Mastering Advanced IRC 1031 Concepts

2. The Power of Strategy™: Mastering Advanced § 1031 Exchange Concepts Hosted by: Asset Preservation, Inc. Presented by: William B. Hood, CPA Division Manager One Hour

18. The Taxpayer acquired property of a lower value, keeps $100,000 of the net equity and acquired a replacement property with $40,000 less debt. Analysis: This results in a total of $140,000 in boot. ($40,000 mortgage boot and $100,000 in cash boot = $140,000) The Exchange Equation $ 100,000 $440,000 $540,000 Net Equity $60,000 - Cost of Sale $140,000 Total Boot $40,000 $260,000 $300,000 - Debt $700,000 $900,000 Value Boot Replacement Relinquished

19. The Taxpayer acquired property of a lower value, reinvesting all net equity, but has less debt on the replacement property. Analysis: This results in $40,000 in mortgage boot. The Exchange Equation $60,000 - Cost of Sale $ 0 $540,000 $540,000 Net Equity $40,000 Total Boot $40,000 $260,000 $300,000 - Debt $800,000 $900,000 Value Boot Replacement Relinquished

23. SALE The Delayed Exchange with a QI Direct Deed

24. Direct Deed SALE $ The Delayed Exchange with a QI

25. Direct Deed $ PURCHASE The Delayed Exchange with a QI Direct Deed $ SALE

41. Replacement Property Parked (Step 1) $800k Rep. Prop. Deed EAT Acquisition Lease Reverse Exchange Format Replacement Property Parked (Step 1) $700,000 Loan $100,000 Cash $800,000 Purchase Price $100,000 + $700,000

42. Replacement Property Parked (Step 2) $ Rep. Prop. Deed $ Rel. Prop. Deed Reverse Exchange Format Replacement Property Parked (Step 2) $100,000 $200,000 Equity $700,000 $200,000 Debt $800,000 $400,000 Value Purchase Price Sale Price

44. Lease Rel. Prop. Deed Reverse Exchange Format Relinquished Property Parked (Step 1)

45. Relinquished Property Parked (Step 1) $ Rep. Prop. Deed $ Reverse Exchange Format

46. $ $ Rel. Prop.Deed Reverse Exchange Format Relinquished Property Parked (Step 2)

49. The Improvement Exchange Identification of Replacement Property to be Produced “… if a legal description is provided for the underlying land and as much detail is provided regarding construction of the improvements as is practicable at the time identification is made.”

50. The Improvement Exchange Receipt of Replacement Property to be Produced “… if not within the provisions of Section 1031(a) if the relinquished property is transferred in exchange for services (including production services). Thus, any additional production occurring with respect to the replacement property after the property is received by the taxpayer will not be treated as the receipt of property of like-kind.”

51. Step 1 $ Rep. Prop Deed Rel. Prop. Deed Construction Agreement $ The Improvement Exchange

52. Rep. Prop. Deed The Improvement Exchange Step 2

53. The Improvement Exchange How do the Numbers Work Out? $230,000 Draw 2f oundation $930,000 Exchange Value $100,000 Draw 1 site work $600,000 Lot Purchase (cash purchase) Replacement Property $70,000 Cost of Sale $930,000 Net Equity to QI $0 Debt $1,000,000 Sales Price Relinquished Property

55. Revenue Procedure 2004-51 An Exchange of Real Estate Owned by a Taxpayer for Improvements on Land Owned by the Same Taxpayer Does Not Meet the Requirements of §1031. See Decleene v. Commissioner, 115 T.C. 457 (2000); Bloomington Coco-Cola Bottling Co. v. Commissioner, 189 F.2d 14 (7th Cir. 1951). Rev. Rul. 67- 255. 1967 2 C. B. 270, Holds that a Building Constructed on Land Owned by a Taxpayer is Not of a Like-Kind to Involuntarily Converted Land of the Same Taxpayer.

58. Why Exchange? Sale vs. an Exchange $189,960 TOTAL TAX DUE +$66,960 plus State Tax (CA 9.3%) +$85,500 plus Federal Capital Gain (15%) $37,500 Recaptured Depreciation (25%) 3rd CALCULATE CAPITAL GAIN TAX DUE $720,000 equals CAPITAL GAIN -$80,000 minus Cost of Sale -$400,000 minus Net Adjusted Basis $1,200,000 Sales Price 2nd CALCULATE CAPITAL GAIN* $400,000 equals Net Adjusted Basis -$150,000 minus Depreciation +$50,000 plus Capital Improvement $500,000 Original Purchase Price (Basis) 1st CALCULATE NET ADJUSTED BASIS

59. Why Exchange? Sale vs. an Exchange Note: 25% x $150,000 = $37,500 * 15% x $570,000 = $85,500 * 9.3% x 720,000 = $66,960 $3,280,000 Gross Equity x 4 $820,000 Gross Equity = Net Equity 6th ANALYZE REINVESTMENT – EXCHANGE $2,520,160 After-Tax Equity x 4 5th ANALYZE REINVESTMENT - SALE $630,040 equals AFTER-TAX EQUITY $189,960 minus Capital Gain Taxes Due $820,000 equals GROSS EQUITY -$300,000 minus Loan Balances -$80,000 minus Cost of Sale $1,200,000 Sales Price 4th CALCULATE AFTER-TAX EQUITY

60. Choosing a Qualified Intermediary

61. Choosing a Qualified Intermediary

64. William B. Hood, CPA 770-641-1031 – Office 770-597-8184 – Cell [email_address] National Headquarters 800-282-1031 Eastern Regional Office 866-394-1031 www.apiexchange.com www.apiexchange.com For more information, contact: