Category: 1031 Exchange General

As Politico noted in a recent report on The Center for American Progress study, Federation of Exchange Accommodators (FEA) recently responded directly to this report, clarifying inaccuracies, myths and misstatements of the legislative history that were noted to justify repeal of Internal Revenue Code section 1031 (“Section 1031”) (see page 28 in http://cdn.americanprogress.org/wp-content/uploads/2014/09/SteinTaxRefo… report).  While we all support the goal of making the “tax code work better for everyone – not just the wealthy and well connected,” many disagree that repeal or limitation of Section 1031 would further tax reform goals.   Merely deleting code sections in our tax code does not make it simpler or fairer. On the contrary, removing the benefits of like-kind exchanges encourages effectively penalizes business owners who have limited access to capital while hoping to grow operations and maintain their workforce.
 
Lawmakers often rely on sources or themes that might promote good political policy but result in decisions that promote bad economic policies. In order to fully understand why Section 1031 like-kind exchanges create good political, tax and economic policy, let’s review some of the myths surrounding the code section’s original intent noted by the FEA in a formal response.
Myth 1: The Congressional purpose for Section 1031 is no longer relevant
Truth: Section 1031 was enacted in 1921 for three primary purposes, two of which are even more relevant today in our global economy.

Avoiding unfair taxation of ongoing investments to allow taxpayers to maintain investments in property without being taxed on theoretical (i.e. “paper”) gains and losses during the course of a continuous investment.
Encouraging active reinvestment, which encourages the tax-deferred exchange of property, thus promoting transactional activity.

The third primary purpose of the 1921 law had to do with “administrative convenience,” which referred to “the difficulty of valuing exchanged property.” Three years later in 1924, Congress scrapped administrative convenience as a purpose for Section 1031 as being too vague, however this long-defunct third purpose, which the U.S. Treasury Department acknowledges is no longer true, is curiously the only rationale cited by the Treasury for repeal.
Myth 2: The absence of a precise definition of “like-kind” is administratively difficult for the IRS and creates the opportunity for abuse.
Truth: The definition of “like-kind” is well understood. Section 1031 is neither administratively difficult for either the IRS or taxpayers, nor is it abused.
The study, citing the Tax Reform Act of 2014, states that “the current rules have no precise definition of ‘like-kind,’ which often leads to controversy within the IRS and provides significant opportunities for abuse.”
Treasury Regulations in effect since 1991 provide specific frameworks for determining whether assets are “like-kind.” Like-kind exchanges conducted within the regulatory safe harbors under Section 1031 using professional qualified intermediaries are straightforward transactions that follow a well understood set of rules, procedures and documents. Taxpayers claiming tax-deferral treatment must report certain information on IRS Form 8824 with their tax returns. Determination of whether the rules have been complied with is not complicated. Furthermore, professional qualified intermediaries promote compliance, and are subject matter experts who simplify Section 1031 transactions by guiding clients and their tax advisors through the process, providing proper documentation, holding funds and offering other services.
Myth 3: Section 1031 allows taxpayers to avoid capital gains taxes (taxation), and to defer gain indefinitely until the gain and related tax are eliminated at death.
Truth: Under Section 1031, taxes are deferred – not eliminated. At some point the tax gets paid.
The study states that Ways and Means Committee Chairman Dave Camp’s (R-MI) staff “caution that the rules enable investors to defer capital gains taxes for decades or avoid them entirely if the owner of the property dies before realizing their gain for tax purposes.” Citing a journal article, the study also asserts that Section 1031 rules are frequently used to “avoid capital gains taxes on real estate investments.” 
Section 1031 exchanges structured under the IRS regulatory safe harbors using professional qualified intermediaries are neither tax savings vehicles nor “abusive tax avoidance schemes.” Rather, they are legitimate transactions utilizing an important tax planning tool.
Payment of tax occurs:

upon sale of the replacement asset;
incrementally, through increased income tax due to foregone depreciation; or
by inclusion in a decedent’s taxable estate,

at which time the value of the replacement asset could be subject to estate tax at a rate more than double the capital gains tax rate. It should also be noted that taxpayers utilizing Section 1031 exchanges include corporations and other business entities that cannot “take the gain to the grave.”
Myth 4: Like-kind exchanges are used only by the wealthy or well connected. 
Truth: Like-kind exchanges are fair and working well for a broad spectrum of taxpayers at all levels.
Section 1031 is fair, benefiting taxpayers of all sizes, from individuals of modest means to high net worth taxpayers and from small businesses to large entities. Transactions represent taxpayers at all levels, in all lines of business, including individuals, partnerships, limited liability companies, and corporations. An industry survey showed that 60% of exchanges involved properties worth less than $1 million, and more than a third were worth less than $500,000. Exchanged properties include real estate, construction and agricultural equipment, railcars, vehicles, shipping vessels and other investment and business-use assets.  Tax deferral benefits are only available if the taxpayer continues their investment by acquiring like-kind replacement property.  This restriction retains value and stimulates activity within an economic sector that has a positive ripple effect.  Thus, even the relatively rare exchanges of art and classic cars stimulate business for auction houses, galleries, artists, framers, insurers, auto dealers, mechanics, body shops and the like.
Myth 5: Elimination of Section 1031 like-kind exchanges will raise significant revenue.
Truth: When the impacts of the economic stimulus effect of Section  1031 and the effect of depreciation are taken into account, any Treasury revenue raised from elimination of Section 1031 would be negligible.
The study cites the Joint Committee on Taxation’s assertion that the elimination of Section 1031 will raise approximately $41 billion over 10 years.
This ignores the fact that like-kind exchanges are a powerful economic stimulator, encouraging investment in small and medium sized growing businesses and thereby promoting U.S. job growth. Section 1031 exchanges contribute to the velocity of the economy by stimulating a broad spectrum of transactions which, in turn, generate jobs and taxable income through business profits, wages, commissions, insurance premiums, financial services, and discretionary spending by gainfully employed workers.  This transactional activity raises state, local and federal tax revenue through transfer, sales and use taxes and increased property taxes. The loss of this economic stimulus would be costly to the U.S. economy, creating a chilling effect on real estate transactions, reduced demand for manufactured goods and job loss, as many transactions would be abandoned or delayed by taxpayers unwilling or unable to withstand an effective tax on their working cash flow.
With respect to depreciable assets, like-kind exchanges are essentially revenue-neutral because gain deferred is directly offset by a reduction in future depreciation deductions available for assets acquired through an exchange. The tax basis of newly acquired replacement property is reduced by the amount of the gain not recognized due to the exchange of the sold property. Consequently, the taxpayer forgoes an equal dollar amount of future depreciation deductions on the replacement property, resulting in increased annual taxable income over time, taxed at ordinary income tax rates.
Conclusion
We generally all support the goals of tax reform: to achieve a simpler, fairer and flatter tax code that is more efficient and results in a broader tax base, minimized economic distortion, greater financial growth, job creation and a strengthened economy. However, effective reform requires well-reasoned change.  Achieving meaningful reform starts with preserving existing incentives for investment that are proven tools used to spur economic growth and productivity within the United States.
Don’t forget to share your thoughts at https://www.1031taxreform.com”>www.1031taxreform.com.

As Politico noted in a recent report on The Center for American Progress study, Federation of Exchange Accommodators (FEA) recently responded directly to this report, clarifying inaccuracies, myths and misstatements of the legislative history that were noted to justify repeal of Internal Revenue Code section 1031 (“Section 1031”) (see page 28 in http://cdn.americanprogress.org/wp-content/uploads/2014/09/SteinTaxRefo… report).  While we all support the goal of making the “tax code work better for everyone – not just the wealthy and well connected,” many disagree that repeal or limitation of Section 1031 would further tax reform goals.   Merely deleting code sections in our tax code does not make it simpler or fairer. On the contrary, removing the benefits of like-kind exchanges encourages effectively penalizes business owners who have limited access to capital while hoping to grow operations and maintain their workforce.
 
Lawmakers often rely on sources or themes that might promote good political policy but result in decisions that promote bad economic policies. In order to fully understand why Section 1031 like-kind exchanges create good political, tax and economic policy, let’s review some of the myths surrounding the code section’s original intent noted by the FEA in a formal response.
Myth 1: The Congressional purpose for Section 1031 is no longer relevant
Truth: Section 1031 was enacted in 1921 for three primary purposes, two of which are even more relevant today in our global economy.

Avoiding unfair taxation of ongoing investments to allow taxpayers to maintain investments in property without being taxed on theoretical (i.e. “paper”) gains and losses during the course of a continuous investment.
Encouraging active reinvestment, which encourages the tax-deferred exchange of property, thus promoting transactional activity.

The third primary purpose of the 1921 law had to do with “administrative convenience,” which referred to “the difficulty of valuing exchanged property.” Three years later in 1924, Congress scrapped administrative convenience as a purpose for Section 1031 as being too vague, however this long-defunct third purpose, which the U.S. Treasury Department acknowledges is no longer true, is curiously the only rationale cited by the Treasury for repeal.
Myth 2: The absence of a precise definition of “like-kind” is administratively difficult for the IRS and creates the opportunity for abuse.
Truth: The definition of “like-kind” is well understood. Section 1031 is neither administratively difficult for either the IRS or taxpayers, nor is it abused.
The study, citing the Tax Reform Act of 2014, states that “the current rules have no precise definition of ‘like-kind,’ which often leads to controversy within the IRS and provides significant opportunities for abuse.”
Treasury Regulations in effect since 1991 provide specific frameworks for determining whether assets are “like-kind.” Like-kind exchanges conducted within the regulatory safe harbors under Section 1031 using professional qualified intermediaries are straightforward transactions that follow a well understood set of rules, procedures and documents. Taxpayers claiming tax-deferral treatment must report certain information on IRS Form 8824 with their tax returns. Determination of whether the rules have been complied with is not complicated. Furthermore, professional qualified intermediaries promote compliance, and are subject matter experts who simplify Section 1031 transactions by guiding clients and their tax advisors through the process, providing proper documentation, holding funds and offering other services.
Myth 3: Section 1031 allows taxpayers to avoid capital gains taxes (taxation), and to defer gain indefinitely until the gain and related tax are eliminated at death.
Truth: Under Section 1031, taxes are deferred – not eliminated. At some point the tax gets paid.
The study states that Ways and Means Committee Chairman Dave Camp’s (R-MI) staff “caution that the rules enable investors to defer capital gains taxes for decades or avoid them entirely if the owner of the property dies before realizing their gain for tax purposes.” Citing a journal article, the study also asserts that Section 1031 rules are frequently used to “avoid capital gains taxes on real estate investments.” 
Section 1031 exchanges structured under the IRS regulatory safe harbors using professional qualified intermediaries are neither tax savings vehicles nor “abusive tax avoidance schemes.” Rather, they are legitimate transactions utilizing an important tax planning tool.
Payment of tax occurs:

upon sale of the replacement asset;
incrementally, through increased income tax due to foregone depreciation; or
by inclusion in a decedent’s taxable estate,

at which time the value of the replacement asset could be subject to estate tax at a rate more than double the capital gains tax rate. It should also be noted that taxpayers utilizing Section 1031 exchanges include corporations and other business entities that cannot “take the gain to the grave.”
Myth 4: Like-kind exchanges are used only by the wealthy or well connected. 
Truth: Like-kind exchanges are fair and working well for a broad spectrum of taxpayers at all levels.
Section 1031 is fair, benefiting taxpayers of all sizes, from individuals of modest means to high net worth taxpayers and from small businesses to large entities. Transactions represent taxpayers at all levels, in all lines of business, including individuals, partnerships, limited liability companies, and corporations. An industry survey showed that 60% of exchanges involved properties worth less than $1 million, and more than a third were worth less than $500,000. Exchanged properties include real estate, construction and agricultural equipment, railcars, vehicles, shipping vessels and other investment and business-use assets.  Tax deferral benefits are only available if the taxpayer continues their investment by acquiring like-kind replacement property.  This restriction retains value and stimulates activity within an economic sector that has a positive ripple effect.  Thus, even the relatively rare exchanges of art and classic cars stimulate business for auction houses, galleries, artists, framers, insurers, auto dealers, mechanics, body shops and the like.
Myth 5: Elimination of Section 1031 like-kind exchanges will raise significant revenue.
Truth: When the impacts of the economic stimulus effect of Section  1031 and the effect of depreciation are taken into account, any Treasury revenue raised from elimination of Section 1031 would be negligible.
The study cites the Joint Committee on Taxation’s assertion that the elimination of Section 1031 will raise approximately $41 billion over 10 years.
This ignores the fact that like-kind exchanges are a powerful economic stimulator, encouraging investment in small and medium sized growing businesses and thereby promoting U.S. job growth. Section 1031 exchanges contribute to the velocity of the economy by stimulating a broad spectrum of transactions which, in turn, generate jobs and taxable income through business profits, wages, commissions, insurance premiums, financial services, and discretionary spending by gainfully employed workers.  This transactional activity raises state, local and federal tax revenue through transfer, sales and use taxes and increased property taxes. The loss of this economic stimulus would be costly to the U.S. economy, creating a chilling effect on real estate transactions, reduced demand for manufactured goods and job loss, as many transactions would be abandoned or delayed by taxpayers unwilling or unable to withstand an effective tax on their working cash flow.
With respect to depreciable assets, like-kind exchanges are essentially revenue-neutral because gain deferred is directly offset by a reduction in future depreciation deductions available for assets acquired through an exchange. The tax basis of newly acquired replacement property is reduced by the amount of the gain not recognized due to the exchange of the sold property. Consequently, the taxpayer forgoes an equal dollar amount of future depreciation deductions on the replacement property, resulting in increased annual taxable income over time, taxed at ordinary income tax rates.
Conclusion
We generally all support the goals of tax reform: to achieve a simpler, fairer and flatter tax code that is more efficient and results in a broader tax base, minimized economic distortion, greater financial growth, job creation and a strengthened economy. However, effective reform requires well-reasoned change.  Achieving meaningful reform starts with preserving existing incentives for investment that are proven tools used to spur economic growth and productivity within the United States.
Don’t forget to share your thoughts at https://www.1031taxreform.com”>www.1031taxreform.com.

When to Use the Services of a Tax Deferred Exchange Company?
Many people and companies sell appreciated assets, such as real estate, and wish to acquire similar replacement assets without being subject to capital gain tax. Also at times, taxpayers will sell an asset that has been depreciated and do not wish to incur tax caused by the recapture of that depreciation.  Almost always the sale and purchase are separated in time and the buyer of the old asset is not the seller of the new asset.  The ability to defer these tax consequences can be accomplished by the use of an Internal Revenue Code (IRC) §1031 tax deferred exchange or 1031 exchange.
As discussed in my recent blog post, “Are Tax Deferred Exchanges of Real Estate Approved by the IRS ”, in 1991, the IRS issued regulations governing these types of transaction.  Several of the key components of these regulations are the use of an intermediary to tie the sale and purchase together and as a party who can hold the sale proceeds until used to purchase replacement property from the taxpayer’s seller.  By using an intermediary the taxpayer is deemed to have sold the old property to the intermediary and through the intermediary to the buyer and to have the intermediary acquire the new property from the seller and transfer it to the taxpayer.  The taxpayer is deemed to have concluded an exchange with the intermediary.  The taxpayer can have up to 180 days to complete a purchase made after the sale.  Consistent with the fact that the transfer of the old asset is not a sale, but rather the first leg of an exchange, the taxpayer cannot receive the proceeds of the sale.  Instead the proceeds are held by the intermediary with or without the use of a trust or escrow arrangement.
Are All Exchange Companies Who Follow the Same IRS Rules Equal?
We know that the Declaration of Independence states that all persons are created equal.  Due to the U.S. Supreme Court’s recent holding in the Citizens United case, we also know that companies are persons too.  Does this mean that all exchange companies are equal?  No, they most definitely are not equal.  The recent South Dakota Supreme Court decision in Kreisers Inc. v. First Dakota Title Limited Partnership is a classic example of what can go wrong using exchange services from a company whose main business is something other than facilitating like-kind exchanges.
The Case of Kreisers Inc. v. First Dakota Title Limited Partnership
In the case of Kreisers Inc. v. First Dakota Title, the taxpayer was selling a property and intended to acquire a new property and use some of the proceeds from the exchange to pay for building a new warehouse.  These types of exchanges are somewhat complicated since the IRS will not allow the taxpayer to include in the value of the replacement property any money that the taxpayer puts into the property in the form of improvements once the taxpayer takes ownership of the property.  Rather, once ownership is taken, money spent for improvements is considered to be the payment of contractor services and the purchase of materials.  As such these costs are not like-kind to the sale of real estate.  The IRS approved safe harbor work around requires the exchange facilitator to take title to the property on behalf of the taxpayer and causing the desired improvements to be made using the exchange funds.  Once the taxpayer takes title to the property, the taxpayer is deemed to be acquiring improved real estate rather than paying directly for labor and materials. 
In regard to the Kreiser’s case, as is frequently the case, persons involved on the title insurance side of the transaction held out that they could also provide §1031 exchange services.  There was no representation that the title company did not provide any exchange services other than simple, forward exchanges, which are paper transactions and do not involve the facilitator taking title to the property.  An attorney at First Dakota, who was also the manager of its title department, did double duty at First Dakota by facilitating exchanges.  Apparently there was very little dialog between Kreisers and the exchange representative.  The exchange documents were also sent to First Dakota’s outside counsel to review but no questions were asked by outside counsel to Kreisers.  Kreisers requested by phone that the title company representative call Kreisers’ local tax advisors presumably to get more information on the planned transaction.  According to testimony, that call was never made.  At closing, the closing agent at First Dakota briefly summarized the exchange documents and suggested that Kreisers sign a blank new property designation form, which would be filled in later by her to identify the replacement property.  Later, Kreisers acquired the new property and requested that First Dakota begin paying for the normal costs of a build out.  First Dakota declined based upon the fact that the exchange transaction was not set up as a typical exchange involving new construction.  Kreisers filed suit for negligence resulting in the loss of the tax deferral benefit.  They prevailed in the lower court and the matter was appealed to the state Supreme Court.
The South Dakota Supreme Court Decision
The court upheld the circuit court’s decision noting “The circuit court determined that First Dakota owed Kreisers a common law duty of care when First Dakota held itself out as being qualified to handle §1031 exchanges. First Dakota agreed to provide these services prior to signing any contract with Kreisers”.  Therefore, the circuit court concluded that “First Dakota had a common law duty to exercise reasonable and proper care in the handling of the §1031 exchange, including the drafting of the closing documents.” The Supreme Court decision went on to state
“Moreover, as the circuit court highlighted, Kreisers already believed that it had an expert in §1031 exchanges in First Dakota, which never informed Kreisers that its work was limited to forward exchanges.  It is important to once again note the complexity of these exchanges.  There is no evidence that anyone at Kreisers had any expertise in §1031 exchanges.  Kreisers was putting faith in First Dakota to properly exercise its knowledge and expertise to facilitate the §1031 exchange.  The circuit court’s finding that Kreisers was not negligent in not clear error”.
What Can be Taken Away from the Decision in the Kreisers’ Case?
Sometimes it is best to stick with what you know best, not trying to be all things to all people.   There are many companies whose primary business is facilitating §1031 exchanges, yet they do not have a secondary business acting as a title insurance company.  A taxpayer should do some due diligence before selecting an exchange services provider such as asking:

Are you a member of the Federation of Exchange Accommodators?
Are you compliant with all state required regulations of exchange facilitors?
Do you have Certified Exchange Specialists® on staff?
What types of exchange services are provided by your company?
How many exchanges do you conduct annually?
Do you have a list of client references available?
Do you maintain a fidelity bond?
Are client funds put into a escrow or trust account?

It is important to make sure that if all pertinent facts are not given by the taxpayer, an experienced, dedicated exchange facilitator will know what questions to ask to solicit all things relevant.  Remember, not all intermediaries are created equal.

When to Use the Services of a Tax Deferred Exchange Company?
Many people and companies sell appreciated assets, such as real estate, and wish to acquire similar replacement assets without being subject to capital gain tax. Also at times, taxpayers will sell an asset that has been depreciated and do not wish to incur tax caused by the recapture of that depreciation.  Almost always the sale and purchase are separated in time and the buyer of the old asset is not the seller of the new asset.  The ability to defer these tax consequences can be accomplished by the use of an Internal Revenue Code (IRC) §1031 tax deferred exchange or 1031 exchange.
As discussed in my recent blog post, “Are Tax Deferred Exchanges of Real Estate Approved by the IRS ”, in 1991, the IRS issued regulations governing these types of transaction.  Several of the key components of these regulations are the use of an intermediary to tie the sale and purchase together and as a party who can hold the sale proceeds until used to purchase replacement property from the taxpayer’s seller.  By using an intermediary the taxpayer is deemed to have sold the old property to the intermediary and through the intermediary to the buyer and to have the intermediary acquire the new property from the seller and transfer it to the taxpayer.  The taxpayer is deemed to have concluded an exchange with the intermediary.  The taxpayer can have up to 180 days to complete a purchase made after the sale.  Consistent with the fact that the transfer of the old asset is not a sale, but rather the first leg of an exchange, the taxpayer cannot receive the proceeds of the sale.  Instead the proceeds are held by the intermediary with or without the use of a trust or escrow arrangement.
Are All Exchange Companies Who Follow the Same IRS Rules Equal?
We know that the Declaration of Independence states that all persons are created equal.  Due to the U.S. Supreme Court’s recent holding in the Citizens United case, we also know that companies are persons too.  Does this mean that all exchange companies are equal?  No, they most definitely are not equal.  The recent South Dakota Supreme Court decision in Kreisers Inc. v. First Dakota Title Limited Partnership is a classic example of what can go wrong using exchange services from a company whose main business is something other than facilitating like-kind exchanges.
The Case of Kreisers Inc. v. First Dakota Title Limited Partnership
In the case of Kreisers Inc. v. First Dakota Title, the taxpayer was selling a property and intended to acquire a new property and use some of the proceeds from the exchange to pay for building a new warehouse.  These types of exchanges are somewhat complicated since the IRS will not allow the taxpayer to include in the value of the replacement property any money that the taxpayer puts into the property in the form of improvements once the taxpayer takes ownership of the property.  Rather, once ownership is taken, money spent for improvements is considered to be the payment of contractor services and the purchase of materials.  As such these costs are not like-kind to the sale of real estate.  The IRS approved safe harbor work around requires the exchange facilitator to take title to the property on behalf of the taxpayer and causing the desired improvements to be made using the exchange funds.  Once the taxpayer takes title to the property, the taxpayer is deemed to be acquiring improved real estate rather than paying directly for labor and materials. 
In regard to the Kreiser’s case, as is frequently the case, persons involved on the title insurance side of the transaction held out that they could also provide §1031 exchange services.  There was no representation that the title company did not provide any exchange services other than simple, forward exchanges, which are paper transactions and do not involve the facilitator taking title to the property.  An attorney at First Dakota, who was also the manager of its title department, did double duty at First Dakota by facilitating exchanges.  Apparently there was very little dialog between Kreisers and the exchange representative.  The exchange documents were also sent to First Dakota’s outside counsel to review but no questions were asked by outside counsel to Kreisers.  Kreisers requested by phone that the title company representative call Kreisers’ local tax advisors presumably to get more information on the planned transaction.  According to testimony, that call was never made.  At closing, the closing agent at First Dakota briefly summarized the exchange documents and suggested that Kreisers sign a blank new property designation form, which would be filled in later by her to identify the replacement property.  Later, Kreisers acquired the new property and requested that First Dakota begin paying for the normal costs of a build out.  First Dakota declined based upon the fact that the exchange transaction was not set up as a typical exchange involving new construction.  Kreisers filed suit for negligence resulting in the loss of the tax deferral benefit.  They prevailed in the lower court and the matter was appealed to the state Supreme Court.
The South Dakota Supreme Court Decision
The court upheld the circuit court’s decision noting “The circuit court determined that First Dakota owed Kreisers a common law duty of care when First Dakota held itself out as being qualified to handle §1031 exchanges. First Dakota agreed to provide these services prior to signing any contract with Kreisers”.  Therefore, the circuit court concluded that “First Dakota had a common law duty to exercise reasonable and proper care in the handling of the §1031 exchange, including the drafting of the closing documents.” The Supreme Court decision went on to state
“Moreover, as the circuit court highlighted, Kreisers already believed that it had an expert in §1031 exchanges in First Dakota, which never informed Kreisers that its work was limited to forward exchanges.  It is important to once again note the complexity of these exchanges.  There is no evidence that anyone at Kreisers had any expertise in §1031 exchanges.  Kreisers was putting faith in First Dakota to properly exercise its knowledge and expertise to facilitate the §1031 exchange.  The circuit court’s finding that Kreisers was not negligent in not clear error”.
What Can be Taken Away from the Decision in the Kreisers’ Case?
Sometimes it is best to stick with what you know best, not trying to be all things to all people.   There are many companies whose primary business is facilitating §1031 exchanges, yet they do not have a secondary business acting as a title insurance company.  A taxpayer should do some due diligence before selecting an exchange services provider such as asking:

Are you a member of the Federation of Exchange Accommodators?
Are you compliant with all state required regulations of exchange facilitors?
Do you have Certified Exchange Specialists® on staff?
What types of exchange services are provided by your company?
How many exchanges do you conduct annually?
Do you have a list of client references available?
Do you maintain a fidelity bond?
Are client funds put into a escrow or trust account?

It is important to make sure that if all pertinent facts are not given by the taxpayer, an experienced, dedicated exchange facilitator will know what questions to ask to solicit all things relevant.  Remember, not all intermediaries are created equal.

When to Use the Services of a Tax Deferred Exchange Company?
Many people and companies sell appreciated assets, such as real estate, and wish to acquire similar replacement assets without being subject to capital gain tax. Also at times, taxpayers will sell an asset that has been depreciated and do not wish to incur tax caused by the recapture of that depreciation.  Almost always the sale and purchase are separated in time and the buyer of the old asset is not the seller of the new asset.  The ability to defer these tax consequences can be accomplished by the use of an Internal Revenue Code (IRC) §1031 tax deferred exchange or 1031 exchange.
As discussed in my recent blog post, “Are Tax Deferred Exchanges of Real Estate Approved by the IRS ”, in 1991, the IRS issued regulations governing these types of transaction.  Several of the key components of these regulations are the use of an intermediary to tie the sale and purchase together and as a party who can hold the sale proceeds until used to purchase replacement property from the taxpayer’s seller.  By using an intermediary the taxpayer is deemed to have sold the old property to the intermediary and through the intermediary to the buyer and to have the intermediary acquire the new property from the seller and transfer it to the taxpayer.  The taxpayer is deemed to have concluded an exchange with the intermediary.  The taxpayer can have up to 180 days to complete a purchase made after the sale.  Consistent with the fact that the transfer of the old asset is not a sale, but rather the first leg of an exchange, the taxpayer cannot receive the proceeds of the sale.  Instead the proceeds are held by the intermediary with or without the use of a trust or escrow arrangement.
Are All Exchange Companies Who Follow the Same IRS Rules Equal?
We know that the Declaration of Independence states that all persons are created equal.  Due to the U.S. Supreme Court’s recent holding in the Citizens United case, we also know that companies are persons too.  Does this mean that all exchange companies are equal?  No, they most definitely are not equal.  The recent South Dakota Supreme Court decision in Kreisers Inc. v. First Dakota Title Limited Partnership is a classic example of what can go wrong using exchange services from a company whose main business is something other than facilitating like-kind exchanges.
The Case of Kreisers Inc. v. First Dakota Title Limited Partnership
In the case of Kreisers Inc. v. First Dakota Title, the taxpayer was selling a property and intended to acquire a new property and use some of the proceeds from the exchange to pay for building a new warehouse.  These types of exchanges are somewhat complicated since the IRS will not allow the taxpayer to include in the value of the replacement property any money that the taxpayer puts into the property in the form of improvements once the taxpayer takes ownership of the property.  Rather, once ownership is taken, money spent for improvements is considered to be the payment of contractor services and the purchase of materials.  As such these costs are not like-kind to the sale of real estate.  The IRS approved safe harbor work around requires the exchange facilitator to take title to the property on behalf of the taxpayer and causing the desired improvements to be made using the exchange funds.  Once the taxpayer takes title to the property, the taxpayer is deemed to be acquiring improved real estate rather than paying directly for labor and materials. 
In regard to the Kreiser’s case, as is frequently the case, persons involved on the title insurance side of the transaction held out that they could also provide §1031 exchange services.  There was no representation that the title company did not provide any exchange services other than simple, forward exchanges, which are paper transactions and do not involve the facilitator taking title to the property.  An attorney at First Dakota, who was also the manager of its title department, did double duty at First Dakota by facilitating exchanges.  Apparently there was very little dialog between Kreisers and the exchange representative.  The exchange documents were also sent to First Dakota’s outside counsel to review but no questions were asked by outside counsel to Kreisers.  Kreisers requested by phone that the title company representative call Kreisers’ local tax advisors presumably to get more information on the planned transaction.  According to testimony, that call was never made.  At closing, the closing agent at First Dakota briefly summarized the exchange documents and suggested that Kreisers sign a blank new property designation form, which would be filled in later by her to identify the replacement property.  Later, Kreisers acquired the new property and requested that First Dakota begin paying for the normal costs of a build out.  First Dakota declined based upon the fact that the exchange transaction was not set up as a typical exchange involving new construction.  Kreisers filed suit for negligence resulting in the loss of the tax deferral benefit.  They prevailed in the lower court and the matter was appealed to the state Supreme Court.
The South Dakota Supreme Court Decision
The court upheld the circuit court’s decision noting “The circuit court determined that First Dakota owed Kreisers a common law duty of care when First Dakota held itself out as being qualified to handle §1031 exchanges. First Dakota agreed to provide these services prior to signing any contract with Kreisers”.  Therefore, the circuit court concluded that “First Dakota had a common law duty to exercise reasonable and proper care in the handling of the §1031 exchange, including the drafting of the closing documents.” The Supreme Court decision went on to state
“Moreover, as the circuit court highlighted, Kreisers already believed that it had an expert in §1031 exchanges in First Dakota, which never informed Kreisers that its work was limited to forward exchanges.  It is important to once again note the complexity of these exchanges.  There is no evidence that anyone at Kreisers had any expertise in §1031 exchanges.  Kreisers was putting faith in First Dakota to properly exercise its knowledge and expertise to facilitate the §1031 exchange.  The circuit court’s finding that Kreisers was not negligent in not clear error”.
What Can be Taken Away from the Decision in the Kreisers’ Case?
Sometimes it is best to stick with what you know best, not trying to be all things to all people.   There are many companies whose primary business is facilitating §1031 exchanges, yet they do not have a secondary business acting as a title insurance company.  A taxpayer should do some due diligence before selecting an exchange services provider such as asking:

Are you a member of the Federation of Exchange Accommodators?
Are you compliant with all state required regulations of exchange facilitors?
Do you have Certified Exchange Specialists® on staff?
What types of exchange services are provided by your company?
How many exchanges do you conduct annually?
Do you have a list of client references available?
Do you maintain a fidelity bond?
Are client funds put into a escrow or trust account?

It is important to make sure that if all pertinent facts are not given by the taxpayer, an experienced, dedicated exchange facilitator will know what questions to ask to solicit all things relevant.  Remember, not all intermediaries are created equal.

As defined by Merriam-Webster: A Political Action Committee or PAC is a group formed (as by an industry or an issue-oriented organization) to raise and contribute money to the campaigns of candidates likely to advance the group’s interests.
Being a business owner of a small or medium size company, how can you gain access to those who sometimes determine the fate of your business?  Calling on PAC funds at the appropriate time provides a path to meet directly with representatives who, even though they may or may not understand your industry, could close your business or dramatically disrupt the market with a simple “aye or nay” from their lips on the House or Senate floor.   So why should you play the D.C. game? And let’s be clear. It is a “game” – a zero-sum game! Someone will win and someone will lose. Why not increase your odds by playing by the Washington D.C. rules to advance your agenda?
Contributing to this access gives you the opportunity to discuss industry issues with those who receive your support.  Laying out the industry’s top concerns by simply explaining how a certain regulation could (or does) impact your employees and customers helps the representative better understand potential laws being introduced. 
PACs are Only Funded by Special Interest
I speak all over the country on the topic of legislative issues specifically related to IRC 1031 like-kind exchanges.  When I reference our industry’s PAC, at times, I receive considerable resistance. I simply ask doubters, how do you think our industry is able to pierce disinterested first-level staffers or grab enough attention by the decision makers to ensure our concerns are at least considered?  Would you prefer to leave it to the uninformed representatives to determine the fate of your industry or your job?  Simply put, PACs contributors are interested in having the opportunity to state their case, support their cause, and yes, express their special interest.  If you don’t like the game, that’s OK.  But just don’t be upset if you lose.
Representatives simply don’t have the time to read, much less understand the consequences of any one bill.  That is where strategically utilizing PAC funds is a very powerful avenue to grab a representative’s attention.  It’s one way to ensure representatives hear industry concerns. Once an industry’s PAC chooses to allocate funds to a certain Senator or Congressman, they have an opportunity to ensure key points are communicated.
PAC Fund Restrictions
Political Action Committees have some very specific rules that must be followed so that both you and your selected candidate don’t get entangled in the laws that surround the management of PAC monies.

Only individual employees or connected associates can contribute to a PAC. Funds directly from the company are not allowed.
Permission must first be given from an employer prior to the PAC soliciting monies from employees.
Maximum contribution levels need to be monitored.

So, the next time you are approached about contributing to a PAC.  Ask yourself does this PAC represent my interest?  Are those in charge of the PAC able to express the concerns that best represent your interest?  Is the PAC targeting the right representatives?  As with so much in politics, it is easy to look the other way and simply rely on the ongoing inability of Congress to move anything forward.  But, eventually a bill or just a small sentence buried deep within a bill could severely impact an entire industry.  As I have said before, “If you are not at the table, then you are most likely on the menu.”  So consider if your PAC can get a chair at the table.  And if so, then do your part to support the seat.
http://www.fea1031pac.org/”>Learn more on the official 1031 PAC website.
 
 

As defined by Merriam-Webster: A Political Action Committee or PAC is a group formed (as by an industry or an issue-oriented organization) to raise and contribute money to the campaigns of candidates likely to advance the group’s interests.
Being a business owner of a small or medium size company, how can you gain access to those who sometimes determine the fate of your business?  Calling on PAC funds at the appropriate time provides a path to meet directly with representatives who, even though they may or may not understand your industry, could close your business or dramatically disrupt the market with a simple “aye or nay” from their lips on the House or Senate floor.   So why should you play the D.C. game? And let’s be clear. It is a “game” – a zero-sum game! Someone will win and someone will lose. Why not increase your odds by playing by the Washington D.C. rules to advance your agenda?
Contributing to this access gives you the opportunity to discuss industry issues with those who receive your support.  Laying out the industry’s top concerns by simply explaining how a certain regulation could (or does) impact your employees and customers helps the representative better understand potential laws being introduced. 
PACs are Only Funded by Special Interest
I speak all over the country on the topic of legislative issues specifically related to IRC 1031 like-kind exchanges.  When I reference our industry’s PAC, at times, I receive considerable resistance. I simply ask doubters, how do you think our industry is able to pierce disinterested first-level staffers or grab enough attention by the decision makers to ensure our concerns are at least considered?  Would you prefer to leave it to the uninformed representatives to determine the fate of your industry or your job?  Simply put, PACs contributors are interested in having the opportunity to state their case, support their cause, and yes, express their special interest.  If you don’t like the game, that’s OK.  But just don’t be upset if you lose.
Representatives simply don’t have the time to read, much less understand the consequences of any one bill.  That is where strategically utilizing PAC funds is a very powerful avenue to grab a representative’s attention.  It’s one way to ensure representatives hear industry concerns. Once an industry’s PAC chooses to allocate funds to a certain Senator or Congressman, they have an opportunity to ensure key points are communicated.
PAC Fund Restrictions
Political Action Committees have some very specific rules that must be followed so that both you and your selected candidate don’t get entangled in the laws that surround the management of PAC monies.

Only individual employees or connected associates can contribute to a PAC. Funds directly from the company are not allowed.
Permission must first be given from an employer prior to the PAC soliciting monies from employees.
Maximum contribution levels need to be monitored.

So, the next time you are approached about contributing to a PAC.  Ask yourself does this PAC represent my interest?  Are those in charge of the PAC able to express the concerns that best represent your interest?  Is the PAC targeting the right representatives?  As with so much in politics, it is easy to look the other way and simply rely on the ongoing inability of Congress to move anything forward.  But, eventually a bill or just a small sentence buried deep within a bill could severely impact an entire industry.  As I have said before, “If you are not at the table, then you are most likely on the menu.”  So consider if your PAC can get a chair at the table.  And if so, then do your part to support the seat.
http://www.fea1031pac.org/”>Learn more on the official 1031 PAC website.
 
 

As defined by Merriam-Webster: A Political Action Committee or PAC is a group formed (as by an industry or an issue-oriented organization) to raise and contribute money to the campaigns of candidates likely to advance the group’s interests.
Being a business owner of a small or medium size company, how can you gain access to those who sometimes determine the fate of your business?  Calling on PAC funds at the appropriate time provides a path to meet directly with representatives who, even though they may or may not understand your industry, could close your business or dramatically disrupt the market with a simple “aye or nay” from their lips on the House or Senate floor.   So why should you play the D.C. game? And let’s be clear. It is a “game” – a zero-sum game! Someone will win and someone will lose. Why not increase your odds by playing by the Washington D.C. rules to advance your agenda?
Contributing to this access gives you the opportunity to discuss industry issues with those who receive your support.  Laying out the industry’s top concerns by simply explaining how a certain regulation could (or does) impact your employees and customers helps the representative better understand potential laws being introduced. 
PACs are Only Funded by Special Interest
I speak all over the country on the topic of legislative issues specifically related to IRC 1031 like-kind exchanges.  When I reference our industry’s PAC, at times, I receive considerable resistance. I simply ask doubters, how do you think our industry is able to pierce disinterested first-level staffers or grab enough attention by the decision makers to ensure our concerns are at least considered?  Would you prefer to leave it to the uninformed representatives to determine the fate of your industry or your job?  Simply put, PACs contributors are interested in having the opportunity to state their case, support their cause, and yes, express their special interest.  If you don’t like the game, that’s OK.  But just don’t be upset if you lose.
Representatives simply don’t have the time to read, much less understand the consequences of any one bill.  That is where strategically utilizing PAC funds is a very powerful avenue to grab a representative’s attention.  It’s one way to ensure representatives hear industry concerns. Once an industry’s PAC chooses to allocate funds to a certain Senator or Congressman, they have an opportunity to ensure key points are communicated.
PAC Fund Restrictions
Political Action Committees have some very specific rules that must be followed so that both you and your selected candidate don’t get entangled in the laws that surround the management of PAC monies.

Only individual employees or connected associates can contribute to a PAC. Funds directly from the company are not allowed.
Permission must first be given from an employer prior to the PAC soliciting monies from employees.
Maximum contribution levels need to be monitored.

So, the next time you are approached about contributing to a PAC.  Ask yourself does this PAC represent my interest?  Are those in charge of the PAC able to express the concerns that best represent your interest?  Is the PAC targeting the right representatives?  As with so much in politics, it is easy to look the other way and simply rely on the ongoing inability of Congress to move anything forward.  But, eventually a bill or just a small sentence buried deep within a bill could severely impact an entire industry.  As I have said before, “If you are not at the table, then you are most likely on the menu.”  So consider if your PAC can get a chair at the table.  And if so, then do your part to support the seat.
http://www.fea1031pac.org/”>Learn more on the official 1031 PAC website.
 
 

We all know that one of the most vexing problems plaguing the trucking industry today is driver turnover and the expense and havoc it creates throughout virtually every trucking organization. We also know that the reasons for driver turnover are not uniform nor predictable and vary dramatically by region, by company and by your operating practices and business model.
Traditional Reasons Drivers Quit
Pay: The perception that the “other company” always pays more and provides better benefits and delivers more miles.
Time at Home: This isn’t the 50s, and family needs and pressures have become a huge catalyst for drivers leaving companies or getting out of the business entirely.
Broken Promises:  Driver turnover is particularly acute with new hires who quit within 90 days of accepting the job, underscoring the perceived gap between what they felt they were told and promised when recruited, versus the reality they experienced once hired.
Aggregate of the Small: This can be the most devastating exit trigger many trucking companies experience and the most frustrating to identify and cure. Like many divorces, truck drivers who quit don’t have one big reason for exit. They simply have an accumulated frustration with a multitude of small – even tiny – irritants that over time will cause dissatisfaction and eventual exit. You name it: payroll, operations, maintenance, delays, etc.. It adds up and proves the old adage that 100 thumbtacks can be as destructive as one railroad spike.
Dissatisfaction with Management: Often overlooked but a huge reason for much of current driver turnover. The old adage is definitely true today: “People don’t quit companies. They quit managers!”
The Impact of Old Equipment on Driver Retention
None of these universal disengagement triggers should come as any surprise to seasoned trucking executives. Whether we accept and act upon them is the million dollar question.
I worked for a national consulting company that interviewed 100,000 drivers during a five-year period. We were surprised by how often aging equipment was cited as a reason for leaving. That’s right; the age of your truck fleet impacts driver satisfaction and retention!
Consider what drivers experience working for trucking companies that try and cut costs by holding on to their fleet longer than they should:

Increased Risk of CSA Violations: It’s common sense that a truck on the fringe of maintenance issues and expense will have a higher potential for unforeseen failure or problems that could tag the driver with a safety violation. 
Increased Discomfort: As drivers realize they are not getting the same “features and benefits” that the newer trucks provide.
Increased Driving Frustration: Let’s face it, driving an old truck is simply not as enjoyable as driving a new truck, especially given the pace of improvements in the later model tractors.
“Truck Envy”:  As your drivers routinely see drivers with other companies at truck stops and on the road sporting brand new state of the art tractors, the attraction of staying with YOUR company is greatly diminished.

In other words, the way you manage your fleet’s finances can have an impact on driver retention. One way to free up funds for updating your equipment is to implement a 1031 like-kind exchange program.
Use a Like-Kind Exchange to Update your Fleet and Reduce Driver Turnover
1031 like-kind exchanges can instantly free up a lot of extra cash that you are currently paying in taxes on the sale of your used equipment – tractors in particular. With bonus depreciation expired, trucking companies are paying between 38%-50% income tax on the sale of their used tractors. That can add up to paying the government up to $17,500 on every used tractor you sell! That’s the kind of expense that delays the purchase of new replacement equipment, with predictable driver turnover consequences.
Consider the following example, which illustrates what happens when 100 trucks (purchased new for $120,000 each) are then sold for $35,000 each:

 
Without LKE
With LKE

Selling 100 trucks with, and without, like-kind strategy

Original equipment cost
$12,000,000
$12,000,000

Tax depreciation allowed
$12,000,000
$12,000,000

Tax basis at sale
$0
$0

Sales proceeds
$3,500,000
$3,500,000

Gain on sale
$3,500,000
$3,500,000

Tax due on gain (40%)
$1,400,000
$0

Cash available for new equipment
$2,100,000
$3,500,000

 
With only 100 trucks, a 1031 like-kind exchange program would have provided $1.4 million additional dollars for the purchase of new tractors. The LKE program converted those tax dollars into extra cash to spend on new equipment. Trucking companies using LKEs are tapping into an interest-free source of capital to keep their businesses rolling and to reduce their driver dissatisfaction with driving older vehicles. The cash benefit via the tax deferral is essentially a line of credit you control – and you decide when to pay back.
The trucking industry is extremely competitive. Your ability to retain your best drivers is absolutely critical to your long term success. Companies that are able to generate this huge amount of extra cash via tax deferral are able to purchase more new tractors more frequently. The ability to upgrade and modernize your fleet is a crucial component of keeping drivers happy, satisfied and working for your company longer.
So the next time you look at your fleet, ask yourself this question: Would the best drivers want to drive that truck?

We all know that one of the most vexing problems plaguing the trucking industry today is driver turnover and the expense and havoc it creates throughout virtually every trucking organization. We also know that the reasons for driver turnover are not uniform nor predictable and vary dramatically by region, by company and by your operating practices and business model.
Traditional Reasons Drivers Quit
Pay: The perception that the “other company” always pays more and provides better benefits and delivers more miles.
Time at Home: This isn’t the 50s, and family needs and pressures have become a huge catalyst for drivers leaving companies or getting out of the business entirely.
Broken Promises:  Driver turnover is particularly acute with new hires who quit within 90 days of accepting the job, underscoring the perceived gap between what they felt they were told and promised when recruited, versus the reality they experienced once hired.
Aggregate of the Small: This can be the most devastating exit trigger many trucking companies experience and the most frustrating to identify and cure. Like many divorces, truck drivers who quit don’t have one big reason for exit. They simply have an accumulated frustration with a multitude of small – even tiny – irritants that over time will cause dissatisfaction and eventual exit. You name it: payroll, operations, maintenance, delays, etc.. It adds up and proves the old adage that 100 thumbtacks can be as destructive as one railroad spike.
Dissatisfaction with Management: Often overlooked but a huge reason for much of current driver turnover. The old adage is definitely true today: “People don’t quit companies. They quit managers!”
The Impact of Old Equipment on Driver Retention
None of these universal disengagement triggers should come as any surprise to seasoned trucking executives. Whether we accept and act upon them is the million dollar question.
I worked for a national consulting company that interviewed 100,000 drivers during a five-year period. We were surprised by how often aging equipment was cited as a reason for leaving. That’s right; the age of your truck fleet impacts driver satisfaction and retention!
Consider what drivers experience working for trucking companies that try and cut costs by holding on to their fleet longer than they should:

Increased Risk of CSA Violations: It’s common sense that a truck on the fringe of maintenance issues and expense will have a higher potential for unforeseen failure or problems that could tag the driver with a safety violation. 
Increased Discomfort: As drivers realize they are not getting the same “features and benefits” that the newer trucks provide.
Increased Driving Frustration: Let’s face it, driving an old truck is simply not as enjoyable as driving a new truck, especially given the pace of improvements in the later model tractors.
“Truck Envy”:  As your drivers routinely see drivers with other companies at truck stops and on the road sporting brand new state of the art tractors, the attraction of staying with YOUR company is greatly diminished.

In other words, the way you manage your fleet’s finances can have an impact on driver retention. One way to free up funds for updating your equipment is to implement a 1031 like-kind exchange program.
Use a Like-Kind Exchange to Update your Fleet and Reduce Driver Turnover
1031 like-kind exchanges can instantly free up a lot of extra cash that you are currently paying in taxes on the sale of your used equipment – tractors in particular. With bonus depreciation expired, trucking companies are paying between 38%-50% income tax on the sale of their used tractors. That can add up to paying the government up to $17,500 on every used tractor you sell! That’s the kind of expense that delays the purchase of new replacement equipment, with predictable driver turnover consequences.
Consider the following example, which illustrates what happens when 100 trucks (purchased new for $120,000 each) are then sold for $35,000 each:

 
Without LKE
With LKE

Selling 100 trucks with, and without, like-kind strategy

Original equipment cost
$12,000,000
$12,000,000

Tax depreciation allowed
$12,000,000
$12,000,000

Tax basis at sale
$0
$0

Sales proceeds
$3,500,000
$3,500,000

Gain on sale
$3,500,000
$3,500,000

Tax due on gain (40%)
$1,400,000
$0

Cash available for new equipment
$2,100,000
$3,500,000

 
With only 100 trucks, a 1031 like-kind exchange program would have provided $1.4 million additional dollars for the purchase of new tractors. The LKE program converted those tax dollars into extra cash to spend on new equipment. Trucking companies using LKEs are tapping into an interest-free source of capital to keep their businesses rolling and to reduce their driver dissatisfaction with driving older vehicles. The cash benefit via the tax deferral is essentially a line of credit you control – and you decide when to pay back.
The trucking industry is extremely competitive. Your ability to retain your best drivers is absolutely critical to your long term success. Companies that are able to generate this huge amount of extra cash via tax deferral are able to purchase more new tractors more frequently. The ability to upgrade and modernize your fleet is a crucial component of keeping drivers happy, satisfied and working for your company longer.
So the next time you look at your fleet, ask yourself this question: Would the best drivers want to drive that truck?