Category: 1031 Exchange General

Your tax relief deadline might be closer than you think!
Remember, the deadline to complete a 1031 Like-Kind Exchange (LKE) is the earlier of 180 calendar days, or the due date, with extension of your income tax return.  If you are currently participating in an LKE, be sure to contact your tax advisor right away.  You might have to extend your tax return in order to take advantage of the full 180 days.
If you are thinking about starting the LKE process, contact Accruit today.  Our representatives will carefully discuss the details and highlight how much money you can save through our custom LKE solutions.

Your tax relief deadline might be closer than you think!
Remember, the deadline to complete a 1031 Like-Kind Exchange (LKE) is the earlier of 180 calendar days, or the due date, with extension of your income tax return.  If you are currently participating in an LKE, be sure to contact your tax advisor right away.  You might have to extend your tax return in order to take advantage of the full 180 days.
If you are thinking about starting the LKE process, contact Accruit today.  Our representatives will carefully discuss the details and highlight how much money you can save through our custom LKE solutions.

Article republished with permission of our Joint Business Relationship partner,

Article republished with permission of our Joint Business Relationship partner,

Article republished with permission of our Joint Business Relationship partner,

Accruit is committed to closely monitoring the marketplace for factors that may have a potential impact on our clients and partners. The IRS recently issued a ruling that we believe is of interest to many companies with 1031 exchange programs, and we thought we’d take this opportunity to offer some details on that ruling.
It should be noted that this is not intended as tax advice – Accruit does not provide tax guidance. We do, however, encourage any business that thinks they may be affected to discuss the following information with their respective tax advisors. Accruit is glad to be involved, as appropriate, in those discussions.
The Ruling
On June 25, 2010 the Internal Revenue Service (IRS) National Office of the Chief Counsel released Chief Counsel Advisory (CCA) 201025049. In brief, this ruling reaffirms that depreciation deductions and like-kind exchange (LKE) treatment may not be allowed for equipment held primarily for sale.
It is of the utmost importance to note that this CCA is heavily dependent on a very specific set of facts and circumstances surrounding a single taxpayer employing LKEs as part of their overall tax planning strategy. Furthermore, under Title 26, section 6110(k)(3), CCA determinations are not to be used or cited as precedent. This said, published determinations like this CCA can provide important insight and guidance regarding specific issues.
It’s also important to note that the phrase “property held primarily for sale” is not arbitrary. It appears throughout the Internal Revenue Code (IRC) and, as such, has undergone extensive litigation. Additionally, the Supreme Court has held under the definition of capital assets that “primarily” is defined as “of first importance” or “principally.”
Ultimately, and despite the taxpayer’s own designation of the equipment as primarily held for rental, the Chief Counsel determined the property was principally held for sale, with rental of secondary importance. (Note: the taxpayer in question is not an Accruit client.)
The following summarized facts serve to support the Chief Counsel’s position:

The taxpayer structured the sales of designated rental equipment as LKE transactions.
Taxpayer’s overall revenue structure consists of:

equipment sales making up 91% of total income, and
equipment rentals making up 9% of total income.
Information provided to the IRS indicated that a substantial portion of the equipment designated as rental was sold prior to generating any rental income.

The IRS Examination Division sampled a number of replacement properties received in LKE transactions and determined that many were disposed of shortly after purchase and none of the replacement properties were rented prior to disposition.

Of all the replacement property purchased during Year 1, 40% was disposed of that same year.
Nearly half of these dispositions occurred within 90 days of the replacement property’s receipt by the taxpayer.

Implications
Under IRC section 1031(a), Qualified LKE sales are disposals of relinquished property defined as “held for productive use in a trade or business or for investment.” Property that is held primarily for sale (inventory) is specifically disqualified from LKE treatment.
Does this ruling mean that companies with 1031 exchange programs should conduct a review? Perhaps. This depends on the details of the particular program. The CCA does highlight the importance of properly classifying and qualifying both relinquished and replacement property with respect to LKE eligibility, and it’s always a good idea to make sure that a program remains in compliance with the guidelines established during implementation.
Accruit advises any company that believes it may be implicated by the Chief Counsel’s reasoning to discuss with their tax advisor what steps should be taken (and documented) to help ensure that relinquished property is truly separate and distinct from those assets that are held exclusively or primarily for sale.

Accruit is committed to closely monitoring the marketplace for factors that may have a potential impact on our clients and partners. The IRS recently issued a ruling that we believe is of interest to many companies with 1031 exchange programs, and we thought we’d take this opportunity to offer some details on that ruling.
It should be noted that this is not intended as tax advice – Accruit does not provide tax guidance. We do, however, encourage any business that thinks they may be affected to discuss the following information with their respective tax advisors. Accruit is glad to be involved, as appropriate, in those discussions.
The Ruling
On June 25, 2010 the Internal Revenue Service (IRS) National Office of the Chief Counsel released Chief Counsel Advisory (CCA) 201025049. In brief, this ruling reaffirms that depreciation deductions and like-kind exchange (LKE) treatment may not be allowed for equipment held primarily for sale.
It is of the utmost importance to note that this CCA is heavily dependent on a very specific set of facts and circumstances surrounding a single taxpayer employing LKEs as part of their overall tax planning strategy. Furthermore, under Title 26, section 6110(k)(3), CCA determinations are not to be used or cited as precedent. This said, published determinations like this CCA can provide important insight and guidance regarding specific issues.
It’s also important to note that the phrase “property held primarily for sale” is not arbitrary. It appears throughout the Internal Revenue Code (IRC) and, as such, has undergone extensive litigation. Additionally, the Supreme Court has held under the definition of capital assets that “primarily” is defined as “of first importance” or “principally.”
Ultimately, and despite the taxpayer’s own designation of the equipment as primarily held for rental, the Chief Counsel determined the property was principally held for sale, with rental of secondary importance. (Note: the taxpayer in question is not an Accruit client.)
The following summarized facts serve to support the Chief Counsel’s position:

The taxpayer structured the sales of designated rental equipment as LKE transactions.
Taxpayer’s overall revenue structure consists of:

equipment sales making up 91% of total income, and
equipment rentals making up 9% of total income.
Information provided to the IRS indicated that a substantial portion of the equipment designated as rental was sold prior to generating any rental income.

The IRS Examination Division sampled a number of replacement properties received in LKE transactions and determined that many were disposed of shortly after purchase and none of the replacement properties were rented prior to disposition.

Of all the replacement property purchased during Year 1, 40% was disposed of that same year.
Nearly half of these dispositions occurred within 90 days of the replacement property’s receipt by the taxpayer.

Implications
Under IRC section 1031(a), Qualified LKE sales are disposals of relinquished property defined as “held for productive use in a trade or business or for investment.” Property that is held primarily for sale (inventory) is specifically disqualified from LKE treatment.
Does this ruling mean that companies with 1031 exchange programs should conduct a review? Perhaps. This depends on the details of the particular program. The CCA does highlight the importance of properly classifying and qualifying both relinquished and replacement property with respect to LKE eligibility, and it’s always a good idea to make sure that a program remains in compliance with the guidelines established during implementation.
Accruit advises any company that believes it may be implicated by the Chief Counsel’s reasoning to discuss with their tax advisor what steps should be taken (and documented) to help ensure that relinquished property is truly separate and distinct from those assets that are held exclusively or primarily for sale.

Accruit is committed to closely monitoring the marketplace for factors that may have a potential impact on our clients and partners. The IRS recently issued a ruling that we believe is of interest to many companies with 1031 exchange programs, and we thought we’d take this opportunity to offer some details on that ruling.
It should be noted that this is not intended as tax advice – Accruit does not provide tax guidance. We do, however, encourage any business that thinks they may be affected to discuss the following information with their respective tax advisors. Accruit is glad to be involved, as appropriate, in those discussions.
The Ruling
On June 25, 2010 the Internal Revenue Service (IRS) National Office of the Chief Counsel released Chief Counsel Advisory (CCA) 201025049. In brief, this ruling reaffirms that depreciation deductions and like-kind exchange (LKE) treatment may not be allowed for equipment held primarily for sale.
It is of the utmost importance to note that this CCA is heavily dependent on a very specific set of facts and circumstances surrounding a single taxpayer employing LKEs as part of their overall tax planning strategy. Furthermore, under Title 26, section 6110(k)(3), CCA determinations are not to be used or cited as precedent. This said, published determinations like this CCA can provide important insight and guidance regarding specific issues.
It’s also important to note that the phrase “property held primarily for sale” is not arbitrary. It appears throughout the Internal Revenue Code (IRC) and, as such, has undergone extensive litigation. Additionally, the Supreme Court has held under the definition of capital assets that “primarily” is defined as “of first importance” or “principally.”
Ultimately, and despite the taxpayer’s own designation of the equipment as primarily held for rental, the Chief Counsel determined the property was principally held for sale, with rental of secondary importance. (Note: the taxpayer in question is not an Accruit client.)
The following summarized facts serve to support the Chief Counsel’s position:

The taxpayer structured the sales of designated rental equipment as LKE transactions.
Taxpayer’s overall revenue structure consists of:

equipment sales making up 91% of total income, and
equipment rentals making up 9% of total income.
Information provided to the IRS indicated that a substantial portion of the equipment designated as rental was sold prior to generating any rental income.

The IRS Examination Division sampled a number of replacement properties received in LKE transactions and determined that many were disposed of shortly after purchase and none of the replacement properties were rented prior to disposition.

Of all the replacement property purchased during Year 1, 40% was disposed of that same year.
Nearly half of these dispositions occurred within 90 days of the replacement property’s receipt by the taxpayer.

Implications
Under IRC section 1031(a), Qualified LKE sales are disposals of relinquished property defined as “held for productive use in a trade or business or for investment.” Property that is held primarily for sale (inventory) is specifically disqualified from LKE treatment.
Does this ruling mean that companies with 1031 exchange programs should conduct a review? Perhaps. This depends on the details of the particular program. The CCA does highlight the importance of properly classifying and qualifying both relinquished and replacement property with respect to LKE eligibility, and it’s always a good idea to make sure that a program remains in compliance with the guidelines established during implementation.
Accruit advises any company that believes it may be implicated by the Chief Counsel’s reasoning to discuss with their tax advisor what steps should be taken (and documented) to help ensure that relinquished property is truly separate and distinct from those assets that are held exclusively or primarily for sale.

Education has always been a key component of the like-kind exchange (LKE) industry and frankly, it has always been one of the more enjoyable parts of my job. Despite the fact that the 1031 exchange business focuses on a very narrow part of the tax code, there will always be significant challenges associated with anything that involves the IRS. So for this month’s 1031 Tips, I’m stepping back and reexamining the most basic type of 1031 exchange, the simultaneous LKE, also known as the “swap.”

The oldest form of exchange, the simultaneous LKE can take on three basic forms:

Two-party swap format, without the use of a Qualified Intermediary (QI)
Three-party format, without the use of a QI
Two or three-party format, with a QI

For the purposes of this article, I’ll stick to the two-party swap format.
Three-party LKEs can be structured without the use of a QI, but the accommodating party is potentially exposed to liability issues related to property they have little information about. This potential exposure makes three-party LKEs without the use of a QI, a rare (and risky) occurrence.
On the other hand, the two-party swap format represents an exchange in its most understandable and unadulterated form. Structured as a true trade, the ownership transfers must occur simultaneously with care taken in order to account for each property’s respective fair market values to ensure tax liabilities are fully deferred. Furthermore, since the two properties don’t usually share the same fair market values, cash or other property used as part of the purchase / sale price must be carefully delivered directly to the other party.
The two-party swap is illustrated as follows:

 
 
 
 
 
 
 
 
 
 
Two-party swaps can be a great way to keep an LKE simple and cost effective. However, what may begin as a simple swap can quickly evolve to suit the circumstances of the seller (exchanger) and / or buyer. It’s these variable circumstances that can move the transaction beyond the requirements for a successful LKE. The old saying goes that the devil’s in the details, and LKEs are heavily dependent on the proper transaction form. Any deviations from that form can be fatal to the exchange.
Assuming the properties qualify for LKE treatment, the primary threat to the exchange lies in delays. Delays in ownership transfers (or the delivery of cash or other considerations) can have a profoundly negative impact on the integrity of the two-party swap, so proper planning is vital. This planning is especially important if you’re involved in a dealer trade-in or a pass-through transaction. In some instances, pass-throughs and trade-ins can fall outside the prescribed format, requiring the use of a QI. In other cases, where the two-party swap format doesn’t require the use of a QI, exchangers may choose to involve one in the transaction. In doing so, they add some very important elements to the LKE:

An experienced, knowledgeable professional.
An approved “Safe Harbor” component.

Exchangers should be very careful regarding transactions that position the dealer as the QI. There are very specific rules within the tax code prohibiting the use of an individual / entity that has a recent agency relationship with the exchanger.

A safety net against LKE-destroying occurrences, such as:

Actual receipt or constructive receipt of funds (this is especially important if the values of the traded properties are not equal).
Delays in the sequential transfer of the properties.

In other words, simultaneous exchanges are legal and valid, but they can expose you to significant liability if they’re conducted improperly. The best way to assure that your swap complies with Section 1031 is to begin the planning process by calling a QI. At Accruit, we don’t charge any fees to discuss the proposed transaction, and our Exchange Operations team can provide you with an honest appraisal of the transaction’s integrity, including whether or not you should use a QI.
Short version: make a call with your QI a prerequisite step in your due diligence process. You won’t regret it.

Education has always been a key component of the like-kind exchange (LKE) industry and frankly, it has always been one of the more enjoyable parts of my job. Despite the fact that the 1031 exchange business focuses on a very narrow part of the tax code, there will always be significant challenges associated with anything that involves the IRS. So for this month’s 1031 Tips, I’m stepping back and reexamining the most basic type of 1031 exchange, the simultaneous LKE, also known as the “swap.”

The oldest form of exchange, the simultaneous LKE can take on three basic forms:

Two-party swap format, without the use of a Qualified Intermediary (QI)
Three-party format, without the use of a QI
Two or three-party format, with a QI

For the purposes of this article, I’ll stick to the two-party swap format.
Three-party LKEs can be structured without the use of a QI, but the accommodating party is potentially exposed to liability issues related to property they have little information about. This potential exposure makes three-party LKEs without the use of a QI, a rare (and risky) occurrence.
On the other hand, the two-party swap format represents an exchange in its most understandable and unadulterated form. Structured as a true trade, the ownership transfers must occur simultaneously with care taken in order to account for each property’s respective fair market values to ensure tax liabilities are fully deferred. Furthermore, since the two properties don’t usually share the same fair market values, cash or other property used as part of the purchase / sale price must be carefully delivered directly to the other party.
The two-party swap is illustrated as follows:

 
 
 
 
 
 
 
 
 
 
Two-party swaps can be a great way to keep an LKE simple and cost effective. However, what may begin as a simple swap can quickly evolve to suit the circumstances of the seller (exchanger) and / or buyer. It’s these variable circumstances that can move the transaction beyond the requirements for a successful LKE. The old saying goes that the devil’s in the details, and LKEs are heavily dependent on the proper transaction form. Any deviations from that form can be fatal to the exchange.
Assuming the properties qualify for LKE treatment, the primary threat to the exchange lies in delays. Delays in ownership transfers (or the delivery of cash or other considerations) can have a profoundly negative impact on the integrity of the two-party swap, so proper planning is vital. This planning is especially important if you’re involved in a dealer trade-in or a pass-through transaction. In some instances, pass-throughs and trade-ins can fall outside the prescribed format, requiring the use of a QI. In other cases, where the two-party swap format doesn’t require the use of a QI, exchangers may choose to involve one in the transaction. In doing so, they add some very important elements to the LKE:

An experienced, knowledgeable professional.
An approved “Safe Harbor” component.

Exchangers should be very careful regarding transactions that position the dealer as the QI. There are very specific rules within the tax code prohibiting the use of an individual / entity that has a recent agency relationship with the exchanger.

A safety net against LKE-destroying occurrences, such as:

Actual receipt or constructive receipt of funds (this is especially important if the values of the traded properties are not equal).
Delays in the sequential transfer of the properties.

In other words, simultaneous exchanges are legal and valid, but they can expose you to significant liability if they’re conducted improperly. The best way to assure that your swap complies with Section 1031 is to begin the planning process by calling a QI. At Accruit, we don’t charge any fees to discuss the proposed transaction, and our Exchange Operations team can provide you with an honest appraisal of the transaction’s integrity, including whether or not you should use a QI.
Short version: make a call with your QI a prerequisite step in your due diligence process. You won’t regret it.