A California realtor learns not to mess with the IRS. Taxpayer did an exchange of her relinquished two rental properties but acquired a residence as replacement property and used it as her principal residence. She obtained an owner-occupied loan on the replacement and falsely reported the primary residence as a rental property and falsely reported rental income to “cover her tracks.” On her tax return, she listed another rental as her residence. She pled guilty to tax evasion and did 14 months in prison! The prosecution was the result of an investigation by the Internal Revenue Service, Criminal Investigation. Hope it was worth it. (https://bit.ly/2CxlGg9)
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Repeal of Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) Proposed
Foreign investors can take advantage of the 1031 exchange process; however, the process is confusing and overly burdensome. (We have been involved with several FIRPTA 1031 exchanges.) The Real Estate Investment and Jobs Act has been introduced to eliminate FIRPTA.
During the tax reform process, many organizations endorsed FIRPTA repeal in joint statements submitted to Congress. Prior efforts on FIRPTA reform resulted in bipartisan bills that were cosponsored by 90% of the members of the tax-writing committees. With a divided government, we’ll see how far this bill gets. See Real Estate Investment and Jobs Act, S. 1181, H.R. 2870 – 113th Congress (https://bit.ly/2AWzcdd.)
Drop and Swap California Case: Taxpayer Wins on a 2007 Transaction
The appeal of Sharon Mitchel vs. California is a CA Drop and Swap tax case we are watching closely. The case has potential national impact. The language of the 1031 law says you can exchange property that is held for investment or business purpose for replacement investment or business property also to be held. The only way to defer taxes is to own the real property and exchange for new real property. The “Drop and Swap” strategy is to drop out of the LLC/partnership ownership into a percentage ownership interest in the real property.
The terms “held” and “hold” in the law do not define a time period but define intent. A taxpayer doing an exchange must have had the intent to hold the property for investment for business purpose. Time is one of many ways to prove intent.
A general partnership owned a relinquished property. The partnership signed an agreement to sell the property. Sharon Mitchell dropped her 10% ownership in the general partnership to a tenant in common ownership two days before the settlement. Sharon “held” the property herself for two days. The California Franchise Tax Board (FTB) argued that the general partnership was the seller of the property and not Sharon Mitchel due to substance over form and step transaction principles. In a two to one decision, the Office of Tax Appeals (OTA) found for Sharon Mitchell because she was continuing investment in real property and not cashing out. The last-minute change in ownership form did not matter. We think it is unusual for CA to lose a case like this, and CA is appealing – the decision isn’t final.
Since 1990 – 29 Years and Counting
This year Realty Exchange Corporation celebrates 29 years as a Qualified Intermediary (QI). Founded in 1990 by Ed Horan (pictured), Realty Exchange continues its laser focus to provide 1031 exchange QI services for our clients. We thank the thousands of clients who have entrusted us with a single 1031 exchange or the many clients who continue to have confidence in us to help them with 1031 exchanges year after year. we also thank everyone who has supported us all theme many years by referring clients.
We look forward to helping our clients and providing current 1031 exchange information for many more years to come.
Forecast
After surviving the generational downturn, we have recovered. We are watching the news and trends as you are, and we know we are due for some correction. Therefore, we are forecasting a slower pace of growth for 2019. We are closely tracking our metrics to give us clues to the future, but we see the fundamentals in the Mid-Atlantic are strong. Welcome, Amazon.
Time on the Hill
The general public and professional practitioners do not know how close we came to losing 1031 exchanges in the last tax reform, even though tax-free exchange of property has been in the tax code since 1921. For several years we have been on the board, a past president and part of the government affairs committee of the Federation of Exchange Accommodators (FEA), the national association of 1031 exchange Qualified Intermediaries. During 2016 and 2017 FEA voluntarily spent many hours walking the halls of Congress lobbying to protect 1031 exchanges. We are humbled to have worked with a small team of truly dedicated professional Qualified Intermediaries from across the country along with genius lobbying direction to keep 1031 exchanges for real estate in the tax code. We cannot thank them enough!
