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In 1031 Like-Kind Exchange Pitfalls to Avoid, we examined 1031 exchange practices that could inadvertently cause an exchange to go awry.  Most of those examples pertained to the taxpayer coming into constructive receipt of funds.  Here, we’ll look at a variety of other practices where problems sometimes occur.
1031 Exchange Pitfall No. 7 – Execution of the Exchange Agreement and Identification Forms
Often relinquished property in a tax deferred exchange can be held by co-owners, including spouses.  This is documented differently than an LLC where the spouses are sole members.  In the event of co-ownership, either spouse can make decisions on behalf of the couple and even sign the other spouse’s name.   In other co-ownership arrangements, one co-owner may sign for the group of co-owners.  However in an exchange transaction, it is important to stick to the formalities of each person with an ownership signing all applicable documentation.  Failure to do so will invalidate the exchange.
1031 Exchange Pitfall No. 8 – Identification of a Group of Replacement Properties
Most replacement properties are identified according to the three property rule, meaning that a taxpayer may identify up to three replacement properties, regardless of their value. It doesn’t matter how many of the three properties are purchased, however problems arise when one party doing an exchange wishes to acquire a group of properties that are owned by one seller and sold under one contract.  While there is a temptation to consider the group as one property, there does not appear to be any foundation for identifying them as one property. 
A similar issue arises when a taxpayer wishes to identify a small percentage in a group of properties in which that interest is being sold as a Delaware Statutory Trust (DST).  These are popular with taxpayers who want a good-yielding, secure investment that involves no management headaches.  However, the number of different properties underlying the individual investment are considered separate properties for exchange purposes.  The 200% rule may be helpful in these instances.
1031 Exchange Pitfall No. 9 – Diminution of Exchange Proceeds Due to Prorations
In the case of a non-exchange sale of property, it is customary to give the buyer a credit for partial month’s rent held by the taxpayer as well as the security deposits.  Most practitioners prepare an exchange-related closing statement the same way.  While it makes no difference if the transaction is not part of an exchange, it does make a difference when an exchange is taking place.  More specifically, the taxpayer is retaining the value of the rent and security deposits and thereby reducing the cash received for the exchange account.  In other words, a taxpayer cannot retain these items of income and offset the amount of money going into the replacement property.  The best solution is to pay to the buyer directly for the rent and security deposits and not give a credit on the closing statement.
1031 Exchange Pitfall No. 10 – Notice to All Parties to the Agreements
In a 1031 exchange, the taxpayer assigns his rights for both the sale of the old property and purchase of the new property to the qualified intermediary. Under safe harbor exchange procedures, the taxpayer must give notice in writing to all parties to each contract of the assignment of rights to the qualified intermediary.  In most cases when a taxpayer is dealing with one buyer and one seller, this notification is easily done.  However sometimes there are many buying or selling entities as well as third parties.  I recently reviewed a contract in which the title insurance company was included as a party under the contract.  Care must be taken to ensure that all parties receive such notice, not just the counterparty.  Note, however, that although it is customary to request the counterparty’s signature on this notice of assignment in order to prove compliance should the transaction be audited, the counter-signature is not a requirement.
 

In 1031 Like-Kind Exchange Pitfalls to Avoid, we examined 1031 exchange practices that could inadvertently cause an exchange to go awry.  Most of those examples pertained to the taxpayer coming into constructive receipt of funds.  Here, we’ll look at a variety of other practices where problems sometimes occur.
1031 Exchange Pitfall No. 7 – Execution of the Exchange Agreement and Identification Forms
Often relinquished property in a tax deferred exchange can be held by co-owners, including spouses.  This is documented differently than an LLC where the spouses are sole members.  In the event of co-ownership, either spouse can make decisions on behalf of the couple and even sign the other spouse’s name.   In other co-ownership arrangements, one co-owner may sign for the group of co-owners.  However in an exchange transaction, it is important to stick to the formalities of each person with an ownership signing all applicable documentation.  Failure to do so will invalidate the exchange.
1031 Exchange Pitfall No. 8 – Identification of a Group of Replacement Properties
Most replacement properties are identified according to the three property rule, meaning that a taxpayer may identify up to three replacement properties, regardless of their value. It doesn’t matter how many of the three properties are purchased, however problems arise when one party doing an exchange wishes to acquire a group of properties that are owned by one seller and sold under one contract.  While there is a temptation to consider the group as one property, there does not appear to be any foundation for identifying them as one property. 
A similar issue arises when a taxpayer wishes to identify a small percentage in a group of properties in which that interest is being sold as a Delaware Statutory Trust (DST).  These are popular with taxpayers who want a good-yielding, secure investment that involves no management headaches.  However, the number of different properties underlying the individual investment are considered separate properties for exchange purposes.  The 200% rule may be helpful in these instances.
1031 Exchange Pitfall No. 9 – Diminution of Exchange Proceeds Due to Prorations
In the case of a non-exchange sale of property, it is customary to give the buyer a credit for partial month’s rent held by the taxpayer as well as the security deposits.  Most practitioners prepare an exchange-related closing statement the same way.  While it makes no difference if the transaction is not part of an exchange, it does make a difference when an exchange is taking place.  More specifically, the taxpayer is retaining the value of the rent and security deposits and thereby reducing the cash received for the exchange account.  In other words, a taxpayer cannot retain these items of income and offset the amount of money going into the replacement property.  The best solution is to pay to the buyer directly for the rent and security deposits and not give a credit on the closing statement.
1031 Exchange Pitfall No. 10 – Notice to All Parties to the Agreements
In a 1031 exchange, the taxpayer assigns his rights for both the sale of the old property and purchase of the new property to the qualified intermediary. Under safe harbor exchange procedures, the taxpayer must give notice in writing to all parties to each contract of the assignment of rights to the qualified intermediary.  In most cases when a taxpayer is dealing with one buyer and one seller, this notification is easily done.  However sometimes there are many buying or selling entities as well as third parties.  I recently reviewed a contract in which the title insurance company was included as a party under the contract.  Care must be taken to ensure that all parties receive such notice, not just the counterparty.  Note, however, that although it is customary to request the counterparty’s signature on this notice of assignment in order to prove compliance should the transaction be audited, the counter-signature is not a requirement.
 

In 1031 Like-Kind Exchange Pitfalls to Avoid, we examined 1031 exchange practices that could inadvertently cause an exchange to go awry.  Most of those examples pertained to the taxpayer coming into constructive receipt of funds.  Here, we’ll look at a variety of other practices where problems sometimes occur.
1031 Exchange Pitfall No. 7 – Execution of the Exchange Agreement and Identification Forms
Often relinquished property in a tax deferred exchange can be held by co-owners, including spouses.  This is documented differently than an LLC where the spouses are sole members.  In the event of co-ownership, either spouse can make decisions on behalf of the couple and even sign the other spouse’s name.   In other co-ownership arrangements, one co-owner may sign for the group of co-owners.  However in an exchange transaction, it is important to stick to the formalities of each person with an ownership signing all applicable documentation.  Failure to do so will invalidate the exchange.
1031 Exchange Pitfall No. 8 – Identification of a Group of Replacement Properties
Most replacement properties are identified according to the three property rule, meaning that a taxpayer may identify up to three replacement properties, regardless of their value. It doesn’t matter how many of the three properties are purchased, however problems arise when one party doing an exchange wishes to acquire a group of properties that are owned by one seller and sold under one contract.  While there is a temptation to consider the group as one property, there does not appear to be any foundation for identifying them as one property. 
A similar issue arises when a taxpayer wishes to identify a small percentage in a group of properties in which that interest is being sold as a Delaware Statutory Trust (DST).  These are popular with taxpayers who want a good-yielding, secure investment that involves no management headaches.  However, the number of different properties underlying the individual investment are considered separate properties for exchange purposes.  The 200% rule may be helpful in these instances.
1031 Exchange Pitfall No. 9 – Diminution of Exchange Proceeds Due to Prorations
In the case of a non-exchange sale of property, it is customary to give the buyer a credit for partial month’s rent held by the taxpayer as well as the security deposits.  Most practitioners prepare an exchange-related closing statement the same way.  While it makes no difference if the transaction is not part of an exchange, it does make a difference when an exchange is taking place.  More specifically, the taxpayer is retaining the value of the rent and security deposits and thereby reducing the cash received for the exchange account.  In other words, a taxpayer cannot retain these items of income and offset the amount of money going into the replacement property.  The best solution is to pay to the buyer directly for the rent and security deposits and not give a credit on the closing statement.
1031 Exchange Pitfall No. 10 – Notice to All Parties to the Agreements
In a 1031 exchange, the taxpayer assigns his rights for both the sale of the old property and purchase of the new property to the qualified intermediary. Under safe harbor exchange procedures, the taxpayer must give notice in writing to all parties to each contract of the assignment of rights to the qualified intermediary.  In most cases when a taxpayer is dealing with one buyer and one seller, this notification is easily done.  However sometimes there are many buying or selling entities as well as third parties.  I recently reviewed a contract in which the title insurance company was included as a party under the contract.  Care must be taken to ensure that all parties receive such notice, not just the counterparty.  Note, however, that although it is customary to request the counterparty’s signature on this notice of assignment in order to prove compliance should the transaction be audited, the counter-signature is not a requirement.
 

A 1031 like-kind exchange (LKE) program allows a business to postpone the tax hit on sales of used equipment in anticipation of buying replacement equipment, and each year more business owners seize upon the cash-flow benefits available via a 1031 like-kind exchange strategy, recognizing that reinvesting money into their business beats sending it to the government in the form of unnecessary taxes.
In addition to the fact that more cash in your business is never a bad thing, there are noteworthy ancillary benefits that accompany the adoption of a 1031 like-kind exchange program. Even currently, with the availability of bonus depreciation, LKE program clients retain their LKE program and continue to enjoy benefits beyond the cash-flow.
Streamlined Business Practices
The adoption of a 1031 like-kind exchange program does little to disrupt existing practices for the purchase and sales of business equipment, however questions arise in this process, the answers to which  frequently leading to positive outcomes for the business. During implementation, clients question their current business process practices: Why DO we buy our assets that way? Why doesn’t Purchasing receive information about what is currently being sold?
The answers to these questions and others are simple. Companies are BUSY, and if things aren’t broken, they are rarely highlighted for improvement.  Personally, I had not checked auto insurance rates for years, choosing instead to trust my insurance advisor. When I finally did check, I ended up saving over 50% on my premium! The same thing happens in businesses as they begin to closely examine potential improvements in the following areas.
Increase Sales Proceeds in the Disposition of Used Equipment
In the trucking industry, the resale value of used trucks has skyrocketed relative to their trade-in value. Savvy trucking company owners have seen a 10% increase in sales proceeds when selling used equipment direct or through a third party such as an auction company.  Asking “what if” or “why” presents opportunities to increase the bottom line and update long-standing, outdated practices. The same is true in the heavy equipment, leasing, and car rental industries.
Financing Benefits Intrinsic to 1031 Like-Kind Exchanges
A 1031 like-kind exchange program allows owners of rental car, trucking, and equipment fleets to channel cash proceeds into fleet equity instead of income taxes. In so doing, many of these companies see a substantial financing benefit as lenders prefer to extend more favorable terms to a fleet financed with an 80%-20% LTV (loan-to-value) versus the commonly extended (and higher priced) 100% financing options.
Equipment and Depreciation Tracking Benefits of 1031 Like-Kind Exchanges
It’s surprising how many equipment-intensive companies still have asset-tracking and depreciation calculation challenges, especially those located in multiple states with varying tax rules and regulations. A like-kind exchange program often encompasses a solution that fully automates all of these challenges and shortcomings.
Ongoing Business Consulting Expertise and Support
There are few companies these days that are not engaged in some or all of the following activities:

Acquiring new lines or business or selling existing lines of business
Evaluating complex compliance, legal, and tax issues and challenges
Strategizing best practices to maximize performance and profits
Tax certainty around existing programs and strategies.

The creation of a like-kind exchange program includes consulting with tax and business experts, and ongoing access to these resources and their respective support and input is a highly-valued benefit of a properly-implemented LKE program.
Summary
While cash-flow and the opportunity to invest funds that would otherwise be lost to taxes back into the business are the primary reasons for adopting a 1031 like-kind exchange program, the ancillary benefits discussed above are among the reasons companies keep their LKE programs active.

A 1031 like-kind exchange (LKE) program allows a business to postpone the tax hit on sales of used equipment in anticipation of buying replacement equipment, and each year more business owners seize upon the cash-flow benefits available via a 1031 like-kind exchange strategy, recognizing that reinvesting money into their business beats sending it to the government in the form of unnecessary taxes.
In addition to the fact that more cash in your business is never a bad thing, there are noteworthy ancillary benefits that accompany the adoption of a 1031 like-kind exchange program. Even currently, with the availability of bonus depreciation, LKE program clients retain their LKE program and continue to enjoy benefits beyond the cash-flow.
Streamlined Business Practices
The adoption of a 1031 like-kind exchange program does little to disrupt existing practices for the purchase and sales of business equipment, however questions arise in this process, the answers to which  frequently leading to positive outcomes for the business. During implementation, clients question their current business process practices: Why DO we buy our assets that way? Why doesn’t Purchasing receive information about what is currently being sold?
The answers to these questions and others are simple. Companies are BUSY, and if things aren’t broken, they are rarely highlighted for improvement.  Personally, I had not checked auto insurance rates for years, choosing instead to trust my insurance advisor. When I finally did check, I ended up saving over 50% on my premium! The same thing happens in businesses as they begin to closely examine potential improvements in the following areas.
Increase Sales Proceeds in the Disposition of Used Equipment
In the trucking industry, the resale value of used trucks has skyrocketed relative to their trade-in value. Savvy trucking company owners have seen a 10% increase in sales proceeds when selling used equipment direct or through a third party such as an auction company.  Asking “what if” or “why” presents opportunities to increase the bottom line and update long-standing, outdated practices. The same is true in the heavy equipment, leasing, and car rental industries.
Financing Benefits Intrinsic to 1031 Like-Kind Exchanges
A 1031 like-kind exchange program allows owners of rental car, trucking, and equipment fleets to channel cash proceeds into fleet equity instead of income taxes. In so doing, many of these companies see a substantial financing benefit as lenders prefer to extend more favorable terms to a fleet financed with an 80%-20% LTV (loan-to-value) versus the commonly extended (and higher priced) 100% financing options.
Equipment and Depreciation Tracking Benefits of 1031 Like-Kind Exchanges
It’s surprising how many equipment-intensive companies still have asset-tracking and depreciation calculation challenges, especially those located in multiple states with varying tax rules and regulations. A like-kind exchange program often encompasses a solution that fully automates all of these challenges and shortcomings.
Ongoing Business Consulting Expertise and Support
There are few companies these days that are not engaged in some or all of the following activities:

Acquiring new lines or business or selling existing lines of business
Evaluating complex compliance, legal, and tax issues and challenges
Strategizing best practices to maximize performance and profits
Tax certainty around existing programs and strategies.

The creation of a like-kind exchange program includes consulting with tax and business experts, and ongoing access to these resources and their respective support and input is a highly-valued benefit of a properly-implemented LKE program.
Summary
While cash-flow and the opportunity to invest funds that would otherwise be lost to taxes back into the business are the primary reasons for adopting a 1031 like-kind exchange program, the ancillary benefits discussed above are among the reasons companies keep their LKE programs active.

A 1031 like-kind exchange (LKE) program allows a business to postpone the tax hit on sales of used equipment in anticipation of buying replacement equipment, and each year more business owners seize upon the cash-flow benefits available via a 1031 like-kind exchange strategy, recognizing that reinvesting money into their business beats sending it to the government in the form of unnecessary taxes.
In addition to the fact that more cash in your business is never a bad thing, there are noteworthy ancillary benefits that accompany the adoption of a 1031 like-kind exchange program. Even currently, with the availability of bonus depreciation, LKE program clients retain their LKE program and continue to enjoy benefits beyond the cash-flow.
Streamlined Business Practices
The adoption of a 1031 like-kind exchange program does little to disrupt existing practices for the purchase and sales of business equipment, however questions arise in this process, the answers to which  frequently leading to positive outcomes for the business. During implementation, clients question their current business process practices: Why DO we buy our assets that way? Why doesn’t Purchasing receive information about what is currently being sold?
The answers to these questions and others are simple. Companies are BUSY, and if things aren’t broken, they are rarely highlighted for improvement.  Personally, I had not checked auto insurance rates for years, choosing instead to trust my insurance advisor. When I finally did check, I ended up saving over 50% on my premium! The same thing happens in businesses as they begin to closely examine potential improvements in the following areas.
Increase Sales Proceeds in the Disposition of Used Equipment
In the trucking industry, the resale value of used trucks has skyrocketed relative to their trade-in value. Savvy trucking company owners have seen a 10% increase in sales proceeds when selling used equipment direct or through a third party such as an auction company.  Asking “what if” or “why” presents opportunities to increase the bottom line and update long-standing, outdated practices. The same is true in the heavy equipment, leasing, and car rental industries.
Financing Benefits Intrinsic to 1031 Like-Kind Exchanges
A 1031 like-kind exchange program allows owners of rental car, trucking, and equipment fleets to channel cash proceeds into fleet equity instead of income taxes. In so doing, many of these companies see a substantial financing benefit as lenders prefer to extend more favorable terms to a fleet financed with an 80%-20% LTV (loan-to-value) versus the commonly extended (and higher priced) 100% financing options.
Equipment and Depreciation Tracking Benefits of 1031 Like-Kind Exchanges
It’s surprising how many equipment-intensive companies still have asset-tracking and depreciation calculation challenges, especially those located in multiple states with varying tax rules and regulations. A like-kind exchange program often encompasses a solution that fully automates all of these challenges and shortcomings.
Ongoing Business Consulting Expertise and Support
There are few companies these days that are not engaged in some or all of the following activities:

Acquiring new lines or business or selling existing lines of business
Evaluating complex compliance, legal, and tax issues and challenges
Strategizing best practices to maximize performance and profits
Tax certainty around existing programs and strategies.

The creation of a like-kind exchange program includes consulting with tax and business experts, and ongoing access to these resources and their respective support and input is a highly-valued benefit of a properly-implemented LKE program.
Summary
While cash-flow and the opportunity to invest funds that would otherwise be lost to taxes back into the business are the primary reasons for adopting a 1031 like-kind exchange program, the ancillary benefits discussed above are among the reasons companies keep their LKE programs active.