Category: 1031 Exchange General

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.

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.

The Problem
William Smith purchased The Imperial Apartments in 1998 for $1.5M and he’s been taking approximately $50,000 in depreciation deductions against the property each year (27.5 year MACRS residential rental property). He sold the building in February 2008 for $2.5M.
At the time of sale, his tax basis in the property was $1M. He purchased another apartment building in July, paying $3.25M. The new building is also 27.5 year MACRS residential rental property and is depreciated for tax purposes from the time of acquisition. Smith’s 2008 tax consequences are significant.
The tax gain recognized on the sale of the apartment building is $1.5M ($2.5M sale price – $1M adjusted tax basis = $1.5M), making his total tax $350,000.
• Federal Long-term Capital gains Tax: $1M appreciation x 15% = $150,000
• Tax Attributable to Unrecaptured Section 1250 gain: $500,000 depreciation x 25% = $125,000
• State/Local Tax (assumes 5% state tax rate): $1.5M tax gain x 5% = $75,000
The Accruit Solution
Working with Accruit, Smith structures the sale of The Imperial as a §1031 single exchange, letting him defer this tax debt indefinitely.
The Results
After executing an LKE, the recognized tax gain on the sale of The Imperial is $0. The benefit to Smith is the deferral of $1.5M of tax gain, resulting in a total tax savings of $350,000 in the year of sale.
* This case is based on a typical real estate exchange scenario.

The Problem
William Smith purchased The Imperial Apartments in 1998 for $1.5M and he’s been taking approximately $50,000 in depreciation deductions against the property each year (27.5 year MACRS residential rental property). He sold the building in February 2008 for $2.5M.
At the time of sale, his tax basis in the property was $1M. He purchased another apartment building in July, paying $3.25M. The new building is also 27.5 year MACRS residential rental property and is depreciated for tax purposes from the time of acquisition. Smith’s 2008 tax consequences are significant.
The tax gain recognized on the sale of the apartment building is $1.5M ($2.5M sale price – $1M adjusted tax basis = $1.5M), making his total tax $350,000.
• Federal Long-term Capital gains Tax: $1M appreciation x 15% = $150,000
• Tax Attributable to Unrecaptured Section 1250 gain: $500,000 depreciation x 25% = $125,000
• State/Local Tax (assumes 5% state tax rate): $1.5M tax gain x 5% = $75,000
The Accruit Solution
Working with Accruit, Smith structures the sale of The Imperial as a §1031 single exchange, letting him defer this tax debt indefinitely.
The Results
After executing an LKE, the recognized tax gain on the sale of The Imperial is $0. The benefit to Smith is the deferral of $1.5M of tax gain, resulting in a total tax savings of $350,000 in the year of sale.
* This case is based on a typical real estate exchange scenario.

The Problem
William Smith purchased The Imperial Apartments in 1998 for $1.5M and he’s been taking approximately $50,000 in depreciation deductions against the property each year (27.5 year MACRS residential rental property). He sold the building in February 2008 for $2.5M.
At the time of sale, his tax basis in the property was $1M. He purchased another apartment building in July, paying $3.25M. The new building is also 27.5 year MACRS residential rental property and is depreciated for tax purposes from the time of acquisition. Smith’s 2008 tax consequences are significant.
The tax gain recognized on the sale of the apartment building is $1.5M ($2.5M sale price – $1M adjusted tax basis = $1.5M), making his total tax $350,000.
• Federal Long-term Capital gains Tax: $1M appreciation x 15% = $150,000
• Tax Attributable to Unrecaptured Section 1250 gain: $500,000 depreciation x 25% = $125,000
• State/Local Tax (assumes 5% state tax rate): $1.5M tax gain x 5% = $75,000
The Accruit Solution
Working with Accruit, Smith structures the sale of The Imperial as a §1031 single exchange, letting him defer this tax debt indefinitely.
The Results
After executing an LKE, the recognized tax gain on the sale of The Imperial is $0. The benefit to Smith is the deferral of $1.5M of tax gain, resulting in a total tax savings of $350,000 in the year of sale.
* This case is based on a typical real estate exchange scenario.

Why put a tax-deferral program in place when taxes are low?

Lessors and other savvy owners of business assets understand the financial benefits of a well-managed, programmatic 1031 Like-Kind Exchange (LKE) system. But “bonus depreciation,” a currently low capital gains tax rate, a reduced effective overall tax rate resulting from reduced corporate profits, and the prospect of increasing tax rates in the future are all causing asset owners to question whether a 1031 LKE program makes sense for them at this time. The simple answer – regardless of current taxable status – is probably a resounding “yes.”
Bonus depreciation is intended to provide additional incentive for investment in capital assets, just as the original

Why put a tax-deferral program in place when taxes are low?

Lessors and other savvy owners of business assets understand the financial benefits of a well-managed, programmatic 1031 Like-Kind Exchange (LKE) system. But “bonus depreciation,” a currently low capital gains tax rate, a reduced effective overall tax rate resulting from reduced corporate profits, and the prospect of increasing tax rates in the future are all causing asset owners to question whether a 1031 LKE program makes sense for them at this time. The simple answer – regardless of current taxable status – is probably a resounding “yes.”
Bonus depreciation is intended to provide additional incentive for investment in capital assets, just as the original

Why put a tax-deferral program in place when taxes are low?

Lessors and other savvy owners of business assets understand the financial benefits of a well-managed, programmatic 1031 Like-Kind Exchange (LKE) system. But “bonus depreciation,” a currently low capital gains tax rate, a reduced effective overall tax rate resulting from reduced corporate profits, and the prospect of increasing tax rates in the future are all causing asset owners to question whether a 1031 LKE program makes sense for them at this time. The simple answer – regardless of current taxable status – is probably a resounding “yes.”
Bonus depreciation is intended to provide additional incentive for investment in capital assets, just as the original

Recently, I came across an article written by Hal Vandiver for the Material Handling Industry of America regarding the

Recently, I came across an article written by Hal Vandiver for the Material Handling Industry of America regarding the