Concepts and Mechanics of Exchanges
Field of Study:
While tax reform visions have changed the tax on profits realized from the disposition of real estate, investors
still seek escape hatches from the capital gain tax. Tax-deferred exchanges permit the disposition of property
often with the taxpayer receiving significant cash but without the payment of any tax. Functionally, an exchange
is a bridge over the normally taxable event of moving from one property to another. This course alerts the
practitioner to the different planning opportunities that surround exchanging. Participants will be able to
identify, analyze, and handle effectively the complex tax problems that arise under 1031. This understanding will
be directly applied to the structuring and audit survival of multi-party and delayed exchanges.
- Identify factors that determine the popularity of exchanging, specify tax law changes influencing exchange popularity noting the impact of current capital gains rates, recognize the capital gain rate "baskets" and determine the tax treatment of assets in each category.
- Recognize the differences between exchanges and installment sales noting cost benefits, identify several advantages given to exchanging by recent legislation and specify continuing problems that can arise with an installment sale that can act as an impetus for using an exchange.
- Specify multiple tax benefits of exchanges noting the advantages they create over installment sales and determine issues that can be resolved or facilitated by using a like-kind exchange.
- Determine the conceptual changes made to §1031 by the TRA ’84, TRA ’86, the Revenue Act of 1987, and the RRA ’90 and specify the current provisions of §1031.
- Specify instances where the IRS may assert an unintended mandatory application of §1031.
- Specify the elements §1031 noting how these elements conceptually differentiate a like-kind exchange from a sale.
- Identify excluded property types from qualified property types by determining the meaning the phrases “held for productive use in a trade or business,” “productive use,” and “investment purpose” noting the impact of time and taxpayer intent.
- Recognize the state of mind issues in the concept “held for productive use in trade or business or for investment” noting how qualifying use can ease qualification, determine the differences between §1031 and old §1034, and cite the same taxpayer requirement noting the unsettled caselaw.
- Specify the statutory exclusions from §1031 noting the types of property that are specifically excepted.
- Identify the like-kind requirement as it impacts real estate and personal property exchanges, and recognize classification systems permitting clients to exchange like-kind or like-class personal property.
- Identify “boot” and like-kind property noting boot's potential impact on nonrecognition and list several examples of boot.
- Determine taxable "boot," specify the differences between realized gain and recognized gain recalling the limitation on recognition of gain under §1031 that prevents a taxpayer from being taxed greater than if he had sold the property, and recognize taxable “boot’s” net effect.
- Determine mortgage boot and property boot identifying whether a taxpayer has given or received boot in an exchange noting the related tax consequences.
- Identify the popular and alternate offset rules used to determine net boot, specify techniques to limit net taxable boot such as adjusting mortgages before an exchange and treating closing costs according to R.R. 72-456, and recognize the taxability of gain rule to reflect netting.
- Identify the categories of property received in an exchange into noting which category is permitted to recognize loss, recognize how avoiding §1031 can allow clients to potentially increase recognizable losses, and determine the tax treatment of non-recognized losses under §1031.
- Identify the general carryover basis rule to calculate a taxpayer’s basis in acquired property by determining its application and specifying the related allocation of basis to multiple properties and boot in an ex-change.
- Identify property depreciation under §167 particularly as it applies to property used in a taxpayer’s trade or business or held for the pro-duction of income noting the impact of ERTA, TRA ’86 and OBRA ’93, determine the changes made by Notice 2000-4, and cite the depre-ciation requirements of later regulations affecting recovery periods and depreciation methods.
- Recognize the distinction between land and depreciable improve-ments, identify the recapture provisions noting their impact on the rate to be applied to all or a portion of the gain that would otherwise be recognized.
- Specify the holding period of acquired property, identify the character of gain or loss recognized in an exchange, and recall the evolution of the installment sale method noting current rules related to exchanges and determine the formula for gain recognized using gross profit, selling price and total contract price under §453.
- Recognize the danger of exchanges between related parties.
- Recognize how leveraging can be useful in a §1031 exchange, specify ways to cash out one or more partners out as part of an exchange by a partnership, and choose the proper tax forms to report an exchange.
- Recognize a simple test that permits clients and their advisors to de-termine if an exchange is completely tax-deferred noting the compo-nents of the this test, identify the basic computation figures necessary to economically balance an exchange, and specify methods of evening out to insure that all parties get the same value as they give.
- Determine how to balance multiple party exchanges using the in and out test determining net boot, select optimal exchange property to minimize taxable gain, and identify how to use refinancing, the “Cole-man” solution, a wrap-around mortgage or a tax-free “cash out” to balance out an exchange.
- Identify the mechanics of a two-party and three-party exchange in-cluding related variations involving the cash out of a party.
- Determine the transactional flow of a traditional three-party “Alder-son” exchange including variations to the format, recognize the respec-tive parties tax consequences and recall procedural guidelines to en-sure mechanics comply with §1031 provisions.
- Determine the elements of a three-party “Baird Publishing” exchange and an “Alderson” exchange, specify variations of the “Baird Publishing” exchange noting situations when each is the preferable format to use, identify categories of four-party exchanges, and specify when conditions favor the use a four-party “Coupe” exchange or a four-party “Mercantile Trust” exchange.
- Identify the distinctions between delayed exchanges and delayed closes particularly as to simultaneity, recall the evolution of delayed exchange requirements from the Starker case through the restrictive TRA ’84 time limits to the present noting the popularity of delayed exchanges and specify unresolved issues for delayed exchanges.
- Recognize the requirements of the final regulations for delayed ex-changes.
- Identify the purpose a longtime exchange technique called “ware-housing,” specify the procedural aspects of reverse exchanges under R.P. 2000-37 noting variables impacting its application, recognize the “pot” method recalling the procedural role of “strawmen,” and deter-mine the role of exchange escrows.
- Identify the differences between an accommodator and an interme-diary, determine how using such parties can facilitate exchanging by avoiding certain holding problems, multiple parties and properties, and transfer difficulties, and recognize a sale and lease-back transaction noting associated exchange complications.
Recommended CPE Credits:
Type of Delivery Method:
QAS Self Study
Final examination expiration date:
The program participant will have one year from the date of purchase to complete the course and final examination.
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