1031 Exchange Specialists,

A National Qualified Intermediary

Inc.

[1031 ESI]



Corporate Headquarters:
1155 Asbury Avenue
Ocean City
New Jersey 08226

Ocean City, NJ: 609-398-1031

Naples, FL: 877-513-1031

   Fax: 609-398-0500

Web: www.1031esi.com
Email: info@1031esi.com
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Independently Owned and Operated
 
SERVICING ALL 50 STATES!
 
Your Tax Savings is Our Business!
 
 
 
 
 
 
 

1031 Exchange Specialists, Inc.

So much more than a Qualified Intermediary.


When you're structuring your next 1031 exchange,
there's no room for guesswork.


Peerless strategy, masterful interpretations, and
insightful analysis are just a few of the advantages
we bring to your exchange.  As your Qualified
Intermediary, you'll find us indispensable.


Whether exchanging a rental cottage at the shore,
a commercial warehouse, or an airplane, we stand
ready to help you save tax dollars.


Your tax savings is our business!!!

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SOME OF THIS WEEKS SCENARIOS, INQUIRIES AND POSTS



During the period 2001 to 2009, taxpayers in a 1031 Exchange bought replacement property approximately equal in value to the property sold. During the period 2009 through today, taxpayers in a 1031 Exchange bought replacement property approximately 10% greater in value than the property sold. Closing costs add another 10% to the difference in values. Perhaps the change in the two 8-year periods indicate a strengthening of the economy and the confidence in same.




When selling an investment property in a 1031 EXCHANGE, prepaid rents and security deposits held by the Seller should be conveyed to the Buyer from the Seller's funds outside of closing and not deducted from the 1031 proceeds. Deducting these funds from 1031 proceeds could disqualify the entire 1031 exchange as the IRS would deem the Seller in control of the proceeds.


The 1031 EXCHANGE process has many checks and balances created by the IRS to ensure taxpayer honesty, including the creation of the Qualified Intermediary industry. These checks and balances require the cooperation of the other party to the transaction. When Fannie Mae is the "other" party to a 1031 exchange, they always refuse to sign the IRS required documents, leaving the taxpayer vulnerable to IRS disallowance of the exchange.


True story....I received a call from a individual selling a storage facility and wanting to defer taxes on the sale using a 1031 exchange. The sale price of the property was $3.1 million. The contract indicated the sale is for the real estate with no value allocated to any other assets being conveyed. The Seller also had entered into a contract to purchase real estate of approximately the same value with a closing date within 30 days of the sale. This transaction appeared to be the perfect opportunity for a taxpayer to save thousands of dollars in taxes utilizing a 1031 exchange.

At time of closing and at the advice of the Seller's CPA, the settlement sheet indicated an allocation of the sales price of $800 thousand to real estate and $2.3 million to goodwill. The CPA's thought process was that if the exchange failed, the bulk of the taxes would be capital gains taxes and not depreciation recapture taxes as the real estate was being valued below the depreciated value. In addition, the CPA for the Buyer knew that the amortization of goodwill was over a 15 year period vs. a 39 year period for commercial real estate, thereby affording his client greater amortization deductions against income each year. Both CPAs also were trying to avoid higher transfer taxes for the Buyer and Seller by understating the real estate value.

Well, as their intentions and thought processes were logical, neither were aware that the gain on goodwill could not be deferred in a 1031 exchange. Since the real estate assigned value was less than the depreciated value, there was no tax savings to be had on the real estate sale. Hence, the full $2.3 million of goodwill was taxable, costing the Seller approximately $700 thousand in taxes as opposed to no taxes owed if the real estate was valued at the full $3.1 million sales price.

Given this revelation came at the settlement table upon review of the settlement sheet, the Buyer was not willing to adjust the allocation negotiated by the two CPAs, proving that Bad Advice Can Cost Thousands! Involving the Qualified Intermediary in the negotiations would have saved this Seller $700 thousand in taxes. Perhaps next time the advice of an expert will be sought!