Section 1031 Like-Kind ExchangesGuidance ● Strategies ● Solutions

Presented by:

Andy GelsonVice President & Assistant General CounselRockland Trust Company288 Union StreetRockland, MA  02370781-982-6738

Services

Forward Exchanges

Reverse Exchanges

Improvement Exchanges

Replacement Property Strategies

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Like Kind ExchangesTypes of Assets Commonly Exchanged

• Real Estate (fee, easements, long-term leaseholds)• Mineral interests (royalties, leaseholds)• Aircraft• Vehicles• Equipment• Rolling stock

• Intangibles (licenses, brands, franchise or distribution rights)

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Forward Exchange

Reverse exchange

Related Party Exchange Rules

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Like Kind Exchange Refresher

Forward Exchange – Used When:

• Client is selling a business or investment property.

• Client intends to replace it with new business or

investment property.

• Old property will be sold before the new property is

acquired.

• In a forward exchange, we hold FUNDS.

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Reverse Exchange – Used When:

• Client is selling a business or investment property.

• Client intends to replace it with new business or

investment property.

• New property will be acquired before the old property is

sold.

• In a reverse exchange, we hold PROPERTY.

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Improvement Exchange - Used When:

• Client is selling a business or investment property.

• Client intends to replace it with new business or

investment property.

• FMV of new property < FMV of old property

• The new property will be improved, and the increased

value is needed to defer gain.

• In an improvement exchange, we hold property, and

build on it.

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Forward Exchange – “Down Leg”

• Before closing, T enters into exchange agreement with QI.

• T assigns its rights under the P&S to the QI.

• QI sets up a bank account at RTC for T’s exchange.

• QI notifies the buyer of the old property that the sale is part

of an exchange and supplies wiring instructions and

instructions for preparation of the settlement statement.

• T transfers old property directly to buyer (direct deeding).

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Common “Down Leg” Issues

• Identity of the taxpayer.

• Qualified use. (holding period, mixed use properties)

• Use of funds to pay debts and closing costs. (Prorations,

security deposits, cross-collateralization, defeasance, etc.)

• Seller financing.

• Taxpayer needs some cash at closing.

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Forward Exchange-Next Steps

• T has 45 days to identify new property (alternative ID rules: 3 property/200% rules).

• T has 180 days to close on the new property.

• The old and new property must be “like-kind”.

• To fully defer the gain:– The purchase price of new property must be greater

than or equal to the old property;– Use all of the proceeds from the old property;– The shortfall in either of these is either cash boot or

mortgage boot;– An exchange is worthwhile only if the replacement

property is worth more than the adjusted basis of the old property.

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Common “Up Leg” Issues

• Sufficient value of replacement property.

• Depreciation recapture on personal property.

• Accuracy of ID.

• Use of funds: deposits, paying loan and due diligence costs.

• Sending the funds to taxpayer’s attorney for closing.

• Amount of financing.

• Title and ownership issues on replacement property.

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Reverse Exchanges• Rev. Proc. 2000-37 establishes a “safe harbor for reverse

exchanges (qualified exchange accommodation arrangements).

• Two principal uses:– Timing: new property closing prior to old– Value: Improve the new property while accommodator

owns it

• T can receive all of the economic benefits (except tax depreciation) during the time of the QEAA.

• Accommodator must treat the property as if it is the owner for tax purposes.

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Reverse Exchanges• Significantly more documents and more risk for the

accommodator.

• Risks mitigated by insuring property and T’s indemnity.

• T, an affiliate or third party lender (or combination) can loan purchase price.

• T can manage the property or manage the LLC owning the property.

• Transfer is effected by an option to purchase that is exercised when the old property sells.

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Common Reverse Exchange Issues

• Setting up rents, security deposits.

• Getting rents to the taxpayer for tax purposes.

• Structuring financing on parked replacement property.

• Improvement exchanges- documenting construction

expenses.

• Improvement exchanges -disbursement of exchange funds.

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Related Party Exchange Rules

• Two related parties can enter into a direct exchange, if each holds its replacement property for 2 years.

• Taxpayer cannot sell its property to a third party through a QI and then buy replacement property from a related party (Rev. Rul. 2002-83) using cash held by QI.

• Taxpayer can sell its relinquished property to a related party to commence an exchange, and the related party does not need to hold the property for 2 years.

• Taxpayer can buy its replacement property from a third party PROVIDED that the related party is also doing an exchange.

• THERE ARE MANY STRATEGIC APPLICATIONS OF THESE RULES TO MINIMIZE TAX LIABILITY!

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BioAndrew F. Gelson, Esq. (Managing Director) is responsible for Compass’ strategic, legal, and product development activities. Andy has 27 years of experience practicing real estate and tax law and specializes in IRC §1031. Prior to co-founding Compass, he was Senior Vice President and General Tax Counsel at J.P. Morgan Property Exchange Inc. (JPEX) where he had primary responsibility for executing more than $20 billion of exchange transactions on behalf of corporate and institutional property owners.

Andy is admitted to the bar in CA and MA and holds a BS from Boston College, a JD from Southwestern University, and an LLM (in Taxation) from New York University. He is also an active member of the American Bar Association (ABA) Tax Section and has spoken before the ABA and written about various exchange topics, including exchanges of oil and gas properties.

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Andy GelsonVice President & Assistant General CounselRockland Trust Company288 Union StreetRockland, MA  02370781-982-6738 Andrew.Gelson@RocklandTrust.com

If you have any questions relative to this strategy or any other like-kind exchange questions, please contact:

About Compass ExchangeCompass Exchange Advisors LLC (Compass) is a Qualified Intermediary (QI) focused on providing its clients with guidance, strategies, and solutions for all their Section 1031 like-kind exchange needs. Our clients own property and wish to sell property, buy replacement property, and defer paying taxes.

About Rockland TrustRockland Trust Company is a full-service commercial bank headquartered in Massachusetts, with $5.7 billion in assets. 　 　 Ranked "Highest Customer Satisfaction with Retail Banking in the New England Region" in 2012 by J.D. Power and Associates, Rockland Trust's network consists of 77 retail branches, 10 commercial lending centers, four investment management and one residential lending center located throughout Eastern Massachusetts and in Rhode Island - including nine Central Bank branches, a division of Rockland Trust as of November 10, 2012. To find out why Rockland Trust is the bank "Where Each Relationship Matters®", please visit www.RocklandTrust.com. Member FDIC. Equal Housing Lender.

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