Development

Category: 1031 Exchange General

  • Installment Sales and 1031 Like-Kind Exchanges, Part 1

    Seller Financing in the Context of a 1031 Exchange
    It is not unusual for a taxpayer to finance the buyer in whole or in part.  Such transactions may or may not involve the seller’s intent to complete a 1031 exchange.  The structure of the seller’s financing can take the form of a note and mortgage/deed of trust from the buyer or under Articles of Agreement for Deed.  The specific form should not impact the seller’s options in structuring an exchange as part of the transaction. 
    Under an installment sale using a note and mortgage/deed of trust, the question frequently arises whether a taxpayer can structure an exchange when the balloon payment becomes due, rather than at the time the parties enter into the installment sale.  Similar questions are raised with Articles of Agreement for Deed – can the exchange be done at the time of the balloon payment when the buyer is receiving the deed? It cannot, since, for tax and legal purposes, the point of transfer of ownership occurs when the parties enter into the note and mortgage or an Articles of Agreement for Deed rather than when the balloon payment is made or when the deed is issued.
    Taxpayer Receiving Cash and a Note
    It’s very common for the taxpayer/seller to receive money down from the buyer and to carry a note for the additional sum due.  At times, this arrangement is entered into because the parties wish to close, but the buyer’s conventional financing is taking more time than expected.  In this instance, the note should be made payable to the qualified intermediary (the exchange company).  To the extent that the buyer can procure the financing from the institutional lender before the taxpayer closes on the replacement property, the note may simply be substituted for cash from the buyer’s loan. 
    It is more likely that the taxpayer’s 180 day exchange period will fall prior to the receipt of funds into the exchange account.  In this case, a solution is for the seller to “buy” his own note from his exchange account with fresh cash.  Essentially, the taxpayer advances personal funds into the replacement property while not receiving the equivalent amount of cash from the buyer at that time. These funds can be cash that the taxpayer already has available, or it can be from a loan that the taxpayer takes out to buy the note.  The benefit to the note buyout is that the future principal payments received by the taxpayer over time will be fully tax deferred. 
    In the example above, care should be taken as to when the note (or installment agreement) should be turned over to the taxpayer. There is a natural tendency to pass the cash and note simultaneously. After all, the client is putting into the exchange account the exact same value that he is taking out.  However, because the regulations prohibit the taxpayer from the “right to receive money or other property pursuant to the security or guaranty arrangement,” it is probably better to receive the cash into the account sometime prior to the purchase of the replacement property, while assigning the note to the seller after all the replacement property has been acquired.  Some qualified intermediaries will have a form that they will sign acknowledging the substitution of cash for the note with a promise to distribute the note upon the closing of the exchange account.
    Conclusion
    There are various scenarios in which an installment sale can impact tax deferral.  In some cases deferral can be attained by the taxpayer’s substitution of cash into an exchange account for an installment note or a sale under articles of agreement for deed. In our next post, we examine more complex instances involving installment sales and 1031 exchanges.

     

  • Installment Sales and 1031 Like-Kind Exchanges, Part 1

    Seller Financing in the Context of a 1031 Exchange
    It is not unusual for a taxpayer to finance the buyer in whole or in part.  Such transactions may or may not involve the seller’s intent to complete a 1031 exchange.  The structure of the seller’s financing can take the form of a note and mortgage/deed of trust from the buyer or under Articles of Agreement for Deed.  The specific form should not impact the seller’s options in structuring an exchange as part of the transaction. 
    Under an installment sale using a note and mortgage/deed of trust, the question frequently arises whether a taxpayer can structure an exchange when the balloon payment becomes due, rather than at the time the parties enter into the installment sale.  Similar questions are raised with Articles of Agreement for Deed – can the exchange be done at the time of the balloon payment when the buyer is receiving the deed? It cannot, since, for tax and legal purposes, the point of transfer of ownership occurs when the parties enter into the note and mortgage or an Articles of Agreement for Deed rather than when the balloon payment is made or when the deed is issued.
    Taxpayer Receiving Cash and a Note
    It’s very common for the taxpayer/seller to receive money down from the buyer and to carry a note for the additional sum due.  At times, this arrangement is entered into because the parties wish to close, but the buyer’s conventional financing is taking more time than expected.  In this instance, the note should be made payable to the qualified intermediary (the exchange company).  To the extent that the buyer can procure the financing from the institutional lender before the taxpayer closes on the replacement property, the note may simply be substituted for cash from the buyer’s loan. 
    It is more likely that the taxpayer’s 180 day exchange period will fall prior to the receipt of funds into the exchange account.  In this case, a solution is for the seller to “buy” his own note from his exchange account with fresh cash.  Essentially, the taxpayer advances personal funds into the replacement property while not receiving the equivalent amount of cash from the buyer at that time. These funds can be cash that the taxpayer already has available, or it can be from a loan that the taxpayer takes out to buy the note.  The benefit to the note buyout is that the future principal payments received by the taxpayer over time will be fully tax deferred. 
    In the example above, care should be taken as to when the note (or installment agreement) should be turned over to the taxpayer. There is a natural tendency to pass the cash and note simultaneously. After all, the client is putting into the exchange account the exact same value that he is taking out.  However, because the regulations prohibit the taxpayer from the “right to receive money or other property pursuant to the security or guaranty arrangement,” it is probably better to receive the cash into the account sometime prior to the purchase of the replacement property, while assigning the note to the seller after all the replacement property has been acquired.  Some qualified intermediaries will have a form that they will sign acknowledging the substitution of cash for the note with a promise to distribute the note upon the closing of the exchange account.
    Conclusion
    There are various scenarios in which an installment sale can impact tax deferral.  In some cases deferral can be attained by the taxpayer’s substitution of cash into an exchange account for an installment note or a sale under articles of agreement for deed. In our next post, we examine more complex instances involving installment sales and 1031 exchanges.

     

  • Installment Sales and 1031 Like-Kind Exchanges, Part 1

    Seller Financing in the Context of a 1031 Exchange
    It is not unusual for a taxpayer to finance the buyer in whole or in part.  Such transactions may or may not involve the seller’s intent to complete a 1031 exchange.  The structure of the seller’s financing can take the form of a note and mortgage/deed of trust from the buyer or under Articles of Agreement for Deed.  The specific form should not impact the seller’s options in structuring an exchange as part of the transaction. 
    Under an installment sale using a note and mortgage/deed of trust, the question frequently arises whether a taxpayer can structure an exchange when the balloon payment becomes due, rather than at the time the parties enter into the installment sale.  Similar questions are raised with Articles of Agreement for Deed – can the exchange be done at the time of the balloon payment when the buyer is receiving the deed? It cannot, since, for tax and legal purposes, the point of transfer of ownership occurs when the parties enter into the note and mortgage or an Articles of Agreement for Deed rather than when the balloon payment is made or when the deed is issued.
    Taxpayer Receiving Cash and a Note
    It’s very common for the taxpayer/seller to receive money down from the buyer and to carry a note for the additional sum due.  At times, this arrangement is entered into because the parties wish to close, but the buyer’s conventional financing is taking more time than expected.  In this instance, the note should be made payable to the qualified intermediary (the exchange company).  To the extent that the buyer can procure the financing from the institutional lender before the taxpayer closes on the replacement property, the note may simply be substituted for cash from the buyer’s loan. 
    It is more likely that the taxpayer’s 180 day exchange period will fall prior to the receipt of funds into the exchange account.  In this case, a solution is for the seller to “buy” his own note from his exchange account with fresh cash.  Essentially, the taxpayer advances personal funds into the replacement property while not receiving the equivalent amount of cash from the buyer at that time. These funds can be cash that the taxpayer already has available, or it can be from a loan that the taxpayer takes out to buy the note.  The benefit to the note buyout is that the future principal payments received by the taxpayer over time will be fully tax deferred. 
    In the example above, care should be taken as to when the note (or installment agreement) should be turned over to the taxpayer. There is a natural tendency to pass the cash and note simultaneously. After all, the client is putting into the exchange account the exact same value that he is taking out.  However, because the regulations prohibit the taxpayer from the “right to receive money or other property pursuant to the security or guaranty arrangement,” it is probably better to receive the cash into the account sometime prior to the purchase of the replacement property, while assigning the note to the seller after all the replacement property has been acquired.  Some qualified intermediaries will have a form that they will sign acknowledging the substitution of cash for the note with a promise to distribute the note upon the closing of the exchange account.
    Conclusion
    There are various scenarios in which an installment sale can impact tax deferral.  In some cases deferral can be attained by the taxpayer’s substitution of cash into an exchange account for an installment note or a sale under articles of agreement for deed. In our next post, we examine more complex instances involving installment sales and 1031 exchanges.

     

  • Installment Sales and 1031 Like-Kind Exchanges, Part 1

    Seller Financing in the Context of a 1031 Exchange
    It is not unusual for a taxpayer to finance the buyer in whole or in part.  Such transactions may or may not involve the seller’s intent to complete a 1031 exchange.  The structure of the seller’s financing can take the form of a note and mortgage/deed of trust from the buyer or under Articles of Agreement for Deed.  The specific form should not impact the seller’s options in structuring an exchange as part of the transaction. 
    Under an installment sale using a note and mortgage/deed of trust, the question frequently arises whether a taxpayer can structure an exchange when the balloon payment becomes due, rather than at the time the parties enter into the installment sale.  Similar questions are raised with Articles of Agreement for Deed – can the exchange be done at the time of the balloon payment when the buyer is receiving the deed? It cannot, since, for tax and legal purposes, the point of transfer of ownership occurs when the parties enter into the note and mortgage or an Articles of Agreement for Deed rather than when the balloon payment is made or when the deed is issued.
    Taxpayer Receiving Cash and a Note
    It’s very common for the taxpayer/seller to receive money down from the buyer and to carry a note for the additional sum due.  At times, this arrangement is entered into because the parties wish to close, but the buyer’s conventional financing is taking more time than expected.  In this instance, the note should be made payable to the qualified intermediary (the exchange company).  To the extent that the buyer can procure the financing from the institutional lender before the taxpayer closes on the replacement property, the note may simply be substituted for cash from the buyer’s loan. 
    It is more likely that the taxpayer’s 180 day exchange period will fall prior to the receipt of funds into the exchange account.  In this case, a solution is for the seller to “buy” his own note from his exchange account with fresh cash.  Essentially, the taxpayer advances personal funds into the replacement property while not receiving the equivalent amount of cash from the buyer at that time. These funds can be cash that the taxpayer already has available, or it can be from a loan that the taxpayer takes out to buy the note.  The benefit to the note buyout is that the future principal payments received by the taxpayer over time will be fully tax deferred. 
    In the example above, care should be taken as to when the note (or installment agreement) should be turned over to the taxpayer. There is a natural tendency to pass the cash and note simultaneously. After all, the client is putting into the exchange account the exact same value that he is taking out.  However, because the regulations prohibit the taxpayer from the “right to receive money or other property pursuant to the security or guaranty arrangement,” it is probably better to receive the cash into the account sometime prior to the purchase of the replacement property, while assigning the note to the seller after all the replacement property has been acquired.  Some qualified intermediaries will have a form that they will sign acknowledging the substitution of cash for the note with a promise to distribute the note upon the closing of the exchange account.
    Conclusion
    There are various scenarios in which an installment sale can impact tax deferral.  In some cases deferral can be attained by the taxpayer’s substitution of cash into an exchange account for an installment note or a sale under articles of agreement for deed. In our next post, we examine more complex instances involving installment sales and 1031 exchanges.

     

  • Pay Now or Pay Later: Like-Kind Exchanges and Depreciation

    Are 1031 Exchanges simply a loophole for wealthy taxpayers?
    No. Like-kind exchanges provide individuals and businesses, both small and large, incentive to replace old investment property and business-use assets with new assets that are like-kind. The economy is stimulated in exactly the way intended when Section 1031 was written in 1921 – by allowing for the continued sale and purchase of real estate for business use. Deferring taxes on the sale of the old assets makes the purchase of new assets possible.
    Doesn’t the government lose revenue as a result of 1031 exchanges?
    When a like-kind exchange occurs, Section 1031 provides the mechanism to defer taxable gain recognition in return for reinvestment of 100% of the sales proceeds back into a “like-kind” asset, and it accounts for the new asset on the tax books in a specific manner: Every dollar that is deferred in a 1031 exchange must be subtracted from the amount that can be depreciated from the replacement asset.
    The U.S. Treasury immediately offsets tax revenue losses by disallowing future tax depreciation equal to the gain that was deferred under an exchange. So, when a company files its taxes the year following a deferral, less depreciation expense is taken due to the disallowance and more income tax is paid. Over the tax life of the replacement property, the foregone depreciation is EXACTLY equal to the original deferral amount. The extra taxes collected by the U.S. Treasury during the tax life are also EXACTLY equal to the taxes otherwise paid under a sale transaction. This relationship between deferral and depreciation is outlined in a paper recently released by the Federation of Exchange Accommodators,

  • Pay Now or Pay Later: Like-Kind Exchanges and Depreciation

    Are 1031 Exchanges simply a loophole for wealthy taxpayers?
    No. Like-kind exchanges provide individuals and businesses, both small and large, incentive to replace old investment property and business-use assets with new assets that are like-kind. The economy is stimulated in exactly the way intended when Section 1031 was written in 1921 – by allowing for the continued sale and purchase of real estate for business use. Deferring taxes on the sale of the old assets makes the purchase of new assets possible.
    Doesn’t the government lose revenue as a result of 1031 exchanges?
    When a like-kind exchange occurs, Section 1031 provides the mechanism to defer taxable gain recognition in return for reinvestment of 100% of the sales proceeds back into a “like-kind” asset, and it accounts for the new asset on the tax books in a specific manner: Every dollar that is deferred in a 1031 exchange must be subtracted from the amount that can be depreciated from the replacement asset.
    The U.S. Treasury immediately offsets tax revenue losses by disallowing future tax depreciation equal to the gain that was deferred under an exchange. So, when a company files its taxes the year following a deferral, less depreciation expense is taken due to the disallowance and more income tax is paid. Over the tax life of the replacement property, the foregone depreciation is EXACTLY equal to the original deferral amount. The extra taxes collected by the U.S. Treasury during the tax life are also EXACTLY equal to the taxes otherwise paid under a sale transaction. This relationship between deferral and depreciation is outlined in a paper recently released by the Federation of Exchange Accommodators,

  • Pay Now or Pay Later: Like-Kind Exchanges and Depreciation

    Are 1031 Exchanges simply a loophole for wealthy taxpayers?
    No. Like-kind exchanges provide individuals and businesses, both small and large, incentive to replace old investment property and business-use assets with new assets that are like-kind. The economy is stimulated in exactly the way intended when Section 1031 was written in 1921 – by allowing for the continued sale and purchase of real estate for business use. Deferring taxes on the sale of the old assets makes the purchase of new assets possible.
    Doesn’t the government lose revenue as a result of 1031 exchanges?
    When a like-kind exchange occurs, Section 1031 provides the mechanism to defer taxable gain recognition in return for reinvestment of 100% of the sales proceeds back into a “like-kind” asset, and it accounts for the new asset on the tax books in a specific manner: Every dollar that is deferred in a 1031 exchange must be subtracted from the amount that can be depreciated from the replacement asset.
    The U.S. Treasury immediately offsets tax revenue losses by disallowing future tax depreciation equal to the gain that was deferred under an exchange. So, when a company files its taxes the year following a deferral, less depreciation expense is taken due to the disallowance and more income tax is paid. Over the tax life of the replacement property, the foregone depreciation is EXACTLY equal to the original deferral amount. The extra taxes collected by the U.S. Treasury during the tax life are also EXACTLY equal to the taxes otherwise paid under a sale transaction. This relationship between deferral and depreciation is outlined in a paper recently released by the Federation of Exchange Accommodators,

  • How to Mitigate the Financial Impact of Tier 4 Regulations

     In 2015, American heavy equipment companies will be subject to the many pressures associated with the purchase and use of Tier 4 equipment. Tier regulations require manufacturers to adhere to emissions regulations in the production of equipment engines. The EPA introduced Tier 4 in 2004 and designated a ramp-up period from 2008-2015 so that manufacturers could phase-in engine design changes that would meet the stringent standards. Well, 2015 is here, and manufacturers will not be the only ones impacted by the new requirements. Their burden is already being passed on to the companies that use heavy equipment in the form of higher acquisition costs.
    How Tier 4 Impacts  Your Heavy Equipment Business
    Selling Equipment With Remaining Utility
    Most businesses that utilize diesel driven equipment to conduct their business operations adhere to a predictable schedule of disposition and acquisition of their company’s equipment. Tier 4 mandates now require many companies to sell off used equipment far short of the end of its utility and useful life. This has cost ramifications.
    Sacrificing Government Contracts
    Many companies that depend on federal and state contracts will not be able to bid on or work jobs if their equipment is not Tier 4-compliant — once again imposing extra costs onto businesses who are forced to upgrade equipment if they want to  work on government projects. These companies will have to upgrade to equipment that is Tier 4-compliant if they want this business.
    Increased Maintenance Cost
    If companies do not replace their fleets with Tier 4 approved equipment, they will not only find themselves at a competitive disadvantage; they will see their maintenance costs on non-compliant equipment rise as the use of that equipment is increasingly disincented.
    Consider a 1031 Like-Kind Exchange Strategy
    Given these challenges, companies may consider a 1031 like-kind exchange strategy as part of their equipment acquisition/disposition practice. Such a strategy could provide owners the cash flow boost necessary to mitigate the new equipment-replacement policies that come with Tier 4.
    Section 1031 of the IRC Tax Code provides for the deferral of taxes on realized gains from the sale of business assets. This can result in an immediate cash benefit of 40% of the sale revenues generated when you dispose of your old or non-compliant equipment, money that would otherwise be paid in taxes.
    If you bought a piece of construction equipment for $200,000, used it in your business for five years, and then sold it for $50,000, you would normally owe $20,000 in income taxes — leaving you with only $30,000 to buy new equipment. With a 1031 like-kind exchange, you would pay ZERO in taxes and have the entire $50,000 to use towards purchasing new equipment.
    Conclusion
    A company’s success is intrinsically linked to its ability to replace and replenish its business equipment in a timely and financially-viable manner. Embracing a personal property like-kind exchange strategy may be an advantageous means of generating extra cash for the purchase of new equipment to stay competitive in a Tier 4 environment.

  • How to Mitigate the Financial Impact of Tier 4 Regulations

     In 2015, American heavy equipment companies will be subject to the many pressures associated with the purchase and use of Tier 4 equipment. Tier regulations require manufacturers to adhere to emissions regulations in the production of equipment engines. The EPA introduced Tier 4 in 2004 and designated a ramp-up period from 2008-2015 so that manufacturers could phase-in engine design changes that would meet the stringent standards. Well, 2015 is here, and manufacturers will not be the only ones impacted by the new requirements. Their burden is already being passed on to the companies that use heavy equipment in the form of higher acquisition costs.
    How Tier 4 Impacts  Your Heavy Equipment Business
    Selling Equipment With Remaining Utility
    Most businesses that utilize diesel driven equipment to conduct their business operations adhere to a predictable schedule of disposition and acquisition of their company’s equipment. Tier 4 mandates now require many companies to sell off used equipment far short of the end of its utility and useful life. This has cost ramifications.
    Sacrificing Government Contracts
    Many companies that depend on federal and state contracts will not be able to bid on or work jobs if their equipment is not Tier 4-compliant — once again imposing extra costs onto businesses who are forced to upgrade equipment if they want to  work on government projects. These companies will have to upgrade to equipment that is Tier 4-compliant if they want this business.
    Increased Maintenance Cost
    If companies do not replace their fleets with Tier 4 approved equipment, they will not only find themselves at a competitive disadvantage; they will see their maintenance costs on non-compliant equipment rise as the use of that equipment is increasingly disincented.
    Consider a 1031 Like-Kind Exchange Strategy
    Given these challenges, companies may consider a 1031 like-kind exchange strategy as part of their equipment acquisition/disposition practice. Such a strategy could provide owners the cash flow boost necessary to mitigate the new equipment-replacement policies that come with Tier 4.
    Section 1031 of the IRC Tax Code provides for the deferral of taxes on realized gains from the sale of business assets. This can result in an immediate cash benefit of 40% of the sale revenues generated when you dispose of your old or non-compliant equipment, money that would otherwise be paid in taxes.
    If you bought a piece of construction equipment for $200,000, used it in your business for five years, and then sold it for $50,000, you would normally owe $20,000 in income taxes — leaving you with only $30,000 to buy new equipment. With a 1031 like-kind exchange, you would pay ZERO in taxes and have the entire $50,000 to use towards purchasing new equipment.
    Conclusion
    A company’s success is intrinsically linked to its ability to replace and replenish its business equipment in a timely and financially-viable manner. Embracing a personal property like-kind exchange strategy may be an advantageous means of generating extra cash for the purchase of new equipment to stay competitive in a Tier 4 environment.

  • How to Mitigate the Financial Impact of Tier 4 Regulations

     In 2015, American heavy equipment companies will be subject to the many pressures associated with the purchase and use of Tier 4 equipment. Tier regulations require manufacturers to adhere to emissions regulations in the production of equipment engines. The EPA introduced Tier 4 in 2004 and designated a ramp-up period from 2008-2015 so that manufacturers could phase-in engine design changes that would meet the stringent standards. Well, 2015 is here, and manufacturers will not be the only ones impacted by the new requirements. Their burden is already being passed on to the companies that use heavy equipment in the form of higher acquisition costs.
    How Tier 4 Impacts  Your Heavy Equipment Business
    Selling Equipment With Remaining Utility
    Most businesses that utilize diesel driven equipment to conduct their business operations adhere to a predictable schedule of disposition and acquisition of their company’s equipment. Tier 4 mandates now require many companies to sell off used equipment far short of the end of its utility and useful life. This has cost ramifications.
    Sacrificing Government Contracts
    Many companies that depend on federal and state contracts will not be able to bid on or work jobs if their equipment is not Tier 4-compliant — once again imposing extra costs onto businesses who are forced to upgrade equipment if they want to  work on government projects. These companies will have to upgrade to equipment that is Tier 4-compliant if they want this business.
    Increased Maintenance Cost
    If companies do not replace their fleets with Tier 4 approved equipment, they will not only find themselves at a competitive disadvantage; they will see their maintenance costs on non-compliant equipment rise as the use of that equipment is increasingly disincented.
    Consider a 1031 Like-Kind Exchange Strategy
    Given these challenges, companies may consider a 1031 like-kind exchange strategy as part of their equipment acquisition/disposition practice. Such a strategy could provide owners the cash flow boost necessary to mitigate the new equipment-replacement policies that come with Tier 4.
    Section 1031 of the IRC Tax Code provides for the deferral of taxes on realized gains from the sale of business assets. This can result in an immediate cash benefit of 40% of the sale revenues generated when you dispose of your old or non-compliant equipment, money that would otherwise be paid in taxes.
    If you bought a piece of construction equipment for $200,000, used it in your business for five years, and then sold it for $50,000, you would normally owe $20,000 in income taxes — leaving you with only $30,000 to buy new equipment. With a 1031 like-kind exchange, you would pay ZERO in taxes and have the entire $50,000 to use towards purchasing new equipment.
    Conclusion
    A company’s success is intrinsically linked to its ability to replace and replenish its business equipment in a timely and financially-viable manner. Embracing a personal property like-kind exchange strategy may be an advantageous means of generating extra cash for the purchase of new equipment to stay competitive in a Tier 4 environment.