated in the above ruling. This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) provides that it may not be used or cited as precedent. In accordance with the Power of Attorney on file with this office, a copy of this letter is being sent to your authorized representative. A copy of this letter must be attached to any income tax return to which it is relevant. Alternatively, taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of the letter ruling. The rulings contained in this letter are based upon information and representations submitted by Taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party. While this office has not verified any of the material submitted in support of the request for rulings, it is subject to verification on examination. Sincerely, Amy J. Pfalzgraf
Senior Counsel, Branch 5
Office of Chief Counsel
(Income Tax & Accounting)
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Posted by Strategic Property Exchanges on Mar 11, 2008
(The following is an excerpt from our 1031 Advisor newsletter located here ) - New Revenue Procedure related to structuring a Section 1031 Exchange for a vacation home or a second home
- Review of the case of: Moore vs. Commissioner, which is related to sale of vacation homes
- Review of IRS Guidelines related to exchange of real estate properties
- Meeting the Qualifying Use Standards: How would you advise your Client in this situation?
- Criteria to determine if the taxpayer is deemed to have used a dwelling unit for personal purposes
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Posted by Strategic Property Exchanges on Mar 11, 2008
Internal Revenue Service
Department of the Treasury
Washington, DC 20224
Number: 200805012
Release Date: 2/1/2008
Index Number: 1031.03-00 Refer Reply To:
CC:ITA:B05
PLR-133610-07
Date:
October 30, 2007 Dear : This is in response to your request for a private letter ruling dated July 20, 2007. Specifically, you have asked us to rule that the Development Rights described below are like kind, for purposes of § 1031 of the Internal Revenue Code (“Code”), to the fee interest in Property 1 that Taxpayer will, using a QI, sell to a third party. Please see Revenue Procedure 2007-56, Section 17, and the notice below for further details.
FACTS Taxpayer is a subchapter C corporation that owns Property 1 and Property 2 located in City. Taxpayer uses the cash method of accounting and a calendar taxable year. Taxpayer intends to transfer its fee interest in Property 1 (“Relinquished Property”) to a QI pursuant to an exchange agreement that Taxpayer indicates will meet the deferred like-kind exchange provisions of Treas. Reg. §1.1031(k)-1. QI will sell the Relinquished Property to a third-party purchaser in an arm’s-length transaction. QI will use part of the cash proceeds from this sale to purchase Development Rights (“Replacement
Property”) from a third-party seller. QI will transfer Development Rights to Taxpayer. Taxpayer will cause Development Rights to be recorded with respect to Property 2, which lies within Special Area of City and, according to Taxpayer, is otherwise eligible for use of Development Rights. Development Rights will permit Taxpayer (or its lessee) to develop Property 2 with greater floor space than would otherwise have been allowed if Property 2 does not have Development Rights. When Development Rights are applied to Property 2, the floor area permitted to be constructed on that property will be increased by the increased floor area carried by Development Rights. Special Area is in that part of City characterized by a disused Line. On Date, the City Council of City approved Ordinances, which include certain zoning text and map amendments that re-zoned the area around Line to create Special Area, a new zoning district. The rezoning was designed to provide opportunities for new residential and commercial development, facilitate the reuse of Line, and enhance the neighborhood’s art district. To encourage the preservation of light and air around Line, Ordinances created Line Corridor, which is a narrow area surrounding Line within Special Area. Ordinances permit the owners of property within Line Corridor, termed the “granting site,” to transfer their Development Rights, equivalent to the base floor ratio for the property, to a designated the “receiving site” within a subarea in Special Area. Under Ordinances, Development Rights are as-of-right and not discretionary, meaning that they exist permanently rather than at the discretion of a city agency or other decision-making authority. Development Rights must be verified by filings with City’s Department of City Planning (“DCP”). DCP may require recording of certain easements as a condition of the transfer of Development Rights on certain properties. Evidence of
such filings and DCP approval must be submitted to the City Register before the transfer document can be recorded and indexed against the granting and receiving sites. Certified copies of such filings must be submitted to DCP, and notice of receipt of the certified copies by the DCP is a pre-condition to the issuance of any building permit for the development or enlargement on a receiving site. Sections of State Z Tax Statute (and the corresponding sections of State Z regulations), define “real property” to include “every estate or right, legal or equitable, present or future, vested or contingent, in lands, tenements or hereditaments, including buildings, structures and other improvements thereon, which are located in whole or in part within [State Z].” Sections of State Z Tax Statute further define an “interest in real property” to include “title in fee, a leasehold interest, a beneficial interest, an encumbrance, development rights, air space and air rights, or any other interest with the right to use or occupancy of real property or the right to receive rents, profits, or other income derived from real property.” See also Local Ruling, which noted that a transfer of development rights is subject to State Z gains tax as a “transfer of real property.” State Z General Municipal Law generally defines “development rights” as “the rights granted to a lot or parcel of land under a zoning ordinance or local law respecting permissible use, area, bulk or height of improvements executed thereon. Development rights may be calculated and allocated in accordance with such factors as area, floor area, floor area ratios, height limitations or any other criteria including assessed valuation that will effectively quantify a value for the development right in a manner that will carry out the objectives of this article.” State Z General Municipal Law further
defines “Transfer of development rights” to mean “the process by which development rights are passed from one lot or parcel to another.” Taxpayer represents that it will receive no tax credits or direct incentive of any kind from State Z or City in connection with the subject transaction. You have requested a ruling that Development Rights are like kind, for purposes of § 1031, to the fee interest in Property 1 that Taxpayer will, using a QI, sell to a third party. LAW AND ANALYSIS Section 1031(a)(1) provides that no gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like kind which is to be held either for productive use in a trade or business or for investment. Treas. Reg. § 1.1031(a)-1(b) provides, in part, that the words “like kind” refer to the nature or character of the property and not to its grade or quality. One kind or class of property may not be exchanged for property of a different kind or class. The fact that any real estate involved is improved or unimproved isnot material, for that fact relates only to the grade or quality of the property and not to its kind or class. Properties to be exchanged tax free under § 1031 must be of the same kind or class. Treas. Reg. § 1.1031(a)-1(c) sets forth examples of properties that will be considered like kind. The most relevant examples pertain to real estate and provide that a taxpayer who is not a dealer in real estate may exchange city real estate for a ranch or farm, a leasehold of a fee with 30 years or more to run for real estate, or improved real estate for unimproved real estate. Whether property constitutes real or personal property generally is determined under state or local law. See, e.g., Rev. Rul. 77-414, 1977-2 C.B. 299 (Development right in agricultural land constitutes “interest or right” in real property under local law). The types of property rights and interests that constitute interests in real property and may be considered like kind to real property for purposes of § 1031 are broad. For instance, in Rev. Rul. 55-749, 1955-2 C.B. 295, land was exchanged for perpetual water rights, which are considered real property rights under the applicable state law. The ruling holds that the fee interest in the land and the water rights in perpetuity are sufficiently similar to constitute like kind property for § 1031(a) purposes. In addition, Rev. Rul. 72549, 1972-2 C.B. 472, holds that an easement and right-of-way, both of which were permanent, granted to an electric power company are properties of like kind to both real property with nominal improvements and real property improved with an apartment building. Similarly, in Rev. Rul. 68-331, 1968-1 C.B. 352, a leasehold interest in a producing oil lease extended until the exhaustion of the deposit that it held for productive use in the taxpayer’s trade or business was exchanged for the fee interest in an improved ranch to be held for the productive use in the taxpayer’s business. The revenue ruling holds that the exchange was an exchange of real property of a like kind under § 1031(a) since both the leasehold interest and the fee interestare continuing interests in real property. See also Notice 2005-57, 2005-2 C.B. 267, which, in Q&A 8, noted that a tobacco quota is considered an interest in land; and, under Q&A-11, the Owner thereof may defer gain or loss from the termination of a quota by entering into a like-kind exchange pursuant to § 1031 and the regulations thereunder. In this case, Taxpayer proposes to acquire Development Rights as its replacement property for purposes of § 1031(a) and to transfer such rights to Property 2, which Taxpayer already owns. In Rev. Rul. 68-394, 1968-2 C.B. 338, the Service noted that for purposes of § 1031(a), it is not material that the property acquired by the taxpayer as the replacement property is on property already owned by that taxpayer so long as it is acquired in an arm’s-length transaction. In Rev. Rul. 68-394, land held by the taxpayer for investment was condemned for a state freeway. The taxpayer owned adjacent land that he had leased to a second party to use and develop as a mobile trailer park site. For purposes of replacing the condemned property, the taxpayer used part of the condemnation proceeds to purchase the outstanding leasehold on the adjacent land. The lease still had 45 years to run at the time of purchase. After acquisition of the leasehold, the taxpayer used the land as a mobile trailer park site. The purchase of the outstanding leasehold was an arm’s length transaction. The ruling notes that for purposes of reinvesting condemnation proceeds under § 1033(g) of the Code, Treas. Reg. § 1.1033(g)(1)(a) refers to Treas. Reg. § 1.1031(a)-1 for guidance in determining whether the replacement property is property of like kind. Since, under the § 1031 regulations, the exchange of a leasehold interest in real estate with 30 years or more to run for real estate qualifies as a like kind exchange for purposes of § 1031(a), the ruling holds that the acquisition of a leasehold interest with more than 30 years to run following the condemnation of unimproved real estate would likewise qualify as replacement property of like kind for purposes of § 1033(g), even though the leasehold interest was on property already owned by the taxpayer. For proposes of determining if Taxpayer’s proposed transaction qualifies as a like-kind exchange under § 1031(a), it is thus immaterial that Development Rights to be acquired by Taxpayer will be used merely to enhance the real property already owned by Taxpayer. More important is whether Development Rights constitute interests in real property under the state and local laws of State Z. Although it is unclear whether Development Rights are treated as interests in real property for all purposes of State Z law, it is clear that Sections of State Z Tax Statute and the regulations thereunder cited by Taxpayer do treat Development Rights as an interest in real property. Moreover, the various sections of the local Ordinances cited by Taxpayer provide that Development Rights are as-of-right and not discretionary, meaning that they exist permanently rather than at the discretion of a city agency or other decision-making authority. As such, these rights appear to be analogous to perpetual rights. Similarly, Taxpayer represents that a deed transfer is similar to the perfecting of Development
Rights, which involves an actual transfer of rights from one property to another. For instance, the transfer of Development Rights must be verified by filings with City’s DCP, which may require recording of certain easements as a condition of the transfer of Development Rights on certain properties. Evidence of such filings and DCP approval must be submitted to the City Register before the transfer document can be recorded and indexed against the granting and receiving sites. Certified copies of such filings must be submitted to DCP, and notice of receipt of the certified copies by the DCP is a pre-condition to the issuance of any building permit for the development or enlargement on a receiving site. Also, Development Rights are subject to City and State Z transfer taxes in the same manner as a deed transfer. Thus, while the Tax Statutes of State Z do not explicitly state that Development Rights are granted in perpetuity, such rights do arise out of an interest in the underlying real estate. Moreover, as indicated by the submission, City Ordinances do not set an expiration date for Development Rights, and thus they are effectively perpetual in nature. Based on the above authorities and the facts and representations that were submitted, and assuming that Development Rights are, by virtue of State Z law and local law cited by Taxpayer, an interest in real property, we conclude that Development Rights that Taxpayer intends to acquire as replacement property will be considered like kind, for purposes of § 1031, to the fee interest in Relinquished Property. Except as expressly provided herein, no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter. We express no opinion whether the proposed transaction qualifies in all other respects for tax deferral under § 1031 beyond what is expressly stated in the above ruling. Specifically, no opinion is expressed with respect to whether the proposed transaction meets the deferred like-kind exchange requirements of Treas. Reg. § 1.1031(k)-1. The rulings contained in this letter are based upon information and representations submitted and accompanied by a penalty and perjury statement executed by an appropriate party. While this office has not verified any of the material submitted in support of the request for rulings, it is subject to verification on examination. This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the Code provides that it may not be used or cited as precedent. In accordance with the Power of Attorney on file with this office, a copy of this letter is being sent to your authorized representative. A copy of this letter must be attached to any income tax return to which it is relevant. Alternatively, taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of the letter ruling. Sincerely, William A. Jackson
Branch Chief, Branch 5 Office of Chief Counsel
(Income Tax & Accounting)
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Posted by Strategic Property Exchanges on Feb 21, 2008
(The following is an excerpt from our 1031 Advisor newsletter located here )
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Posted by Strategic Property Exchanges on Feb 07, 2008
(The following is an excerpt from our 1031 Advisor newsletter located here ) Are Banks (actually or legally) Qualified Intermediaries (QIs)? Requirements for Banks to Hold Proceeds from Sale of Relinquished Property What is the Downside of Banks nor meeting these Requirements? What are Other Situations where a Bank may NOT be used as a QI? How can you know if a Bank does not understand the rules under Section 1031, or disregards the rules?
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Posted by Strategic Property Exchanges on Jan 10, 2008
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