| In order to complete a Section 1031 tax deferred real estate
exchange you must comply with the rules of the Internal Revenue Code
and all other applicable tax laws. |
The general requirements are clear:
Exchange Agreement
Prior to the closing on the sale of your property, you must retain
the services of a Qualified Intermediary, such as Heartland
Exchange, LLC. An exchange agreement between yourself and the
Intermediary must be in place prior to the closing date. |
Identification Period
The replacement property must be properly identified within 45 days
of the closing date.
Identification Procedures - It is a common misconception that you
may identify as many properties as you wish. On the contrary, you
must identify property in accordance with one of the follow rules or
it will be as if no property was identified at all. |
| • |
Three Property Rule:
Three properties, regardless of value; or |
| • |
200 Percent Rule:
Any number of properties as long as the total aggregate value
of all properties identified does not exceed 200% of the value
of the relinquished property; or |
| • |
95 Percent Rule:
Any number of properties, regardless of their combined fair
market value, as long as you acquire 95% or more of the total
value of such properties. |
|
Exchange Period
You must acquire the replacement property by the earlier of the
following: |
| • |
180 days after the transfer of the property
you sold; or |
| • |
the due date of filing your federal tax return
for the year in which you transferred the relinquished property,
including extensions. |
|
Trade Value
In order to fully defer all capital gains taxes on the sale of your
property, you must purchase replacement property of equal or greater
value and with equal or greater equity than your relinquished
property. Simply stated, trade up in value and in equity. |
Like-Kind Property
There is an erroneous belief that the like-kind requirement
necessitates that the property you sell and the property you
purchase be exactly the same. Quite the opposite is true, like-kind
does not mean exactly the same. For example, a residential rental
home may be exchanged for farmland, an office building, or retail
center. Most real property is considered like-kind to other real
property. The like-kind requirement places stricter limitations on
the exchange of personal property. |
Cost Segregation Services
Cost Segregation is the process of separating or “segregating”
the cost of a building into the appropriate IRS Federal Tax
Classifications to correctly calculate depreciation. Depreciable
periods are 5, 7, 27.5 and 39 years. |
| Who can benefit from a Cost Segregation Study? |
| 1. |
Any business or building owner that has
purchased or renovated a building since January 1, 1987. |
| 2 |
The business or owner is profitable and paying
taxes. |
| 3 |
The total purchase price or improvement
exceeds $400,000. |
|
| How does Cost Segregation work? |
| 1. |
Commercial property owners can now segregate
building costs into asset categories with shorter lives and
apply sharply accelerated methods for computing depreciation. In
many cases, 20% to 40% of building costs can be depreciated in
the first 5 to 15 years versus 27.5 to 39 years. |
| 2 |
Cash flow from tax savings can be 5% to 15% of
building costs within the first 5 years of ownership (e.g.,
$50,000 to $150,000 in cash flow for each million dollars in
building cost). The average ROI benefit from a Cost Segregation
Study typically runs from 8:1 to over 11:1, after-tax. |
|
| Why haven’t I heard of Cost Segregation before? |
| 1. |
The large national CPA firms began offering
Cost Segregation in 1997 to only their very large clients
because of the prohibitive costs to perform the studies. |
| 2 |
In 2006, the IRS defined a clear set of rules
and procedures, titled the “2006 Cost Segregation Audit
Technique Guide” which specifies that Cost Segregation
Studies must be completed by “qualified personnel in
design, construction, auditing and estimation procedures
relating to building construction”. |
| 3 |
The IRS now allows a “life-to-date”
deduction THIS YEAR compared to a 4 year allocation previously
required. |
| 4. |
We partner with your CPA on your behalf to
give you the best possible tax benefit allowed by law. Our
associates do the engineered analysis; this is not a CPA’s
area of expertise. |
|
| What are examples of costs that qualify as 5 & 15 year
categories? |
| 1. |
Resilient floor tile and wallpaper |
| 2 |
Cabinetry and shelving |
| 3 |
Electrical costs to all equipment |
| 4. |
Costs related to communications lines |
| 5. |
Parking lots and landscaping |
|
| What are the first steps in the process? |
| 1. |
Our associates perform a no-cost review of
your commercial property to illustrate the “benchmark”
of expected tax savings. |
| 2 |
Our associates complete a full review of the
economics with your CPA to give you a full picture for
determining the benefit. |
| 3 |
To begin, our associates need to know: |
|
a. |
the date of ownership/purchase of the building |
|
b. |
the value of the commercial building excluding
the land (land is not depreciable) |
|
c. |
the type or use of the building (retail store,
manufacturing, hospitality, etc) |
|
d. |
current depreciation schedule |
|