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Washington State Enacts New Law Protecting Exchangors...Read more about this new law in our "News" section.

 
 

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Financial Reform Bill Contains Requirement of Study of QI Regulation.

The Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank Act") signed into law on July 21, 2010 creates a Bureau of Consumer Financial Protection (the "Bureau") within the Federal Reserve.  The Bureau will regulate consumer financial products and services.  The Director of the Bureau must conduct a study and propose legislation and/or regulations to protect consumers using QIs.  The study and recommendations must be completed within 1 year after the new law takes effect, and a program or proposed regulations must be implemented within 2 years after the Director's report.  Mary Foster, as a member of the Federal Legislative Committee of the Federation of Exchange Accommodators (FEA), worked on the insertion of this provision in the Dodd-Frank Act, and will continue to work with the FEA in assisting the Director of the Bureau to create regulation that will promote the security of client exchange funds.  Mary is also Past President and former Board Member of the FEA.  Click here to see entire release from the FEA.

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New Tax Law Changes Affecting 1031

Capital Gain Tax Rate in 2011

The maximum capital gain rate increases from 15% to 20% in 2011, in accordance with the sunset provisions contained in the law enacting the lower rate.  There are no changes to the 28% rate on unrecaptured depreciation or collectibles.

Medicare Contribution Tax (Code Sec. 1411)

Starting in 2013, "net investment income" of individuals, estates and trusts will be subject to an additional 3.8% tax to the extent the taxpayer's modified adjusted gross income (MAGI) exceeds threshold amounts.  "Net investment income" includes capital gains from sales on investment properties and rentals (property held in a passive activity).  Thus, it will apply to most 1031 properties held by individuals, or by partnerships and S corporations because they pass through the income to the individual members or shareholders.  It will not apply to properties used in an active trade or business or by a C corporation.  The income thresholds are $250K for married couples and $200K for other taxpayers.

This tax should be deferred by a 1031 exchange, although no regulations have been issued yet.  The definition of net investment income states "to the extent taken into account in computing taxable income".  Thus, gain deferred under Section 1031 should not be subject to the tax.  Nor should gain from a principal residence that is excluded under Section 121.

e.g. Single taxpayer has MAGI of $150,000, including $100,000 of gain from a rental home.  The tax does not apply because the MAGI is less than $200K.  If taxpayer had MAGI of $250,000, the tax would apply to $50,000 of the gain (the net investment income in excess of MAGI).  If the taxpayer had MAGI of $300,000, the tax would apply to the full $100,000 of gain.

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Recent Rulings

 NEW!   July 2010:  PLR 201027036 Related Party Acquisition of Relinquished Property from Controlled Foreign Corporation.  The relinquished property in this ruling is owned by a controlled foreign corporation (CFC) within the meaning of IRC § 957(a).  The ruling holds that Section 1031(f) does not apply if the CFC, using a QI arrangement, sells the relinquished property to related corporations and acquires replacement property from an unrelated party.  Read full analysis
 NEW!   June 2010:  ILM 201025049 No 1031 Treatment for Equipment Held Primarily for Sale.  In this ruling, the IRS found that the taxpayer, and equipment renter and seller, was holding equipment primarily for sale and thus did not qualify for Section 1031 treatment, and could not depreciate the equipment.  Read full analysis
 NEW!   June 2010:  PLR 201024036 Emission Credits are Like-Kind.  This ruling holds that Parent corporation of consolidated group can acquire Sub's emission reduction credits for nitrous oxide (NOx) and then exchange them under Section 1031 for volatile organic chemical compounds (VOCs) credits.  Read full analysis

Rev. Proc. 2010-14:  Safe Harbor for Reporting Gain When the QI Defaults.  The IRS has issued Revenue Procedure 2010-14 providing a safe harbor method of reporting gain or loss for taxpayers who fail to complete their exchange because their QI filed for bankruptcy protection or entered receivership (a “QI default”).  Read full analysis

April 2010: ILM 201013038 (April 2, 2010):  Acquisition of Replacement Property Equipment from Related Party Dealer Violates Section 1031(f)  Read full analysis
April 2010:  Goolsby v. Commissioner (April 1, 2010); T.C. Memo. 2010-64. The Tax Court held that property acquired by the taxpayers in a Section 1031 exchange did not qualify as replacement property when the taxpayers moved into the property two months after acquiring it.  Taxpayers were also held liable for the accuracy-related penalty.  Read full analysis
September 2009: Ninth Circuit Upholds Tax Court Decision on Related Party Exchange.  Teruya Brothers Ltd. v. Commissioner > Read full analysis

IRS Disaster Tax Relief

Revenue Procedure 2007-56, Section 17, provides an extension to the 45 and 180 day exchange deadlines in certain circumstances, including declared Presidential disasters. The extension is for the longer of the extension date listed in the IRS notice, or 120 days after the applicable exchange deadline.  (But a deadline cannot be extended beyond the due date, including extensions, of the tax return for the year of disposition of the relinquished property). Generally, the taxpayer must be located in one of the designated counties, regardless of where the relinquished property or replacement property is located, or the taxpayer must otherwise have difficulty meeting the exchange deadlines under the conditions in Revenue Procedure 2007-56, Section 17. Also, the relinquished property must have been transferred, or a property must have been acquired by the EAT in a reverse exchange under Revenue Procedure 2000-37, on or before the declared disaster date.

 

For the most up-to-date information on IRS granted tax relief in disaster situations, please refer to the IRS website > Go

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

                                                                                       

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