Our Exchange News is published each season and covers current exchange topics of interest.

Signup to receive our Exchange News by email Newsletter Signup

Newsletters are also available in PDF format. Download the latest Adobe Acrobat .pdf Reader

Spring 2012 Newsletter .pdf

1031 Assignment Addendum – Do You Need One?

There is no question that an assignment of the contract rights to the Qualified Intermediary (QI) must occur in the exchange process in an overwhelming majority of cases. It is clear in the IRS Regulation 1.1031(k)-1(g)(4)(iv) and (v) that the QI is treated as entering into the agreement “if the rights of a party to the agreement are assigned to the intermediary and all parties to that agreement are notified in writing of the assignment on or before the date of the relevant transfer of property.” (The notification document to all parties is normally provided by the QI.)

Over the years, it has often been asked if there also must be 1031 language in the contract or an addendum to the sales contract for the relinquished and replacement properties. A 1031 addendum will normally clearly show intent to do a 1031 exchange, permit assignment, and advise the other party there will be no expense or liability as a result of the exchange. Sometimes there is “cooperation” language asserting that both parties to the contract will cooperate with a 1031 exchange. However, concerns have been expressed over the need for such an addendum.

These concerns are twofold. First, the other parties may not permit any assignment. Second, the exchanger may not want to disclose that the sale or purchase is a possible 1031 transaction for fear of jeopardizing his negotiating position and possibly the sales price. When an exchanger discloses that he is attempting to complete a 1031 exchange, he alerts the seller of the replacement property that the exchanger, as the buyer, has gain to be deferred from taxes, as well as a 1031 time frame to meet.

Some generic real estate contracts have a conflict. This conflict occurs when the contract provides for cooperation if there is a 1031 exchange, but then also requires the approval of the other party for an assignment. A buyer or seller can agree to cooperate, but that does not mean they agree to an assignment. Recently, some Associations of Realtors® have updated language in their standard contract or addendum that the parties will cooperate and agree to an assignment for either the buyer or seller to do a 1031 exchange. As an example the recent Greater Capitol Area Association of Realtors® (GCAAR) Addendum of Clauses includes a checkbox for Item #24, which has 1031 cooperation language and permission for assignment of the contract to a qualified intermediary. The 2012 version of the NC Offer to Purchase and Contract deals with the cooperation and exchange assignment in Clauses #16 and #17. We prefer the NC version, which incorporates the language in the main contract; there should be no need for a checkbox as in the GCAAR version.

Some practitioners argue that since only the exchanger’s rights in the contract are being assigned while the original obligations remain with the exchanger, this is not a complete assignment and therefore is not a violation of the assignment restriction in the contract.
While there is no regulatory requirement that there be a 1031 addendum to the contract, sometimes it is suggested that one be introduced after the contract price and all the terms have been agreed to in the basic contract.  If the other party still objects to any assignment, usually his objection is overcome by an explanation that only contract rights will be assigned in order to comply with the 1031 regulations. As part of the IRS regulations, the parties to the contract must be notified there has been an assignment. Therefore, the required 1031 notification of the assignment will be made before settlement.

Updated Forecast by Joint Committee on Taxation (JCT)

Each year the Joint Committee on Taxation (JCT), a joint committee of members of the US Senate and Congress (www.jct.gov), publishes estimates of federal tax expenditures. In May of 2011 the JCT preliminarily targeted 1031 exchanges to have a tax expenditure of $15.2 billion dollars over five years (2011 -15). The Federation of Exchange Accommodators (FEA), the voice of the qualified intermediary industry, quickly provided realistic feedback to JCT that the JCT’s five year estimate of $15.6 billion is at least five times too high, and that the appropriate estimate should be $2.9 billion.The JCT numbers published January 17, 2012, still reflect the $15.6 billion tax expenditure, but an updated report provided to members of Congress in October 2011 updates the future forecast for 1031 exchanges. The updated report estimates the tax cost of §1031 exchange deferrals over the next 10 years (2012 – 2021, not five years as the typical JCT annual forecast) at $18.2 billion, with just $2.4 billion for the next five years. We appreciate the JCT listening to the industry and updating their estimates to be more realistic, to what we are seeing for 1031 exchange activity across the country.

Quiz: Can You Swap a Cow for a Bull?

No! Since when is a male “like kind” to a female? It’s in the Law! §1031(e)

Maryland and West Virginia Non-Resident Waivers

If you are an out-of-state owner of Maryland or West Virginia property and want to do a 1031 exchange to defer the state taxes as well as federal taxes, you must file for a waiver to get an exemption from paying state tax on your sale at settlement. MD and WV are worried you’ll forget to pay taxes once you’ve made money and leave their state.

For out-of-state owners both MD (http://individuals.marylandtaxes.com/estatetax/withholding.asp) and WV (http://www.state.wv.us/taxrev/taxdoc/tsd389.pdf) have laws to collect tax from your cash proceeds on a sale. The states figure the money from the buyer is at the settlement so they might as well collect it then. Both MD and WV recognize the federal 1031 provisions, but you must file for a waiver. In MD the waiver is MW506AE and it’s requested to be filed 21 days in advance of the closing; WV is WV/NRAE and has the same 21-day request. WV followed MD’s lead. We have the details on who to communicate with at MD and WV if you need 1031 waiver help.

This publication is designed to provide accurate information on tax-deferred exchanges.  The publisher is not engaged in rendering legal or accounting services. If legal or tax advise is required, the services of a competent professional should be sought.[/expand]

Fall 2011 .pdf

1031 Accidental Mistake

For years Qualified Intermediaries (QIs), like ourselves, have been concerned that an accidental mistake could derail a good 1031 exchange – a mistake such as a settlement agent sending the proceeds from a settlement directly to the seller, when the instructions from the QI clearly told the settlement agent to send the funds to the Qualified Escrow Account at a bank. While the main thrust of the case addressed another issue, in Morton v. United States, of April 27, 2011, in the Court of Federal Claims, the judge made a common sense ruling that accidental 1031 exchange mistakes that are quickly corrected do not void a 1031 exchange. In the closing of the relinquished property, the settlement agent accidentally, and in contravention of the escrow agreement, wired funds from the escrow account directly to the taxpayer. The funds were returned to the QI the following day.

The Court held that an accidental transfer followed by an immediate return of funds does not constitute actual or constructive receipt. The court concluded that since Morton had complied with all the other 1031 exchange requirements, he validly effected a deferred 1031 like-kind exchange. Additionally, the Court held that the taxpayer should not be penalized for another’s mistake when the taxpayer took every step to validly effect a deferred 1031 like-kind exchange. As one 1031 expert stated, this case is important for situations where there is a mistake in the closing of an exchange.  Prompt correction of the error and proper documentation can apparently save the day.

Covered Federally Declared Disaster Area

When there is a Federally Declared Disaster, 1031 exchanges potentially qualify for an extension of the 45-day ID and 1031 exchange periods. The Virginia earthquake has recently been added as a federal disaster, covering, Louisa County VA.  The IRS posts notices of Tax Relief in Disaster Situations here: http://www.irs.gov/newsroom/article/0,,id=108362,00.html.

The relief described in http://www.irs.gov/irb/2007-34_IRB/ar13.html#d0e2854 pertains to those doing a 1031 like-kind exchange. The following criteria for 1031 exchangers must be met to get the extension: (1) The taxpayer is located in the Covered Disaster Area or is otherwise an affected taxpayer as defined in the Notice, regardless of where the relinquished property or replacement property is located, or otherwise has difficulty meeting the exchange deadlines, and (2) The relinquished property was transferred (or the exchange accommodator titleholder acquired the property in a reverse exchange) on or before the disaster date. IF the taxpayer meets these criteria, THEN any 45-day or 180-day deadline that falls on or after the disaster date is extended 120 days from such deadline. Note the date may not be extended beyond one year or the due date (including extensions) of the tax return for the year of the disposition of the relinquished property.

Counting the Days

The new 2011 IRS Form 1040, Schedule E (page 1), which is the main form used to report rental income and expenses, has been drastically revised. The final version has been published at http://www.irs.gov/pub/irs-pdf/f1040se.pdf, and the final version of the 2011 Schedule E Instructions are at http://www.irs.gov/pub/irs-pdf/i1040se.pdf. Of particular interest is the new requirement in Box 2 to count the fair rental days and personal use days. In years past, Box 2 simply asked if personal use was more than the greater of 14 days or 10% of the days rented at fair rental value.

1099 MISC Instructions

The real estate and accounting industry fought a successful legislative battle in early 2011 to have 2011 rental property expenses excluded from Form 1099 MISC reporting by landlords. The new 2011 IRS instructions for Form 1099 MISC did not pick up this legislative change, but IRS did publish the following notice of importance to all landlords.
Legislative Change Affecting 2011 Instructions for Form 1099-MISC.
Section 3 of Public Law 112-9 repealed section 6041(h) of the Internal Revenue Code, which would have required the reporting on Form 1099-MISC of rental property expense payments made after December 31, 2010.
Therefore, in the 2011 Instructions for Form 1099-MISC, please disregard:
• Treatment of rental property expense payments under What’s New on page 1,
• The second paragraph under Trade or business reporting only on page 1, and
• Rental property expense payments on page 3.
This notice: http://www.irs.gov/formspubs/article/0,,id=239708,00.html
Form 1099 MISC Instructions: http://www.irs.gov/pub/irs-pdf/i1099msc.pdf
Section 3 of Public Law 112-9:

1031 Exchanges Being Studied by Consumer Finance Protection Board (CFPB)

The Wall Street Reform and Consumer Protection Act (Dodd-Frank Bill) includes a provision for the Consumer Financial Protection Bureau (CFPB) to study the 1031 exchange industry. The study and report must be completed and submitted to Congress by June 21, 2012. Regulations must be proposed or a program to protect consumers must be established within 2 years of the date that the report is filed. As a board member of the Federation of Exchange Accommodators (FEA), Realty Exchange President Bill Horan participated in the first industry meeting with representatives of the CFPB. This initial meeting was important for FEA to give the CFPB background information on why the 1031 study provision was added to the bill. We are sure there will be many more interactions with the CFPB over the coming year as they study and then make recommendations for regulations or a program to protect consumers.

This publication is designed to provide accurate information on tax-deferred exchanges.  The publisher is not engaged in rendering legal or accounting services. If legal or tax advise is required, the services of a competent professional should be sought.[/expand]

[expand title=”Spring 2011″ tag=”h2″ trigclass=”arrowright” alt=”click to view”]
Spring 2011 .pdf

Follow the Rules, and Don’t Skip a Step

We’ve had IRS 1031 regulations since 1990. There have been a few changes over the years, but the fundamental steps are still in place. Ralph Crandall and Dene Dulin skipped a few of those fundamental steps and paid the price. In a recent court case, Ralph E. Crandall, Jr. and Dene E. Dulin vs Commissioner of Internal Revenue, which was decided in February 2011, Crandall and Dulin sold their Arizona investment property and bought a California investment property. The cash from the Arizona sale went into an Arizona title company’s escrow account, and was then used to purchase, through a California title company, the replacement property in California. They reported the transaction as an exchange on their 2005 tax return.

Where was the problem? The IRS argued that Crandall and Dulin actually had constructive receipt of the money from the sale. They did not use a qualified intermediary. Further, neither of the escrow arrangements with the title companies limited Crandall and Dulin’s right to receive, pledge, borrow or otherwise obtain the benefits of the funds. The taxpayer’s own limitation on the use of the funds does not convert the escrow account into a qualified escrow account (Klein v. Commissioner, T.C. memo 1993-491). The regulations are clear: to avoid being in constructive receipt of the funds, a taxpayer may use a qualified escrow account (1.1031(k)-1(g)(3).
The underlying purpose of Section 1031 is to permit the taxpayer to defer gain on “an ongoing investment, rather than ridding himself of one investment to obtain another” (Teruya Brothers, LTD vs Commissioner). So even though the end result was that Crandall and Dulin sold an investment and used the funds to replace their investment, they technically had access to the monies in between transactions. Skipping the qualified intermediary and qualified escrow step cost them their exchange. – Ouch!.

1099 Update

In our last newsletter we alerted landlords to new 1099 reporting requirements. H.R. 4 (H.R. 4: Comprehensive 1099 Taxpayer Protection and Repayment of Exchange Subsidy Overpayments Act of 2011) repeals the 1099 reporting provisions that are included in the The Small Business Jobs Act of 2010. HR 4 has been passed by both houses of Congress and has been signed by the President.

Swap Till You Drop Strategy

We have often heard the saying “…nothing can be said to be certain, except death and taxes.” Well, with a 1031 exchange we have learned how to defer the capital gains (profit) and 1250 depreciation recapture taxes on investment or business property. Unfortunately, we still haven’t figured out how to avoid death (yet).
While death is inevitable, 1031 exchange property holders should rejoice over the answers to three questions under current tax laws:

What happens to the taxes that have been deferred?
Will my estate be taxed?
What tax basis will my heirs inherit in the 1031 property?

If you die owning a replacement property you obtained through a 1031 exchange, there is no change in the rules. Regardless of how low your tax basis is in the property, there is no tax due. All the taxes on the profit and depreciation recapture you previously deferred when you did the 1031 exchange are forgotten. We have often called this the “ultimate deferral.” The property is part of your estate so you may now need to deal with estate taxes.

Due to the Tax Relief Unemployment Insurance Re-authorization and Job Creation Act of 2010 (“Tax Relief Act”), signed into law in December 2010, the estate tax exemption was raised to $5 million dollars. If you are married this exemption may reach $10 million dollars. In other words, if the value of your estate is less than $5 million, then the exemption will cover all of it, and no estate tax will be due. If it is more than the exemption, then the tax on the excess will be at the top rate of 35%. These estate tax rules are good through 2012.

Under the current “Tax Relief Act”, our heirs will inherit property we leave them at the current market value, or what is called the “stepped up” basis. Today if your heirs were to immediately sell the property, no tax would be due. As a simple example, I own a rental townhouse worth $500k that I exchanged into many years ago and now have a basis of 100k, giving me a gain of $400k. This gain includes both depreciation I took over all the years and my profit. I pass away and my son inherits this $500k property. His starting basis steps up to today’s value of $500k. If my son immediately sells the property, he has a basis of $500k and a sale at $500k, so he has no gain and no taxes due.

We had a client who inherited property years ago and received a stepped up basis, but the property was tied up in estate fights. Once the property was finally sold, there was gain from when he inherited the property to the time of the eventual sale, so our client owed taxes on that gain.

Some of our clients know their heirs do not want the rental properties they have been managing for years. As part of their estate planning, they will ask the family where they want to eventually own property. Clients will sell the rental properties and exchange into a location where they know their heirs will want to own property. For example, they will exchange two smaller rental properties for a new rental beach property or a new rental ski condo that they know their heirs will want to own. When their heirs inherit the property, there are no taxes due.

While we cannot escape death, at least we can escape paying taxes on the property we own. While the “Tax Relief Act” gives us current guidance, it has only moved the 2010 uncertainty out for two years. We can be certain that in 2012 we will have the same political battles over taxes that we saw in 2010 until the “Tax Relief Act” was passed.

8824 Workbook for the 2010 Tax Return is Published

The free complimentary Realty Exchange Corporation 8824 workbook for the 2010 tax return is published and can be found here: https://www.1031.us/8824/IRS8824.htm.

This publication is designed to provide accurate information on tax-deferred exchanges.  The publisher is not engaged in rendering legal or accounting services. If legal or tax advise is required, the services of a competent professional should be sought.[/expand]

[expand title=”Winter 2010″ tag=”h2″ trigclass=”arrowright” alt=”click to view”]
Winter 2010 .pdf

1031 Exchange Planning for 2011

The law (the amended version of H.R. 4853) that passed after agreements were reached between the President and Congress has a definite positive effect on 1031 exchanges. The major areas of concern were the capital gains tax rates, the tax-free exclusion amount for estate and gift taxes, and the stepped-up basis for inherited property. First, the capital gain tax rates have remained as they were. For real estate this means they remain at 15% maximum. For estate and gift taxes, the exclusion will be $5 million per person, with a tax rate of 35% for amounts over $5 million. An important aspect of the estate tax agreement for taxpayers is that a property is inherited at the stepped-up basis. This means that while the decedent may have had a low tax basis as a result of purchases made years ago and/or exchanging, the property will be inherited at a stepped-up basis at the market value at the date of death. Thus, an exchanger can continue over the years to defer capital gains, including depreciation recapture, by doing an exchange, and then leave the property to heirs without any income tax on the deferred capital gain. Their exchanges over the years are, in fact, income tax free. The heirs will not have to pay any income tax on the previous gain as they will receive the property with a tax basis at its current market value. If they sell immediately, they probably will not have any capital gain. If they hold the property, then only the capital gain and depreciation taken while they owned the property would be taxed, unless they also do a 1031 exchange. Importantly, the bill gives some certainty to the exchange tax provisions that will be in effect until the end of 2012.

The Wall Street Reform and Consumer Protection Act

The Wall Street Reform and Consumer Protection Act, which includes a provision to study the 1031 exchange industry, created a new consumer regulator called the Consumer Financial Protection Bureau (CFPB). The new law requires the Director of the Bureau to conduct a study and report in one year on any proposed legislation and/or regulations to protect consumers using exchange facilitators. Any proposed regulations or law should then be implemented within the following two years.

Landlords Be Aware

There will be expanded IRS Form 1099 reporting for rental property owners starting with the year 2011. The Small Business Jobs Act of 2010 requires all individuals who own rental property to issue an IRS Form 1099 for payments relating to their rental properties. Now, by definition, “a person receiving rental income from real estate shall be considered to be engaged in a trade or business of renting property.” A 1099-MISC form will be required if the property owner spends $600 or more per year per recipient. Examples of possible 1099-MISC recipients: gardeners, landscapers, pool cleaners, contractors and repair service providers.

Do You Need to File an On-Time Extension?

The IRS 1031 regulations say:   “The exchange period begins on the date the taxpayer transfers the relinquished property and ends at midnight on the earlier of the 180th day thereafter or the due date (including extensions) for the taxpayer’s return of the tax imposed by chapter 1 of subtitle A of the Code for the taxable year in which the transfer of the relinquished property occurs.” (§ 1.1031(k)-1(B)(2)(ii)).

If you closed on a relinquished property after October 19, 2010, and will not receive your replacement property until after the normal 2010 income tax filing due date (April 15, 2011, for individuals), you must file an on-time extension for the filing of your 2010 federal tax return to get the full 180 days to complete the exchange. Taxpayers use IRS Form 4868 to file for an automatic six-month extension. If you closed on your relinquished property anytime in 2010, you must report the completed exchange on IRS Form 8824, Like-Kind Exchange, as part of your 2010 federal tax return. You may not file your tax return for 2010 until the exchange is completed.

Receiving 1031 Escrow Funds in Following Year

The IRS 1031 regulation (§1.1031(k)-1(j)) provides that if an exchanger receives cash from the qualified intermediary at the end of the exchange, or if the exchanger had a bona fide intent to do an exchange but does not complete the exchange by receiving a replacement property, then the gain on cash received will be reported for the tax year in which the exchanger actually receives the cash from the qualified intermediary.

Example: The exchanger relinquishes a debt free property on December 15, 2010, for $400,000. After expenses, the qualified intermediary receives $380,000 in cash and places it in a qualified escrow account. The exchanger identifies a single replacement property and goes to settlement on the purchase on March 30, 2010. However, the exchanger only uses $300,000 of the cash in escrow to purchase the replacement property. Following settlement, the qualified intermediary returns to the exchanger $80,000 (cash boot). The exchange is still reported on the Form 8824 for 2010. The cash boot received in 2011 will be included on Line 20, but not carried forward to Line 22. The cash received in 2011 may be reported as an installment sale on IRS Form 6252. Even if the exchanger does not complete the exchange by obtaining a replacement property – but there was a bona fide intent to exchange – then the gain may still be reported on an installment basis for the tax year the cash was received from the qualified intermediary. See IRS Publication 537, Installment Sales, for more details. An exchanger will have the choice to pay the taxes on the boot on the 2010 tax return or on the 2011 tax return.

The 8824 Workbook for the 2010 Tax Return is Published

The free complimentary Realty Exchange Corporation 8824 workbook for the 2010 tax return is published and can be found here: https://www.1031.us/8824/IRS8824.htm. The IRS instructions for Form 8824 say you only need a couple hours to understand the form and the law (page 4), however this is one of the most complex forms we have ever dealt with. If you have ever tried to fill out the 8824 using the IRS 8824 instructions you know you need some guidance.

This publication is designed to provide accurate information on tax-deferred exchanges.  The publisher is not engaged in rendering legal or accounting services. If legal or tax advise is required, the services of a competent professional should be sought.


[expand title=”Spring 2010″ alt=”click to view” tag=”h2″ trigclass=”arrowright”]

Spring 2010 .pdf

Virginia Exchange Facilitators Act

To ensure security of exchange funds, the Virginia Legislature has passed and the Governor has signed VA House Bill 417, Exchange Facilitators Act in early April. The bill becomes effective July 1, 2010. We, along with the national Federation of Exchange Accommodators and Virginia Association of Realtors, have been promoting this bill and are thankful it has become law. Realty Exchange Corporation is in full compliance with the law and fully supported its passage. If you have a potential exchange on a VA property, please make sure your qualified intermediary is in full compliance with this new VA law.

Conversion to a Primary Residence, Goolsby Case Lessons Learned.

Many of our clients are following a strategy to convert their investment properties to their principal residence and are using the principal residence exclusion to avoid paying taxes. We recently wrote an article explained the rules for converting a rental property into a primary residence and the rules for claiming this great tax exclusion when you eventually sell the property as a primary residence.

The full article can be found here: www.1031.us/Articles/Converting.html.

Section 1031(a) of the tax code provides that no gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for a like-kind property that is to be held either for productive use in a trade or business or for investment. How do you prove the property you are going to exchange into is to be held for productive use in a trade or business? It all depends on your intent and your actions.

In April of 2010 a tax court decision was issued in the case of Goolsby v. the IRS Commissioner, and there are lessons to be learned from this case. The Goolsby family moved from CA to GA in 2003. They set up a 1031 exchange for a CA investment property, and exchanged into two properties in GA. The Goolsby family then moved into one of the GA exchange properties two months later (uh-oh). The IRS challenged that the property did not qualify as an investment property as defined by Section 1031(a). Mr. Goolsby argued that he had tried to rent out the property by putting an ad in the local paper for a couple months but was unsuccessful in renting the property.

The court dug a little further and discovered that the Goolsbys made the purchase of the exchange property in GA contingent on the sale of their personal residence in CA, and never researched rental opportunities in the area or determined if the neighborhood association would allow them to rent the property. They also learned Mr. Goolsby contracted to have the basement finished two weeks after taking title and that he also discussed with the qualified intermediary if he needed to rent the property out before moving into it. The court determined that the Goolsbys never intended to hold the property as an investment and had every intent to move in. The activities the Goolsbys undertook (making the purchase of the property in question contingent on their home sale, adding a new basement two weeks after they purchased, and inquiring if they needed to rent out the new property), along with their lack of other logical investment activity (not exploring rental opportunities in the area, not checking with the HOA if they could even rent, and minimal effort to attempt to rent) all combined to clearly show their intent was to make the new property a home right away. Activity to prove intent to hold the new replacement property as an investment before converting the property to a primary residence was clearly shown as critical in this court case. We are always asked, as Mr. Goolsby asked his qualified intermediary, whether the exchangor has to rent out his new property before moving in. Technically the answer is no, but the exchangor must have all the activity that goes along with buying and holding an investment property. To be safe, this would mean holding it for two years without personal use.

Claiming Losses
As part of the same case, the Goolsbys claimed all their rental activity losses against their income. Mrs. Goolsby’s only activity was manager of their real estate holdings. They claimed she spent the required 750 hours managing the properties to meet the requirements for being a real estate professional (Section 469(c)(7)(B). The Goolsbys didn’t keep very good records and created activity records after their tax return was selected for audit. There was no other evidence to back up the activity logs – no appointment books, calendars, or summaries.
The court decided that the Goolsbys did not meet the requirements of 469(c)(7)(B).
The court found the Goolsby’s liable for the accuracy-related penalty due to a substantial underpayment of tax. Not only did they owe the taxes due, they also had to pay a large penalty.

The lessons learned from this case are that you must show and prove intent to hold the replacement property as investment, business or rental property before you convert the property to a new primary residence. These cases take forever — this case was about 2003 and 2004 tax returns but wasn’t decided until April 2010.

PDF Goolsby v IRS Commissioner

IRS Rev. Procedure 2010-14.

The purpose of this new revenue procedure is to provide a safe harbor method of reporting gain or loss for certain taxpayers who initiate deferred like-kind exchanges under §1031 of the Internal Revenue Code but fail to complete the exchange because a qualified intermediary (QI) defaults on its obligation to acquire and transfer replacement property to the taxpayer. This revenue procedure is effective for taxpayers whose like-kind exchanges fail due to QI default occurring on or after January 1, 2009. Taxpayers effected prior to that date may file an original or amended return.

A copy of the Revenue Procedure is available at ../PDF/RevProc2010-14.pdf and was included in IRB 2010-12, dated March 22, 2010.

Capital Gain Tax Rate Increase after Jan. 1, 2011.

Unless Congress does otherwise, the current capital gain tax rate of 15% will “sunset” at the end of 2010. The capital gain tax rate on the sale of real estate will revert to 20% on January 1, 2011. Also, beginning in 2013, there will be a 3.8% Medicare tax on certain investment income, including capital gains subject to income tax. The new tax will apply to single taxpayers with taxable income over $200,000 and married ones with income over $250,000.
Taxpayers doing a like-kind exchange, regardless of income, will be able to defer capital gains of 20% starting in 2011 along with the depreciation recapture tax of 25%. And beginning in 2013, affected taxpayers can defer their capital gain and Medicare Contribution tax (imposed by the 2010 Reconciliation Act) by deferring the gain through a 1031 like-kind exchange for which Realty Exchange Corporation acts as the qualified intermediary.

This publication is designed to provide accurate information on tax-deferred exchanges.  The publisher is not engaged in rendering legal or accounting services. If legal or tax advise is required, the services of a competent professional should be sought.[/expand]

Older Newsletters: