CAN I EXCHANGE PERSONAL PROPERTY FOR PERSONAL PROPERTY?

Yes you can--but the rules are a lot more restrictive than for a real property exchange.  Remember, the property exchanged must have been held for investment purposes or used in a trade or business, in order to qualify for a Section 1031 tax deferred exchange.  If the personal property is inventory, the product being sold and/or produced by the taxpayer, the inventory (personal property) will NOT qualify as an investment or used in a trade or business. 

For example,  the taxpayer had a factory, with machinery making widgets, the taxpayer could not do an exchange on the widgets.  The taxpayer could however, exchange the machinery that made the widgets for new machinery that make widgets, as that machinery was used in the trade or business.  So the next question is what type of personal property can be exchanged for other types of personal property.  Here is where the IRS Code and Regulations get a lot stricter.  When we talk about real property exchanges, the taxpayer can exchange any type of real estate for any other type of real estate.  That is NOT the case when it comes to personal property exchanges. 

Personal property exchanges are very specific.  You can exchange an airplane for an airplane, but not exchange an airplane for a helicopter.  You can exchange a truck for a truck; but a truck for an automobile will not qualify.  In other words, items being exchanged must be the same types of personal property that are being exchanged for each other. I have been involved in all types of personal property exchanges. 

The following are some examples of personal property exchanges I have been involved in:  copyrights, computers, machinery, billboards, aircraft, collectibles, race horses, cattle, oil paintings, and oil and gas drilling equipment.   Recently, a US Senator tacked onto the proposed Farm Bill, a piece of legislation, to restrict the allowance of exchanging collectibles under Section 1031.  I am pleased to report, that I personally started a campaign to stop that legislation and for at least this year, was successful in having collectibles taken out of the final bill.  Who knows if that Senator will try to add it again.  We will try to continue to be diligent on this issue.  One final comment, you cannot exchange personal property for real property.

IS SECTION 1031 RESTRICTED TO ONLY WEALTHY INVESTORS?

Every taxpayer who makes a profit on the sale of an investment property or has been using the property in their trade or business, should investigate whether they qualify for Section 1031 tax deferral treatment.  The law does not restrict the size of the taxable profit in order to be able to use Section 1031.  Yes, I love to act as the Qualified Intermediary (QI) on our large files.  It is interesting to hold multi-millions of dollars on a single transaction.  But I estimate that close to 50% of our transactions are on exchanges where the taxpayer has made a profit of from $50,000 to $750,000.  It does not make any common sense to discard the taxpayers hard earned profit, when the law (Section 1031) allows the taxpayer to preserve its capital and use it toward the purchase of a replacement property.   I always suggest that the taxpayer discuss these issues with their tax and/or legal advisor.  Of course we can try to help answer questions also-- but remember, the QI must remain independent.  Our toll free  number is:  866-903-1031.

CAN MY ATTORNEY OR REAL ESTATE AGENT HOLD THE PROCEEDS IN ESCROW FROM THE SALE OF MY RELINQUISHED PROPERTY--- WHILE I AWAIT THE CLOSING ON THE REPLACEMENT PROPERTY?

Whew---that was a long question.  I will endeavor to answer the question in a much shorter manner.  Answer:  NOPE!!!!  The Internal Revenue Service, in its infinite wisdom, wrote a section into its Regulations, prohibiting any of the investor's agents from holding the proceeds from the sale of the relinquished property.   Who is defined as the investor's (taxpayer's) agent?  Investor's agents are defined as the taxpayer's broker, attorney, accountant, family member, friend and others who have a relationship with taxpayer.  That is why the taxpayer should deposit the proceeds with a reputable independent Qualified Intermediary, that is insured and bonded and has safeguards to protect the proceeds.  I truly love being that independent QI as you can probably discern from my blogs.

IS THE TAXPAYER RESTRICTED AS TO WHERE THEY CAN PURCHASE THEIR REPLACEMENT PROPERTY?

A CPA from Ohio just asked the above question and it is a good one to present in this blog.  A taxpayer can purchase the replacement property in any state in the Union.  Does Puerto Rico  qualify as a State?  No it doesn't--but there a few exceptions--so please ask your tax advisor if you think you are going to be dealing with Guam, Puerto Rico or the US Virgin Islands.  In the case of the CPA mentioned above, he has a client who is selling an apartment building in Ohio and wants to obtain a replacement property in Arkansas.  That is not a problem and that is allowed.  But the taxpayer cannot obtain a replacement property for Section 1031 purposes in Mexico, because obviously Mexico does not qualify as a State--New Mexico however will qualify.  One other little minor point, a U.S. taxpayer can exchange a foreign property for another foreign property, but not a foreign property for a U..S. property.  Check with your tax and/or legal advisor should you have any questions on these issues.

WHAT TYPES OF REAL PROPERTY QUALIFY FOR A SECTION 1031 EXCHANGE?

The simple answer to that question is:   all types of real estate qualify for exchange purposes.  But both the property being given up, the relinquished property, and the property being received, the replacement property, must have been an investment or used in a trade or business.  The properties must be "like kind".  For a more thorough discussion on "like kind" go to our blogs of August 7, 2008 and August 11, 2008.  Simply put, any type of real estate is "like kind" to any other type of real estate.  "WOW" was the response given to me by a Realtor who never realized that her client could exchange its farm land for an office building.  For example purposes, you can exchange any of the following for each other, as long as they qualify as held for investment or used in a trade or business:  raw land, hotels, single family homes, office buildings, shopping centers, factories, farmland, rock quarries, leases that have 30 or more years remaining (yes most states delineate 30+ year leases as ownership of real estate), commercial buildings, etc.  We will discuss personal property exchanges in the next blog--FYI--personal property exchanges are a lot more restrictive on qualification for Section 1031 purposes.

STAYING ON A BUDGET

          

     STAYING ON A BUDGET

    The following is an excerpt from a newsletter I received from Chris Weir at CountryWide Bank.  Since we are in a recession, many people are now paying more attention to their monthly budgets.  "... One of the best ways to rein in your budget is to get a handle on your spending habits. The tips below can help you figure out where your money is going every month, and whittle down unnecessary expenses.

Taking inventory. Many people can name their major expenses, but don't remember all the little expenses that drain their wallets. To help you get a true picture of your spending, try writing down everything you spend money on during the course of a month. That means writing down not only your major expenses, but also those quick trips to the gas station, grocery store, coffee shop, movie theater, fast food restaurants, and so on. Also, if you pay for insurance or your garbage bill on a quarterly basis, write down what the monthly expense equals. 

Hierarchy of needs. Once you have all your expenses listed, it's time to analyze them. The best place to start is by grouping your expenses using highlighters. For example, you may want to use one color to highlight "must haves" like your house, automobile, life insurance, utility payments and so on. Next, use a different color to highlight items that may be important occasionally, but aren't required--such as, new clothes for work. Finally, use a different color to highlight unnecessary expenses that are nice, but could easily be cut out, such as mochas from the local coffee house. Now, you can make some purposeful decisions about what you can cut--starting with the easy items and working your way up to the important but not necessary. Don't forget, it's not always "either-or." For instance, you don't have to cut out mochas altogether; instead, you can cut down to one per week as a special treat. 

Give yourself an allowance. Sticking to your budget is easier if you have no other option. If you have a real spending problem, you may want to give yourself an allowance to live on. For example, try taking out $50 or $70 in cash for each week and putting your credit cards and checkbook in a safe place. That way, when you spend money, you'll actually see it leave your wallet...which means you'll see the impact more dramatically. This forces you to make some tough decisions. After all, if you go to lunch on Wednesday, you may not be able to go to the movies on Friday night. It'll be tough at first. But soon, being frugal will be second nature. 

Stop window-shopping. Marketing is a powerful force. To help eliminate the urge to overspend, avoid filling your lunch hour or Saturday afternoons by walking around the mall. Instead, spend that time walking around a local park, reading a good book, or playing a board game with a good friend. When you do need to shop, make a plan to go to a specific store or two... and go with a list! Of course, the key to having a list is only shopping for the items on it--no more, no less."      

PLANNING IS ESSENTIAL IF YOU OWN AN INVESTMENT

The following is an excerpt from Christine Latilup’s newsletter.  I have been teaching these same important principles for years:

“Watching the Olympic Games in Beijing this summer reminded us of the dedication that our athletes possess to be competitors on the world stage and ultimately be medal winners.  Planning and years of preparation are essential to achieve the highest rewards. 

The same is true for investors, a dedicated plan is essential for the maximum reward.   When potential clients call to find out what the capital gains rate is, they usually think "oh, that's not so bad".    What they fail to understand is that there are three tax hurdles to overcome on the sale of a capital asset. 

The first hurdle is largely misunderstood and it can be very costly.  Upon the sale of a capital asset, real property or personal property, previously taken depreciation deducted since May 6, 1997 to the date of sale is  recaptured upon sale at the rate of 25%.  

Capital gains tax, the second hurdle, is assessed  at the rate of 15%.  It is calculated based on the original cost-plus improvements less cost of sale against the sale price.  This is usually the result of market appreciation and constitutes equity in the property.  While the rate is not insurmountable, it is anticipated to be in excess of 20% in the not too distant future as Congress looks for revenue raisers. 

The third hurdle depends on where you live and file your tax return, many states also tax capital gains at the state level and this can range from 3%-9%.   Unfortunately, too many taxpayers dutifully pay the tax each year without understanding that the tax can be deferred, interest free, if the sale is handled as a Section 1031 Exchange.  

Every taxpayer regardless of whether that taxpayer is an entity or individual, as long as the property is not personal use property, can utilize exchanges as a tax deferral strategy and never pay the tax!”

DO YOU OWN A LEMON?

Here is an excerpt from an article written by an attorney who specializes in dealing with lemon laws.  "It’s not unreasonable to expect your new car to run like a charm. But if your new ride has a serious defect and the dealer can’t fix it, you have rights under your state’s lemon law. Each state’s law is different, but to be considered a lemon, the defects have to occur within a certain timeframe (during the first two years of the vehicle’s delivery date, for example) and the car has to have been taken in for repair a specified number of times for the same problem. Typically, you then have to notify the manufacturer and give them a final chance to fix the problem. 

If you think you have a lemon, keep a log of your communications with the dealer, the dates your car is out of service, your repair records, and any written correspondence. Contact a lemon law attorney to guide you through the final steps that will legally establish your vehicle as a lemon and entitle you to a refund or a replacement vehicle."  For more information, contact Sergei Lemberg, Esq. at slemberg@lemberglaw.com or go to his lemon law blog at www.lemonjustice.com/blog