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  • Tax Reform: 10 Talking Points in Favor of Preserving Like-Kind Exchanges

    Early April is the expected date for committee discussions on a preliminary tax reform bill. Or is it May? Perhaps before the August recess? 
    That was the comical consensus I received after attending 17 meetings in Washington D.C. last week. Lately, when monitoring the news out of our nation’s capital, we’ve all become a bit skeptical of what defines “good reporting.”  The proposed House tax plan labeled A Better Way is reported to have the full support of Republican lawmakers. However, some closed-door conversations with members of Congress last week provided me with an entirely different story. 
    Is it Really A Better Way?
    The only real consensus is that A Better Way has a lot of unanswered questions for U.S. business owners. This 35-page document seems to gloss over the fact that business owners want more out of tax reform than simplicity and a lower tax rate.  In order to grow, American business needs the ability to do things like expand operations, hire more people, acquire equipment, secure land and facilities, leverage debt fiscally and, when appropriate, be taxed fairly.
    My meetings last week ranged from sit-downs with senior staff on the House Ways & Means Committee to heated discussions with notable elected officials who have never run a business. A reoccurring theme of these discussions was that “tax reform is complex.”  Unfortunately, running a business is ALSO
    complex, and business owners need varied financial tools to return value from their investments.
    Keep Section 1031 of the Tax Code off the Table
    Our elected officials must make the right decisions – not just popular decisions. My most important achievement last week was simply educating lawmakers and their staff about what some of the proposed tax reform components mean for businesses.  1031 exchanges play a vital role in our economy. In addition to supporting the fundamentals of strong tax policy, like-kind exchanges drive real growth by helping businesses acquire equipment, buildings and land. This 1031-induced growth also extends to the ancillary businesses and supporting vendors who provide goods and services to these growing companies. All of this business growth becomes contagious – in a very good way!
    We always hear that “everything is on the chopping block” if we want to become competitive, grow the economy and encourage businesses to remain in the U.S.  One thing that should not be under the axe is Section 1031. Approaching 100 years in our tax code, Section 1031 exemplifies exactly what the authors of tax reform desire to accomplish.  When engaging with your members of Congress, remember some of these helpful talking points:
    Reasons to Preserve 1031 Like-Kind Exchanges

    1031 like-kind exchanges (LKEs) encourage investment and reinvestment in U.S. assets and make it easier for taxpayers to relocate or upgrade into assets that better meet their business needs.
    Section 1031 was enacted in 1921 for two primary purposes: to avoid unfair taxation of ongoing investments in property and to encourage active reinvestment.
    Section 1031 has survived numerous tax reform efforts for almost 100 years because it is based on sound tax policy that prevents taxation of cash flow when there is “continuity of investment” and because it stimulates the economy with transactional activity.
    LKEs substantially stimulate a myriad of industries, including real estate, construction, title insurance, mortgage lending, equipment manufacturing, transportation, energy and agriculture.
    LKEs ensure both the best use of real estate and a used personal property market that significantly benefits start-ups and small businesses. Eliminating LKEs or restricting their use would have a contraction effect on our economy by increasing the cost of capital.
    Without LKEs, businesses and entrepreneurs would have less incentive and ability to make real estate and capital equipment investments. 
    The forced immediate recognition of gain upon the disposition of investment real estate and other capital assets would result in a higher cost of capital and greater reliance upon debt financing, deterring investment in new assets.
    Retention of Section 1031 is complementary to the immediate expensing of equipment and buildings proposal contained in the House Republican Blueprint.  However, these proposals are not equivalent substitutes for the benefits generated by §1031, especially when viewed in conjunction with the non-deductibility of interest.
    Repealing or restricting LKEs would hamper the ability of businesses to be competitive in our global marketplace.
    LKEs are essentially revenue-neutral over the tax life of depreciable assets because gain deferred is directly offset by a reduction in future depreciation deductions available for assets acquired through an exchange.

    Help Preserve 1031 Like-Kind Exchanges
    You make a difference! Continue to stay engaged. Don’t assume that the writers of our tax code know what it means to run a business and grow our economy.  YOU are an important conduit toward ensuring that the tools your business needs to be successful will be available to you moving forward.   Please keep sending me emails and comments about how 1031s help your business. We’ve worked hard to get the attention of our representative government and we are making sure that your voice is heard in Washington.
    Take Action Now

  • Changing Tax Laws Create Unique Opportunities

    The results of the recent election cycle will have a profound effect on the United States income tax system.  With Republican control over both chambers of Congress and the Oval Office, we can expect bold moves in tax reform—bold, but not unexpected.  In anticipation of a reform-friendly environment, the House Republicans, prior to the November elections, released an outline for future tax reform.  Released on June 24, 2016 and titled, “A Better Way, Our Vision for a Confident America,” the document is the foundation for the Republican’s tax reform efforts.  The outline is also referred to as the “House Republican Blueprint” (HRB), and while only 35 pages in length, it seeks to begin a “conversation about how to fix our broken tax code.”
    While few can accurately predict the outcomes of 2017 tax reform, the consensus view is that corporate tax rates will be reduced from current levels. While the timelines and the degree of these reductions are unknown, savvy CFOs are recognizing opportunity in the face of this uncertainty. Many tax advisors are looking at ways to defer current taxation to a post-tax reform future with a lower rate and a more favorable environment. This “tax arbitrage” situation might very well result in permanent deferrals and once-in-a-lifetime opportunities for businesses.
    Two Potential Tax Reform Plans
    Here is a brief look at two of the tax reform plans that have been talked about:
    The House Republican Blueprint – Tax Rate Details
    The HRB looks to change income tax rates in the following ways:

    Individuals – Reducing tax brackets from seven to three, with a top bracket of 33% as opposed to the current 39.6%.  Alternative minimum tax (AMT) would be repealed.
    Sole proprietors and pass-through entities – For active business income, tax rate would be capped at 25%.  Currently, this income passes through the entity and is reported by the owner(s) and taxed at the owner’s rate(s).  In some cases, the owner’s rates can exceed 40%.
    C-corporations – taxed at a single rate of 20% and a complete repeal of the alternative minimum tax.  Currently, these rates can be as high as 39%.

    While the rate cuts are significant, they are but a small sample of the overall HRB. 
    Donald J. Trump’s Plan – Tax Rate Details
    Since tax reform will require cooperation with the president, here is a review of some highlights from President Donald Trump’s tax proposal:

    Individuals – Similar to the HRB with a reduction from seven tax brackets to three and the same reductions in tax rates as the HRB.
    C-corporations – Tax rate would drop from 35% to 15%, and the alternative minimum tax would be eliminated.

    An Opportunity for Owners of Heavy Equipment
    With both proposals, it’s plain to see that lower tax rates are most certainly on the horizon.  For owners of heavy equipment, lower rates offer a chance to conduct a like-kind exchange within a high tax environment to defer income taxation into a lower tax environment. 
    Recognizing gains in a lower tax environment, often referred to as tax arbitrage, takes advantage of an opportunity for sellers of personal property to permanently reduce income tax through changing tax laws.
    Let’s look at an example where the taxpayer sells equipment in a high tax environment, conducts a like-kind exchange, and effectively defers $18,824 of income taxation.
    Then, in a future (lower tax) environment, that same taxpayer sells the replacement equipment without conducting another like-kind exchange.  Instead, the equipment owner chooses to recognize the sale’s income as a taxable event.  For simplicity’s sake, let’s use the same sales and depreciation figures used above.
    The advantage of combining the deferral benefits of like-kind exchanges with an arbitrage strategy is clear.  The equipment owner’s recognition of income in a 20% tax rate environment permanently saves the owner $9,412 in taxation – the difference between the 40% and 20% tax rates.
    Summary
    New tax arbitrage opportunities are good news for equipment owners who take the initiative to carefully engage with their tax advisors and qualified intermediary to ensure their goals are met and that the planning process fits squarely within the parameters of the law. With proper planning, 2017 tax reform could present your business with a rare opportunity.
    For more on 2017 tax reform or if you’d like additional information on tax arbitrage opportunities, contact us today.
    (866) 397-1031
     

  • Changing Tax Laws Create Unique Opportunities

    The results of the recent election cycle will have a profound effect on the United States income tax system.  With Republican control over both chambers of Congress and the Oval Office, we can expect bold moves in tax reform—bold, but not unexpected.  In anticipation of a reform-friendly environment, the House Republicans, prior to the November elections, released an outline for future tax reform.  Released on June 24, 2016 and titled, “A Better Way, Our Vision for a Confident America,” the document is the foundation for the Republican’s tax reform efforts.  The outline is also referred to as the “House Republican Blueprint” (HRB), and while only 35 pages in length, it seeks to begin a “conversation about how to fix our broken tax code.”
    While few can accurately predict the outcomes of 2017 tax reform, the consensus view is that corporate tax rates will be reduced from current levels. While the timelines and the degree of these reductions are unknown, savvy CFOs are recognizing opportunity in the face of this uncertainty. Many tax advisors are looking at ways to defer current taxation to a post-tax reform future with a lower rate and a more favorable environment. This “tax arbitrage” situation might very well result in permanent deferrals and once-in-a-lifetime opportunities for businesses.
    Two Potential Tax Reform Plans
    Here is a brief look at two of the tax reform plans that have been talked about:
    The House Republican Blueprint – Tax Rate Details
    The HRB looks to change income tax rates in the following ways:

    Individuals – Reducing tax brackets from seven to three, with a top bracket of 33% as opposed to the current 39.6%.  Alternative minimum tax (AMT) would be repealed.
    Sole proprietors and pass-through entities – For active business income, tax rate would be capped at 25%.  Currently, this income passes through the entity and is reported by the owner(s) and taxed at the owner’s rate(s).  In some cases, the owner’s rates can exceed 40%.
    C-corporations – taxed at a single rate of 20% and a complete repeal of the alternative minimum tax.  Currently, these rates can be as high as 39%.

    While the rate cuts are significant, they are but a small sample of the overall HRB. 
    Donald J. Trump’s Plan – Tax Rate Details
    Since tax reform will require cooperation with the president, here is a review of some highlights from President Donald Trump’s tax proposal:

    Individuals – Similar to the HRB with a reduction from seven tax brackets to three and the same reductions in tax rates as the HRB.
    C-corporations – Tax rate would drop from 35% to 15%, and the alternative minimum tax would be eliminated.

    An Opportunity for Owners of Heavy Equipment
    With both proposals, it’s plain to see that lower tax rates are most certainly on the horizon.  For owners of heavy equipment, lower rates offer a chance to conduct a like-kind exchange within a high tax environment to defer income taxation into a lower tax environment. 
    Recognizing gains in a lower tax environment, often referred to as tax arbitrage, takes advantage of an opportunity for sellers of personal property to permanently reduce income tax through changing tax laws.
    Let’s look at an example where the taxpayer sells equipment in a high tax environment, conducts a like-kind exchange, and effectively defers $18,824 of income taxation.
    Then, in a future (lower tax) environment, that same taxpayer sells the replacement equipment without conducting another like-kind exchange.  Instead, the equipment owner chooses to recognize the sale’s income as a taxable event.  For simplicity’s sake, let’s use the same sales and depreciation figures used above.
    The advantage of combining the deferral benefits of like-kind exchanges with an arbitrage strategy is clear.  The equipment owner’s recognition of income in a 20% tax rate environment permanently saves the owner $9,412 in taxation – the difference between the 40% and 20% tax rates.
    Summary
    New tax arbitrage opportunities are good news for equipment owners who take the initiative to carefully engage with their tax advisors and qualified intermediary to ensure their goals are met and that the planning process fits squarely within the parameters of the law. With proper planning, 2017 tax reform could present your business with a rare opportunity.
    For more on 2017 tax reform or if you’d like additional information on tax arbitrage opportunities, contact us today.
    (866) 397-1031
     

  • Changing Tax Laws Create Unique Opportunities

    The results of the recent election cycle will have a profound effect on the United States income tax system.  With Republican control over both chambers of Congress and the Oval Office, we can expect bold moves in tax reform—bold, but not unexpected.  In anticipation of a reform-friendly environment, the House Republicans, prior to the November elections, released an outline for future tax reform.  Released on June 24, 2016 and titled, “A Better Way, Our Vision for a Confident America,” the document is the foundation for the Republican’s tax reform efforts.  The outline is also referred to as the “House Republican Blueprint” (HRB), and while only 35 pages in length, it seeks to begin a “conversation about how to fix our broken tax code.”
    While few can accurately predict the outcomes of 2017 tax reform, the consensus view is that corporate tax rates will be reduced from current levels. While the timelines and the degree of these reductions are unknown, savvy CFOs are recognizing opportunity in the face of this uncertainty. Many tax advisors are looking at ways to defer current taxation to a post-tax reform future with a lower rate and a more favorable environment. This “tax arbitrage” situation might very well result in permanent deferrals and once-in-a-lifetime opportunities for businesses.
    Two Potential Tax Reform Plans
    Here is a brief look at two of the tax reform plans that have been talked about:
    The House Republican Blueprint – Tax Rate Details
    The HRB looks to change income tax rates in the following ways:

    Individuals – Reducing tax brackets from seven to three, with a top bracket of 33% as opposed to the current 39.6%.  Alternative minimum tax (AMT) would be repealed.
    Sole proprietors and pass-through entities – For active business income, tax rate would be capped at 25%.  Currently, this income passes through the entity and is reported by the owner(s) and taxed at the owner’s rate(s).  In some cases, the owner’s rates can exceed 40%.
    C-corporations – taxed at a single rate of 20% and a complete repeal of the alternative minimum tax.  Currently, these rates can be as high as 39%.

    While the rate cuts are significant, they are but a small sample of the overall HRB. 
    Donald J. Trump’s Plan – Tax Rate Details
    Since tax reform will require cooperation with the president, here is a review of some highlights from President Donald Trump’s tax proposal:

    Individuals – Similar to the HRB with a reduction from seven tax brackets to three and the same reductions in tax rates as the HRB.
    C-corporations – Tax rate would drop from 35% to 15%, and the alternative minimum tax would be eliminated.

    An Opportunity for Owners of Heavy Equipment
    With both proposals, it’s plain to see that lower tax rates are most certainly on the horizon.  For owners of heavy equipment, lower rates offer a chance to conduct a like-kind exchange within a high tax environment to defer income taxation into a lower tax environment. 
    Recognizing gains in a lower tax environment, often referred to as tax arbitrage, takes advantage of an opportunity for sellers of personal property to permanently reduce income tax through changing tax laws.
    Let’s look at an example where the taxpayer sells equipment in a high tax environment, conducts a like-kind exchange, and effectively defers $18,824 of income taxation.
    Then, in a future (lower tax) environment, that same taxpayer sells the replacement equipment without conducting another like-kind exchange.  Instead, the equipment owner chooses to recognize the sale’s income as a taxable event.  For simplicity’s sake, let’s use the same sales and depreciation figures used above.
    The advantage of combining the deferral benefits of like-kind exchanges with an arbitrage strategy is clear.  The equipment owner’s recognition of income in a 20% tax rate environment permanently saves the owner $9,412 in taxation – the difference between the 40% and 20% tax rates.
    Summary
    New tax arbitrage opportunities are good news for equipment owners who take the initiative to carefully engage with their tax advisors and qualified intermediary to ensure their goals are met and that the planning process fits squarely within the parameters of the law. With proper planning, 2017 tax reform could present your business with a rare opportunity.
    For more on 2017 tax reform or if you’d like additional information on tax arbitrage opportunities, contact us today.
    (866) 397-1031
     

  • Accruit at AED Summit and Condex 2017 – Chicago, IL

    January 10-13, 2017
    AED preferred providers of 1031 exchange services, Accruit and PwC partner to provide over 75 AED members with 1031 like-kind exchanges and exchange programs. We joined these and other leading American and Canadian equipment distributors at AED Summit and Condex 2017 to provide AED members insight into how 1031 like-kind exchanges might reduce their tax liabiiity and increase cash-flow.

  • Accruit at AED Summit and Condex 2017 – Chicago, IL

    January 10-13, 2017
    AED preferred providers of 1031 exchange services, Accruit and PwC partner to provide over 75 AED members with 1031 like-kind exchanges and exchange programs. We joined these and other leading American and Canadian equipment distributors at AED Summit and Condex 2017 to provide AED members insight into how 1031 like-kind exchanges might reduce their tax liabiiity and increase cash-flow.

  • Accruit at AED Summit and Condex 2017 – Chicago, IL

    January 10-13, 2017
    AED preferred providers of 1031 exchange services, Accruit and PwC partner to provide over 75 AED members with 1031 like-kind exchanges and exchange programs. We joined these and other leading American and Canadian equipment distributors at AED Summit and Condex 2017 to provide AED members insight into how 1031 like-kind exchanges might reduce their tax liabiiity and increase cash-flow.

  • Avoid Boot from Rent and Security Deposits in a 1031 Exchange

    Taxable Boot Related to Prepaid Rent and Security Deposits
    In a standard closing (not involving a 1031 exchange), it is typical for the prepaid rent and security deposits being held by the seller to be treated as a credit to the buyer at closing.  In that context, the net amount paid to the seller for the property at closing is simply reduced.  However, this same practice in connection with a sale of relinquished property in a 1031 exchange will inadvertently result in boot, and the amount of prepaid rent and security deposits retained the by taxpayer will be taxable.
    This happens quite frequently in exchange transactions and the taxpayer and his advisors are unwittingly subjecting the taxpayer to taxable gain.  Rent and security deposits are income items and cannot be offset against gain otherwise recognized in an exchange.
    Let’s Look at an Example
    Take the case of a taxpayer selling a multi-family apartment building for $500,000.  Let’s assume he is holding $20,000 in rent he received representing the balance of days in the month where the buyer is actually in ownership of the property (prepaid rent).  Let’s also assume that the total of security deposits held by the taxpayer is $25,000.  So the taxpayer has a total of $45,000 of cash in his pocket.  Let’s also assume for the sake of simplicity that the property has no mortgage and nominal closing costs. 
    If the taxpayer gives a credit to the buyer for this $45,000 amount, the net value received for the property would be $455,000.  However, this is problematic in a 1031 exchange as the $45,000 cannot be offset against gain and any boot will be taxable. To avoid taxable boot the taxpayer would have to buy replacement property equal to or greater than the net value, in this case $500,000, without the offset of the prepaid rent and security deposits.
    How Is this Problem Corrected?
    In a closing involving a 1031 exchange, preparers of settlement statements should ignore the customary practice of providing credits for rent and security deposits. Rather, the taxpayer should transfer those income items directly to the buyer.
    Using the example above, with rent and security credits paid directly to the buyer, the net sale price of the apartment building would be $500,000 and if the taxpayer traded up or even for replacement property, there would be no boot.
    Do Real Estate Taxes Credited to a Buyer Result in the Same Issue?
    Real estate taxes are looked at a bit differently.  Generally at a closing, the seller will give the buyer a credit for taxes that have accrued while the seller was in ownership but which are not yet due and payable.  The payment of real estate taxes generally are billed and paid in arrears.  So the taxpayer has not received income on that sum, rather it is a liability of the property. 
    The treatment of the real estate tax liability is similar to the way debt (mortgage) is treated.  Under exchange rules, any debt paid off upon the sale of a property must be replaced by new debt on the replacement property in an equal or greater amount.  “Relief” of real estate tax liability due to a credit of that amount to the buyer can be offset by equal or greater tax liability the taxpayer may receive from the seller of the replacement property.
    Are These Same Considerations Relevant to the Replacement Property Closing?
    Similar issues arise when there are credits to the taxpayer at closing.  Credit that the taxpayer receives for these items will be treated as taxable cash boot.  Again, a credit given to the taxpayer will reduce the amount that the taxpayer pays to buy the property, however a check directly from the seller to the taxpayer for these amounts avoids the result of taxable boot.  In the event a credit is given, the rent is treated as rental income.  The security deposit amount is not characterized as income since it is being held for return to the tenant upon conclusion of the lease.
    Summary
    It is customary for a seller to give the buyer a credit for the prepaid rent and the security deposits in a non-exchange sale of property. This causes no special issues.  In a closing involving a

  • Avoid Boot from Rent and Security Deposits in a 1031 Exchange

    Taxable Boot Related to Prepaid Rent and Security Deposits
    In a standard closing (not involving a 1031 exchange), it is typical for the prepaid rent and security deposits being held by the seller to be treated as a credit to the buyer at closing.  In that context, the net amount paid to the seller for the property at closing is simply reduced.  However, this same practice in connection with a sale of relinquished property in a 1031 exchange will inadvertently result in boot, and the amount of prepaid rent and security deposits retained the by taxpayer will be taxable.
    This happens quite frequently in exchange transactions and the taxpayer and his advisors are unwittingly subjecting the taxpayer to taxable gain.  Rent and security deposits are income items and cannot be offset against gain otherwise recognized in an exchange.
    Let’s Look at an Example
    Take the case of a taxpayer selling a multi-family apartment building for $500,000.  Let’s assume he is holding $20,000 in rent he received representing the balance of days in the month where the buyer is actually in ownership of the property (prepaid rent).  Let’s also assume that the total of security deposits held by the taxpayer is $25,000.  So the taxpayer has a total of $45,000 of cash in his pocket.  Let’s also assume for the sake of simplicity that the property has no mortgage and nominal closing costs. 
    If the taxpayer gives a credit to the buyer for this $45,000 amount, the net value received for the property would be $455,000.  However, this is problematic in a 1031 exchange as the $45,000 cannot be offset against gain and any boot will be taxable. To avoid taxable boot the taxpayer would have to buy replacement property equal to or greater than the net value, in this case $500,000, without the offset of the prepaid rent and security deposits.
    How Is this Problem Corrected?
    In a closing involving a 1031 exchange, preparers of settlement statements should ignore the customary practice of providing credits for rent and security deposits. Rather, the taxpayer should transfer those income items directly to the buyer.
    Using the example above, with rent and security credits paid directly to the buyer, the net sale price of the apartment building would be $500,000 and if the taxpayer traded up or even for replacement property, there would be no boot.
    Do Real Estate Taxes Credited to a Buyer Result in the Same Issue?
    Real estate taxes are looked at a bit differently.  Generally at a closing, the seller will give the buyer a credit for taxes that have accrued while the seller was in ownership but which are not yet due and payable.  The payment of real estate taxes generally are billed and paid in arrears.  So the taxpayer has not received income on that sum, rather it is a liability of the property. 
    The treatment of the real estate tax liability is similar to the way debt (mortgage) is treated.  Under exchange rules, any debt paid off upon the sale of a property must be replaced by new debt on the replacement property in an equal or greater amount.  “Relief” of real estate tax liability due to a credit of that amount to the buyer can be offset by equal or greater tax liability the taxpayer may receive from the seller of the replacement property.
    Are These Same Considerations Relevant to the Replacement Property Closing?
    Similar issues arise when there are credits to the taxpayer at closing.  Credit that the taxpayer receives for these items will be treated as taxable cash boot.  Again, a credit given to the taxpayer will reduce the amount that the taxpayer pays to buy the property, however a check directly from the seller to the taxpayer for these amounts avoids the result of taxable boot.  In the event a credit is given, the rent is treated as rental income.  The security deposit amount is not characterized as income since it is being held for return to the tenant upon conclusion of the lease.
    Summary
    It is customary for a seller to give the buyer a credit for the prepaid rent and the security deposits in a non-exchange sale of property. This causes no special issues.  In a closing involving a

  • Avoid Boot from Rent and Security Deposits in a 1031 Exchange

    Taxable Boot Related to Prepaid Rent and Security Deposits
    In a standard closing (not involving a 1031 exchange), it is typical for the prepaid rent and security deposits being held by the seller to be treated as a credit to the buyer at closing.  In that context, the net amount paid to the seller for the property at closing is simply reduced.  However, this same practice in connection with a sale of relinquished property in a 1031 exchange will inadvertently result in boot, and the amount of prepaid rent and security deposits retained the by taxpayer will be taxable.
    This happens quite frequently in exchange transactions and the taxpayer and his advisors are unwittingly subjecting the taxpayer to taxable gain.  Rent and security deposits are income items and cannot be offset against gain otherwise recognized in an exchange.
    Let’s Look at an Example
    Take the case of a taxpayer selling a multi-family apartment building for $500,000.  Let’s assume he is holding $20,000 in rent he received representing the balance of days in the month where the buyer is actually in ownership of the property (prepaid rent).  Let’s also assume that the total of security deposits held by the taxpayer is $25,000.  So the taxpayer has a total of $45,000 of cash in his pocket.  Let’s also assume for the sake of simplicity that the property has no mortgage and nominal closing costs. 
    If the taxpayer gives a credit to the buyer for this $45,000 amount, the net value received for the property would be $455,000.  However, this is problematic in a 1031 exchange as the $45,000 cannot be offset against gain and any boot will be taxable. To avoid taxable boot the taxpayer would have to buy replacement property equal to or greater than the net value, in this case $500,000, without the offset of the prepaid rent and security deposits.
    How Is this Problem Corrected?
    In a closing involving a 1031 exchange, preparers of settlement statements should ignore the customary practice of providing credits for rent and security deposits. Rather, the taxpayer should transfer those income items directly to the buyer.
    Using the example above, with rent and security credits paid directly to the buyer, the net sale price of the apartment building would be $500,000 and if the taxpayer traded up or even for replacement property, there would be no boot.
    Do Real Estate Taxes Credited to a Buyer Result in the Same Issue?
    Real estate taxes are looked at a bit differently.  Generally at a closing, the seller will give the buyer a credit for taxes that have accrued while the seller was in ownership but which are not yet due and payable.  The payment of real estate taxes generally are billed and paid in arrears.  So the taxpayer has not received income on that sum, rather it is a liability of the property. 
    The treatment of the real estate tax liability is similar to the way debt (mortgage) is treated.  Under exchange rules, any debt paid off upon the sale of a property must be replaced by new debt on the replacement property in an equal or greater amount.  “Relief” of real estate tax liability due to a credit of that amount to the buyer can be offset by equal or greater tax liability the taxpayer may receive from the seller of the replacement property.
    Are These Same Considerations Relevant to the Replacement Property Closing?
    Similar issues arise when there are credits to the taxpayer at closing.  Credit that the taxpayer receives for these items will be treated as taxable cash boot.  Again, a credit given to the taxpayer will reduce the amount that the taxpayer pays to buy the property, however a check directly from the seller to the taxpayer for these amounts avoids the result of taxable boot.  In the event a credit is given, the rent is treated as rental income.  The security deposit amount is not characterized as income since it is being held for return to the tenant upon conclusion of the lease.
    Summary
    It is customary for a seller to give the buyer a credit for the prepaid rent and the security deposits in a non-exchange sale of property. This causes no special issues.  In a closing involving a