Category: 1031 Exchange General

First, let’s consider eligibility. The revenue procedure applies to:

Taxpayers who properly transferred relinquished property to a QI and
have properly and timely identified replacement property,

unless QI default occurs during the identification period.

Taxpayers who were unable to complete the exchange solely because of the QI default and the QI

then becomes subject to a federal bankruptcy, or
receivership proceedings under federal or state law.

Taxpayers who have not had actual or constructive receipt of

the proceeds from the sale of the relinquished property, or
any other property of the QI prior to the date the QI enters bankruptcy or receivership proceedings.

As you can imagine, a number of taxpayers have been holding their collective breath hoping for some good news on this situation.
The second consideration is reporting. Once the exchanger has determined that they meet the applicability test of the revenue procedure, an analysis must be performed on how to report the failed exchange.  Thankfully, the revenue procedure also explains how this should be done. The application of the revenue procedure includes:

Recognizing gain only as payments are received; this is good news, as the tax liability can be satisfied from payments received by the taxpayer, rather than from other sources.

This also allows the taxpayer to report the gain in the year the payment is received, rather than the year the relinquished property was disposed.

Recognition of gain through the “gross profit ratio method.”

The portion of any payment related to the relinquished property is multiplied by,

a fraction composed of the taxpayer’s gross profit over the contract price.

Definitions for proper reporting are:

Payments include: proceeds, damages, or other amounts related to the sale of the relinquished property.
Gross Profit is defined as the selling price of the relinquished property, less the property’s basis.

Any selling expenses not paid by the QI out of proceeds should be added to this amount.

Selling Price generally means the amount realized on the sale of the relinquished property.
Contract Price is the selling price of the relinquished property less any assumed debt (by the buyer and not in excess of the adjusted basis of the relinquished property).

Assumption of debt in excess of basis is treated as payment, related to the relinquished property, in the year satisfied.

Finally, as always, consult your tax advisor. Like all issuances related to the I.R.S., the actual RevProc 2010-14 document is much more detailed than the above overview and a comprehensive analysis should be left to a competent tax advisor – preferably one familiar with your specific circumstances.  If you believe that you may qualify under this new revenue procedure, you should contact a tax professional immediately.

First, let’s consider eligibility. The revenue procedure applies to:

Taxpayers who properly transferred relinquished property to a QI and
have properly and timely identified replacement property,

unless QI default occurs during the identification period.

Taxpayers who were unable to complete the exchange solely because of the QI default and the QI

then becomes subject to a federal bankruptcy, or
receivership proceedings under federal or state law.

Taxpayers who have not had actual or constructive receipt of

the proceeds from the sale of the relinquished property, or
any other property of the QI prior to the date the QI enters bankruptcy or receivership proceedings.

As you can imagine, a number of taxpayers have been holding their collective breath hoping for some good news on this situation.
The second consideration is reporting. Once the exchanger has determined that they meet the applicability test of the revenue procedure, an analysis must be performed on how to report the failed exchange.  Thankfully, the revenue procedure also explains how this should be done. The application of the revenue procedure includes:

Recognizing gain only as payments are received; this is good news, as the tax liability can be satisfied from payments received by the taxpayer, rather than from other sources.

This also allows the taxpayer to report the gain in the year the payment is received, rather than the year the relinquished property was disposed.

Recognition of gain through the “gross profit ratio method.”

The portion of any payment related to the relinquished property is multiplied by,

a fraction composed of the taxpayer’s gross profit over the contract price.

Definitions for proper reporting are:

Payments include: proceeds, damages, or other amounts related to the sale of the relinquished property.
Gross Profit is defined as the selling price of the relinquished property, less the property’s basis.

Any selling expenses not paid by the QI out of proceeds should be added to this amount.

Selling Price generally means the amount realized on the sale of the relinquished property.
Contract Price is the selling price of the relinquished property less any assumed debt (by the buyer and not in excess of the adjusted basis of the relinquished property).

Assumption of debt in excess of basis is treated as payment, related to the relinquished property, in the year satisfied.

Finally, as always, consult your tax advisor. Like all issuances related to the I.R.S., the actual RevProc 2010-14 document is much more detailed than the above overview and a comprehensive analysis should be left to a competent tax advisor – preferably one familiar with your specific circumstances.  If you believe that you may qualify under this new revenue procedure, you should contact a tax professional immediately.

First, let’s consider eligibility. The revenue procedure applies to:

Taxpayers who properly transferred relinquished property to a QI and
have properly and timely identified replacement property,

unless QI default occurs during the identification period.

Taxpayers who were unable to complete the exchange solely because of the QI default and the QI

then becomes subject to a federal bankruptcy, or
receivership proceedings under federal or state law.

Taxpayers who have not had actual or constructive receipt of

the proceeds from the sale of the relinquished property, or
any other property of the QI prior to the date the QI enters bankruptcy or receivership proceedings.

As you can imagine, a number of taxpayers have been holding their collective breath hoping for some good news on this situation.
The second consideration is reporting. Once the exchanger has determined that they meet the applicability test of the revenue procedure, an analysis must be performed on how to report the failed exchange.  Thankfully, the revenue procedure also explains how this should be done. The application of the revenue procedure includes:

Recognizing gain only as payments are received; this is good news, as the tax liability can be satisfied from payments received by the taxpayer, rather than from other sources.

This also allows the taxpayer to report the gain in the year the payment is received, rather than the year the relinquished property was disposed.

Recognition of gain through the “gross profit ratio method.”

The portion of any payment related to the relinquished property is multiplied by,

a fraction composed of the taxpayer’s gross profit over the contract price.

Definitions for proper reporting are:

Payments include: proceeds, damages, or other amounts related to the sale of the relinquished property.
Gross Profit is defined as the selling price of the relinquished property, less the property’s basis.

Any selling expenses not paid by the QI out of proceeds should be added to this amount.

Selling Price generally means the amount realized on the sale of the relinquished property.
Contract Price is the selling price of the relinquished property less any assumed debt (by the buyer and not in excess of the adjusted basis of the relinquished property).

Assumption of debt in excess of basis is treated as payment, related to the relinquished property, in the year satisfied.

Finally, as always, consult your tax advisor. Like all issuances related to the I.R.S., the actual RevProc 2010-14 document is much more detailed than the above overview and a comprehensive analysis should be left to a competent tax advisor – preferably one familiar with your specific circumstances.  If you believe that you may qualify under this new revenue procedure, you should contact a tax professional immediately.

In some circles Accruit is known for the value it represents for businesses buying and selling investment property – that is, tangible real estate assets. However, Accruit’s patented 1031 process – the only patented like-kind-exchange (LKE) process in the nation* – provides our clients with a level of efficiency that other providers simply cannot match. So when we talk about maximizing your gain and minimizing your risk and administrative burden, we’re talking about businesses buying and selling corporate and commercial real estate, too – no matter what industry they’re in.

We’ve produced a Real Estate 1031 like-kind exchange fact sheet that explains, in greater detail, how the process works, and we also provide a case study that illustrates the cash flow benefit that arises from a typical commercial real estate exchange. Have a look, and if you’d like more information on how an Accruit LKE might benefit your business take a look at our informational Real Estate Exchanges page or contact us.
* U.S. Patent No. 7,379,910, and other patents pending.

In some circles Accruit is known for the value it represents for businesses buying and selling investment property – that is, tangible real estate assets. However, Accruit’s patented 1031 process – the only patented like-kind-exchange (LKE) process in the nation* – provides our clients with a level of efficiency that other providers simply cannot match. So when we talk about maximizing your gain and minimizing your risk and administrative burden, we’re talking about businesses buying and selling corporate and commercial real estate, too – no matter what industry they’re in.

We’ve produced a Real Estate 1031 like-kind exchange fact sheet that explains, in greater detail, how the process works, and we also provide a case study that illustrates the cash flow benefit that arises from a typical commercial real estate exchange. Have a look, and if you’d like more information on how an Accruit LKE might benefit your business take a look at our informational Real Estate Exchanges page or contact us.
* U.S. Patent No. 7,379,910, and other patents pending.

In some circles Accruit is known for the value it represents for businesses buying and selling investment property – that is, tangible real estate assets. However, Accruit’s patented 1031 process – the only patented like-kind-exchange (LKE) process in the nation* – provides our clients with a level of efficiency that other providers simply cannot match. So when we talk about maximizing your gain and minimizing your risk and administrative burden, we’re talking about businesses buying and selling corporate and commercial real estate, too – no matter what industry they’re in.

We’ve produced a Real Estate 1031 like-kind exchange fact sheet that explains, in greater detail, how the process works, and we also provide a case study that illustrates the cash flow benefit that arises from a typical commercial real estate exchange. Have a look, and if you’d like more information on how an Accruit LKE might benefit your business take a look at our informational Real Estate Exchanges page or contact us.
* U.S. Patent No. 7,379,910, and other patents pending.

Some time back I posted a proposal arguing that Section 1031 of the tax code should be altered to provide oil and gas companies a “one-way swinging door” from fossil to green. In a nutshell, the current tax code allows these companies to sell fossil development assets and defer recognizing the gain on the sale if they then reinvest in a “like-kind” asset. Like-kind, of course, means fossil. The code does not allow O&G companies to use this powerful tool to shift their focus away from fossil and into green technologies.
Since the Obama administration has made the migration to sustainable energy a priority, the proposed modification to Section 1031 not only makes solid intuitive sense, it also sounds like a good idea to literally everyone we’ve talked to (a list that includes tax professionals, investors, lawyers, senior corporate leaders, oil and gas industry executives, journalists, academics and Congressional staffers).
As we continue seeking to draw more interested parties into this discussion, we thought it might make sense to have a similar look at another industry implicated by this strategy, coal. I charged Lauren McNitt (School of Journalism and Mass Communication, University of Colorado) and Wenting Zhang (Daniels College of Business, University of Denver), who are interning with Accruit for the summer, with taking a look at the coal industry, which is necessarily implicated in any meaningful attempt to green our economy. While there’s no evidence that coal companies currently have an appetite for this kind of reinvestment (perhaps because they’ve never thought of it), it nonetheless makes sense to begin aligning the tax code with our long-term goals today. As the authors suggest, our shift away from coal is a matter of when, not if. – Sam Smith

Overview
The U.S. coal mining industry reaps $25 billion in annual revenue and is second in the world in terms of production. The top ten coal companies, such as Peabody Energy, Rio Tinto and Arch Coal control about 48.5 percent of electricity generated in the U.S.. The fate of the U.S. coal mining industry relies on the electric utilities industry’s continued use of coal.
Coal: State of the Industry
Coal power plants, which account for a New York Times noted the following provisions in the bill:

A large sum for energy efficiency, including $5 billion for low-income weatherization programs; over $6 billion in grants for state and local governments; and several billion to modernize federal buildings, with a particular emphasis on energy efficiency;
$11 billion for “smart grid” investments;
$3.4 billion for carbon capture and sequestration demonstration projects (sometimes referred to as “clean coal”);
$2 billion for research into batteries for electric cars;
$500 million to help workers train for “green jobs”;
a three-year extension of the “production tax credit” for wind energy (as well as a tax credit extension for biomass, geothermal, landfill gas and some hydropower projects); and
the option, available to many developers, of turning their tax credits into direct cash, with the government underwriting 30 percent of a project’s cost.

The emphasis on greening our economy continued with the introduction of a climate bill currently under debate in the Senate, H.R. 2454: American Clean Energy and Security Act).
What legislators are ignoring
The goal of these bills is to facilitate the transition to a clean energy economy, yet the legislation is missing a key provision that would encourage companies in the fossil fuel mining and utilities industries to begin a crossover to the renewable energy sector: a revision of the tax code to allow companies to employ 1031 Like-Kind Exchanges (LKEs) when transitioning from fossil to renewable energy assets.
The bills instead address the negative effects of the fossil fuel industry on the environment (in particular coal fired power plants) by proposing cap-and-trade policies. If passed, cap-and-trade will require carbon-emitting companies to buy permits that allow them to emit a specific amount of carbon. Companies looking to decrease the number of permits they buy may potentially invest in controversial carbon capture technology instead of investing in proven renewable energy technologies.
CCS technology is not a long-term solution
This presents a problem since, as reported in the Lake Nios disaster, where the lake released a concentrated bubble of carbon dioxide and killed approximately 1,700 people.
Additionally, the equipment that captures and stores carbon consumes large amounts of energy, requiring the generation of yet additional carbon. Keith Johnson of the new book by Harvard University’s Belfer Center estimates that clean coal plants use 30% more energy than traditional plants – that is, clean coal plants require more coal to produce the same amount of energy as dirty coal plants.
The 150 megawatt wind farm costs about $225 million, meaning wind farms are approximately $1 billion less expensive to build (at least on that scale).
Even if safe, energy-efficient, inexpensive carbon capture and sequestration technology is developed, coal reserves are not unlimited. The government estimates that the U.S. has enough coal in the ground to last 240 years. However, this estimate is misleading. As recently noted in the

Some time back I posted a proposal arguing that Section 1031 of the tax code should be altered to provide oil and gas companies a “one-way swinging door” from fossil to green. In a nutshell, the current tax code allows these companies to sell fossil development assets and defer recognizing the gain on the sale if they then reinvest in a “like-kind” asset. Like-kind, of course, means fossil. The code does not allow O&G companies to use this powerful tool to shift their focus away from fossil and into green technologies.
Since the Obama administration has made the migration to sustainable energy a priority, the proposed modification to Section 1031 not only makes solid intuitive sense, it also sounds like a good idea to literally everyone we’ve talked to (a list that includes tax professionals, investors, lawyers, senior corporate leaders, oil and gas industry executives, journalists, academics and Congressional staffers).
As we continue seeking to draw more interested parties into this discussion, we thought it might make sense to have a similar look at another industry implicated by this strategy, coal. I charged Lauren McNitt (School of Journalism and Mass Communication, University of Colorado) and Wenting Zhang (Daniels College of Business, University of Denver), who are interning with Accruit for the summer, with taking a look at the coal industry, which is necessarily implicated in any meaningful attempt to green our economy. While there’s no evidence that coal companies currently have an appetite for this kind of reinvestment (perhaps because they’ve never thought of it), it nonetheless makes sense to begin aligning the tax code with our long-term goals today. As the authors suggest, our shift away from coal is a matter of when, not if. – Sam Smith

Overview
The U.S. coal mining industry reaps $25 billion in annual revenue and is second in the world in terms of production. The top ten coal companies, such as Peabody Energy, Rio Tinto and Arch Coal control about 48.5 percent of electricity generated in the U.S.. The fate of the U.S. coal mining industry relies on the electric utilities industry’s continued use of coal.
Coal: State of the Industry
Coal power plants, which account for a New York Times noted the following provisions in the bill:

A large sum for energy efficiency, including $5 billion for low-income weatherization programs; over $6 billion in grants for state and local governments; and several billion to modernize federal buildings, with a particular emphasis on energy efficiency;
$11 billion for “smart grid” investments;
$3.4 billion for carbon capture and sequestration demonstration projects (sometimes referred to as “clean coal”);
$2 billion for research into batteries for electric cars;
$500 million to help workers train for “green jobs”;
a three-year extension of the “production tax credit” for wind energy (as well as a tax credit extension for biomass, geothermal, landfill gas and some hydropower projects); and
the option, available to many developers, of turning their tax credits into direct cash, with the government underwriting 30 percent of a project’s cost.

The emphasis on greening our economy continued with the introduction of a climate bill currently under debate in the Senate, H.R. 2454: American Clean Energy and Security Act).
What legislators are ignoring
The goal of these bills is to facilitate the transition to a clean energy economy, yet the legislation is missing a key provision that would encourage companies in the fossil fuel mining and utilities industries to begin a crossover to the renewable energy sector: a revision of the tax code to allow companies to employ 1031 Like-Kind Exchanges (LKEs) when transitioning from fossil to renewable energy assets.
The bills instead address the negative effects of the fossil fuel industry on the environment (in particular coal fired power plants) by proposing cap-and-trade policies. If passed, cap-and-trade will require carbon-emitting companies to buy permits that allow them to emit a specific amount of carbon. Companies looking to decrease the number of permits they buy may potentially invest in controversial carbon capture technology instead of investing in proven renewable energy technologies.
CCS technology is not a long-term solution
This presents a problem since, as reported in the Lake Nios disaster, where the lake released a concentrated bubble of carbon dioxide and killed approximately 1,700 people.
Additionally, the equipment that captures and stores carbon consumes large amounts of energy, requiring the generation of yet additional carbon. Keith Johnson of the new book by Harvard University’s Belfer Center estimates that clean coal plants use 30% more energy than traditional plants – that is, clean coal plants require more coal to produce the same amount of energy as dirty coal plants.
The 150 megawatt wind farm costs about $225 million, meaning wind farms are approximately $1 billion less expensive to build (at least on that scale).
Even if safe, energy-efficient, inexpensive carbon capture and sequestration technology is developed, coal reserves are not unlimited. The government estimates that the U.S. has enough coal in the ground to last 240 years. However, this estimate is misleading. As recently noted in the

Some time back I posted a proposal arguing that Section 1031 of the tax code should be altered to provide oil and gas companies a “one-way swinging door” from fossil to green. In a nutshell, the current tax code allows these companies to sell fossil development assets and defer recognizing the gain on the sale if they then reinvest in a “like-kind” asset. Like-kind, of course, means fossil. The code does not allow O&G companies to use this powerful tool to shift their focus away from fossil and into green technologies.
Since the Obama administration has made the migration to sustainable energy a priority, the proposed modification to Section 1031 not only makes solid intuitive sense, it also sounds like a good idea to literally everyone we’ve talked to (a list that includes tax professionals, investors, lawyers, senior corporate leaders, oil and gas industry executives, journalists, academics and Congressional staffers).
As we continue seeking to draw more interested parties into this discussion, we thought it might make sense to have a similar look at another industry implicated by this strategy, coal. I charged Lauren McNitt (School of Journalism and Mass Communication, University of Colorado) and Wenting Zhang (Daniels College of Business, University of Denver), who are interning with Accruit for the summer, with taking a look at the coal industry, which is necessarily implicated in any meaningful attempt to green our economy. While there’s no evidence that coal companies currently have an appetite for this kind of reinvestment (perhaps because they’ve never thought of it), it nonetheless makes sense to begin aligning the tax code with our long-term goals today. As the authors suggest, our shift away from coal is a matter of when, not if. – Sam Smith

Overview
The U.S. coal mining industry reaps $25 billion in annual revenue and is second in the world in terms of production. The top ten coal companies, such as Peabody Energy, Rio Tinto and Arch Coal control about 48.5 percent of electricity generated in the U.S.. The fate of the U.S. coal mining industry relies on the electric utilities industry’s continued use of coal.
Coal: State of the Industry
Coal power plants, which account for a New York Times noted the following provisions in the bill:

A large sum for energy efficiency, including $5 billion for low-income weatherization programs; over $6 billion in grants for state and local governments; and several billion to modernize federal buildings, with a particular emphasis on energy efficiency;
$11 billion for “smart grid” investments;
$3.4 billion for carbon capture and sequestration demonstration projects (sometimes referred to as “clean coal”);
$2 billion for research into batteries for electric cars;
$500 million to help workers train for “green jobs”;
a three-year extension of the “production tax credit” for wind energy (as well as a tax credit extension for biomass, geothermal, landfill gas and some hydropower projects); and
the option, available to many developers, of turning their tax credits into direct cash, with the government underwriting 30 percent of a project’s cost.

The emphasis on greening our economy continued with the introduction of a climate bill currently under debate in the Senate, H.R. 2454: American Clean Energy and Security Act).
What legislators are ignoring
The goal of these bills is to facilitate the transition to a clean energy economy, yet the legislation is missing a key provision that would encourage companies in the fossil fuel mining and utilities industries to begin a crossover to the renewable energy sector: a revision of the tax code to allow companies to employ 1031 Like-Kind Exchanges (LKEs) when transitioning from fossil to renewable energy assets.
The bills instead address the negative effects of the fossil fuel industry on the environment (in particular coal fired power plants) by proposing cap-and-trade policies. If passed, cap-and-trade will require carbon-emitting companies to buy permits that allow them to emit a specific amount of carbon. Companies looking to decrease the number of permits they buy may potentially invest in controversial carbon capture technology instead of investing in proven renewable energy technologies.
CCS technology is not a long-term solution
This presents a problem since, as reported in the Lake Nios disaster, where the lake released a concentrated bubble of carbon dioxide and killed approximately 1,700 people.
Additionally, the equipment that captures and stores carbon consumes large amounts of energy, requiring the generation of yet additional carbon. Keith Johnson of the new book by Harvard University’s Belfer Center estimates that clean coal plants use 30% more energy than traditional plants – that is, clean coal plants require more coal to produce the same amount of energy as dirty coal plants.
The 150 megawatt wind farm costs about $225 million, meaning wind farms are approximately $1 billion less expensive to build (at least on that scale).
Even if safe, energy-efficient, inexpensive carbon capture and sequestration technology is developed, coal reserves are not unlimited. The government estimates that the U.S. has enough coal in the ground to last 240 years. However, this estimate is misleading. As recently noted in the

The Situation
Blue Jay Energy (BJE) focuses on the exploration, development and production of natural gas and crude oil in several regions of the United States. The company currently has proved reserves in excess of one billion cubic feet of gas equivalent and a reserve-to-production ratio of over 10 years.
The Problem
As is common with energy exploration businesses, Blue Jay’s holdings include some underperforming fields. It recently decided to divest an oil and gas leasehold with tangible field machinery and equipment so that it could reinvest in properties it expected would generate greater yields. The property it intended to dispose of was comprised of 80% real property and 20% tangible well equipment. It quickly found a buyer, but the proposed $12.9 million sale price for their 85% operating interest would result in a tax liability of roughly $4 million.
The Solution
Blue Jay has conducted 1031 real property Exchanges in the past, but has done so with Qualified Intermediaries that rely on inefficient paper-based processes. As a result of this added administrative burden company leadership has never fully integrated Like- Kind Exchanges (LKEs) into their strategic planning, operations and asset recovery strategy.
BJE was referred to Accruit by its bank. Accruit established a qualified escrow account under the Trust company at the bank to assure maximum security of funds. Accruit then helped the firm facilitate the sale and purchase of the new lease and equipment as an LKE.
The Results
The exchange was conducted successfully, allowing the company to defer $4 million in tax liability – money that it then invested in more promising properties and new oil and gas tubing and casing. In addition, Accruit’s patented process and one-to-one client services model created a degree of efficiency that Blue Jay had never imagined possible. Blue Jay’s senior leadership and finance team were enthusiastic about both the monetary benefit and the ease of use associated with the Accruit process. Other QIs they had worked with only specialized in real property and failed to account for the differences between real and tangible assets. Blue Jay is now considering implementation of a full-scale Accruit 1031 program.