Creation of the Role of Qualified Intermediary in the Treasury Regulations
Prior to the Internal Revenue Code Section 1031 Treasury Regulations issued in 1991 governing exchanges, it was difficult to arrange for the taxpayer’s buyer to actively participate in the taxpayer’s exchange transaction. It could not be accomplished without the buyer’s significant involvement. However, buyers were not typically motivated to assist in the seller’s attempt at tax deferral. The 1991 regulations sought to deal with this thorny problem by creating a new entity known as a qualified intermediary (QI).
For owners of heavy equipment, replacing or upgrading is a necessity. Newer, faster, more powerful machinery helps expand your capabilities and increase your operating efficiencies, and it allows your crews to operate more safely. For a lot of businesses, this means a trip to your preferred equipment dealer to trade in your old iron for new iron. However, if you’re not exploring all of your options, you could be missing out on the chance to maximize your buying power by reducing your exposure to the taxes associated with such transactions.
Tax deferral in a proper 1031 exchange is based upon strict adherence to Internal Revenue Code Section 1031 and the Regulations promulgated under that code section. In fact, there is a distinct emphasis of form over substance throughout the Regulations.
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.”
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.
Converting a C Corporation to an S Corporation
Thinking about changing your corporate structure from a C corporation to a subchapter S corporation? S corporations, partnerships, and certain LLCs are considered pass-through entities, which means they "pass through" various types of taxable income: interest, dividends, deductions, and credits to the shareholders, partners, or members responsible for paying tax. This avoids the double taxation associated with C corporations that pay entity-level taxes and then distribute dividends that become subject to individual taxes.
During his campaign, President-elect Trump was criticized for the non-release of income tax returns. The information available is limited to his own statements and the release of three pages from his 1995 returns of income from New York and New Jersey. These pages reveal what amounts to a $900M loss. Unfortunately, these documents are driving misstatements and generating misleading information related to Section 1031 Like-Kind Exchanges – one of the real estate industry’s most popular tax strategies
What is the Same Taxpayer Rule in a 1031 Like-Kind Exchange?
In a 1031 exchange, the taxpayer who owns the relinquished property must be the same taxpayer who takes ownership of the replacement property. Keep in mind that one of the justifications for tax deferral is that a taxpayer has reported all the incidences of ownership and that the taxpayer’s basis will carry over into the new replacement property. The taxpayer is only getting deferral, not permanent tax avoidance, and the sheltered gain will be due ultimately upon a future sale of the property without an exchange. If the taxpayer were to change tax identities within an exchange, there would be no continuity of tax ownership and no reason to afford deferral.
What are safe harbors and why are they needed?
The 1991 tax deferred exchange regulations provided for various “safe harbors” to allow certain specific actions set forth in the regulations to be utilized by parties without otherwise running afoul of the rules. Without the safe harbors, these actions would disqualify an exchange. These safe harbors were put into the regulations as solutions for problems in the mechanics of an exchange prior to the 1991 regulations and in order to make a delayed exchange easier to accomplish. Some of these safe harbors have come to be used in almost every single transaction, while others are seldom used. Let’s take a more detailed look at these safe harbors: