§1031 Exchange Intermediary

First let's discuss the earnings that your account generates while it is in the care of the intermediary. Did you know that many intermediary services earn the majority of their income from the interest that your account generates for them while they hold it!? By paying their clients little or no interest on their funds, they pocket the lion's share of the earnings from your money. We do not believe that is fair or reasonable. We have negotiated a special arrangement with our partner banks that allows us to offer 1.5% (as of today, July 24, 2008, and subject to change) on all accounts under $1,000,000. (Higher rates are paid on accounts over $1 million.) Earnings start on day one that the account is opened. We are aware of all sorts of arrangements at other companies: some intermediaries pay no interest to the client if the account is open less than 30 days. Some pay as little as .25%; one-sixth of what your money earns at Iowa Equity Exchange! Even though your money may only be in the exchange account for a relatively short period of time, don't you want it to bring you the highest return it can? In many cases, the interest earned on funds we hold for our clients more than compensates for our exchange fee of $695.

Now, what actually takes place when an exchange is opened? We establish a bank account for each exchange that is segregated from other exchange accounts. We never commingle or pool one exchanger's funds with funds of another exchanger, nor with our own funds. In our opinion, this is critical.

Safety is obviously another critical aspect of our business. With recent bank failures in the news, it is on everyone's mind. You also need to feel secure with the choice of an intermediary. At Iowa Equity Exchange, we address both concerns. Some intermediary companies offer up a bond that they have purchased to guarantee their performance and the availability of your funds. We do not provide a bond because we believe we have a better solution. If you have ever had difficulty collecting on an insurance claim, you will understand the shortcomings of a bond. By the time your exchange period is over, you will very likely not be able to collect on a bond if it is needed. Providing a bond is a marketing gimmick, in my opinion, and nothing more. We provide you with the option of a dual-signature account that requires your signature and authorization before any money can be moved by us. This assures you that we will not abscond with your exchange funds because you would have to sign off on it! We believe that this option fully addresses any issue you might have with our authority over your funds. But what about the bank itself?

As you know, accounts are insured through the FDIC to a limit of $100,000. Exchange accounts routinely exceed that figure, though. If your account is in excess of $100,000 and the bank holding the funds fails, your money could be tied up for a long time. We offer three solutions. First, we choose our banks carefully, seeking strong, well-diversified banks. Second, we offer the opportunity with one of our banks to purchase bonded insurance in $50,000 increments over and above the $100,000 FDIC limit. This bonding is similar to the bond that other intermediary services offer in that it may take too long to pay off to save your exchange, but at least your money is protected. Third is a relatlively new arrangement called CDARS, which stands for Certificate of Deposit Account Registry Service. Using a CDARS account, your funds are deposited with one of our banks, which then purchases short-term (four-week) Certificates of Deposit in $100,000 or less increments from various banks. Interest earned is paid through our bank only, but your money is held by enough other banks to ensure that none of them has more than $100,000 of your funds. This arrangement must be carefully managed, however, so as not to have your exchange funds tied up in a four-week CD when you need those funds to close on your replacement property.

In conclusion, we believe that we have established a set of operational procedures and exchange account options that provide our clients with the best combination of low exchange fees, high return on funds held, and safety of funds held available in the exchange industry today. We welcome your comments and questions.

Ken Tharp

Providing Qualified Intermediary services for Section 1031 tax deferred exchanges all over the United States. Headquartered in Iowa, our services are available in Missouri, Kansas, Nebraska, Colorado, North Dakota, South Dakota, Minnesota, Wisconsin, Illinois, and all other states.

INTEGRITY. PRECISION. SECURITY.

Copyright © 2008 By Ken Tharp, All Rights Reserved. * Tell Me About My Money that the Intermediary Holds During an Exchange *

 

Reverse exchanges are gaining in popularity, but they are often misunderstood and they can be confusing. Let's investigate the basics of this exchange structure.

Sometimes a situation arises in which an investor or property owner wants to purchase a property but wishes to sell a property that he or she already owns to provide the funds needed to purchase the new property. If the old property sells prior to closing on the new property, the investor can employ a standard Section 1031 exchange to defer capital gain taxes on the sale. But what if the investor needs to close on the new property before the old one can close, or perhaps before it is even on the market? In those situations, a reverse exchange can provide the investor the alternative he or she needs to still take advantage of the tax deferral on the sale of the old property.

How does it work? Let's boil it down to the essentials. In a standard exchange, there are four parties involved:

1. The exchanger (you)
2. The intermediary (us)
3. The buyer of the relinquished (old) property
4. The seller of the replacement (new) property.

A reverse exchange adds a fifth party - a single-purpose entity that is typically formed by the intermediary to hold title to either the relinquished property or the replacement property. This title-holding entity is known in exchange parlance as an Exchange Accommodation Titleholder, or EAT. Its sole purpose is to hold title to one of the properties, providing time for the relinquished property to sell.

As we go through the steps of a reverse exchange, you will see that the term itself is a bit of a misnomer. Nothing is actually done in reverse order. The establishing of the EAT to hold the new property merely postpones a standard exchange until the old property sells.

Once the EAT takes title to one of the properties, the clock starts. The rules allow 180 days to sell and close the relinquished property. When that happens, the intermediary can proceed with a standard exchange that transfer title from the EAT to the exchanger. The risk to the exchanger is that the old property does not sell within the 180 days. If that happens, the exchanger essentially has two choices - either take title to the new property and treat the old property however he wishes (that is, either continue to attempt to sell it outside of an exchange structure or simply continue ownership) or move forward with the reverse exchange outside of the 180-day safe harbor established by the IRS. The former could require some financial gymnastics, while the latter establishes a new set of risks, most of which are substantial, particularly if the exchange was not originally established as being outside of the safe harbor. Bottom line, price your old property so that it will sell within the 180 day period so that you never have to make the choice between two poor alternatives.

It might have occurred to you by now that, with the money to purchase the new property wrapped up in the old property, the EAT must be a really great guy to buy the new property for you and hold it until you can sell the old one. While it may be true that the EAT is a really great guy, he will not use his own money to purchase the new property for you. The funds to purchase the new property must be provided by the exchanger. There are essentially two means by which the exchanger can provide those funds: 1) he can provide cash from his back pocket or a handy bank account, or 2) he can work with his bank and the EAT to structure a loan for the new property. The EAT will not want to assume any liability for the loan on the new property, so the bank will generally need additional collateral. While it can be cumbersome to structure such a loan, it can usually be accomplished and the exchange can proceed.

There are two other important documents that are typically part of a reverse exchange. Usually the exchanger and the EAT execute a note that shows the funds that were provided by the exchanger and essentially loaned to the EAT to purchase the property. This assures the exchanger that the EAT will pay back those funds when the closing occurs and can be secured by the new property. The note generally does not carry any interest and is for the same amount as the purchase price of the new property. The second document is a net lease between the EAT and the exchanger. The net lease makes the exchanger responsible for payment of all expenses of the new property, just the same as if he or she owned it. The lease payments, if any, can be equal to any payments that are due to the bank involved. The lease is designed to be strictly a pass-through, allowing the EAT to cover any expenses that the exchanger cannot pay directly, and allowing the exchanger to operate the property as if he or she owned it.

Now let's address the question of WHY. Why would anyone go through all of this? There are many situations that might warrant consideration of a reverse exchange. For instance, we have structured reverse exchanges for land owners who purchased property at an auction and needed to close within a short time frame. In another case, an investor came across a deal that he did not want to miss, but the seller was not willing to wait for the investor's old property to sell. In yet another situation, the sale of the investor's old property fell apart at the last minute and he stood to lose the new property if he did not close on it. One last scenario involves peace of mind - investors sometimes take their time finding just the right deal. When that deal is found, they ask us to structure a reverse exchange and they might put several properties on the market for sale, any one of which could function as their relinquished property should it sell. For some folks, it's actually an easier way to execute an exchange than the typical forward exchange because it avoids having to deal with identifying potential replacement properties within the 45-day window that Section 1031 allows.

There are other ways to structure a reverse exchange. This article is not intended to be comprehensive, but to provide a simplified overview for a basic understanding of the reverse exchange process. Reverse exchanges are more expensive for the investor than a standard exchange, primarily due to the additional expense that the intermediary must incur to establish the single-purpose entity, the tax-reporting requirements for that entity, and so forth. Reverse exchange fees can be several times that of fees for a standard exchange.

To conclude, reverse exchanges are an exchange structure that is increasingly popular. In the right situations, reverse exchanges can be extremely advantageous. Should you have any questions about reverse exchanges, please feel free to contact us.

Ken Tharp

Providing Qualified Intermediary services for Section 1031 tax deferred exchanges all over the United States. Headquartered in Iowa, our services are available in Missouri, Kansas, Nebraska, Colorado, North Dakota, South Dakota, Minnesota, Wisconsin, Illinois, and all other states.

INTEGRITY. PRECISION. SECURITY.

Copyright © 2008 By Ken Tharp, All Rights Reserved. * Demystifying the Reverse Exchange *

In order to clarify things in the mind of anyone who is uncertain about it, the farm bill that was passed by Congress does not include the language about like-kind status that those of us in the exchange industry were concerned about. The Senate version of the bill sought to redefine the term “like-kind” as it applies to agricultural ground. The crux of the change was to make land that generated any sort of subsidy from the government for its owner non-like-kind to any other real estate investment. The central objection to that provision, in my opinion, is that the government essentially imposed the subsidies on farmers over the years and it is not equitable to now make it so those same farmers could not exchange out of their long-term investments into something more manageable in their later years.

While this is good news indeed, investors and real property owners all across the country should remain vigilant with regard to potential changes in Section 1031. The mere idea that Congress took a shot at changing like-kind status as a means to raise additional funding for their other activities is cause for concern. Considering the possibility of chipping away at the provisions of Section 1031 is frightening.

Ken Tharp

Providing Qualified Intermediary services for Section 1031 tax deferred exchanges all over the United States. Headquartered in Iowa, our services are available in Missouri, Kansas, Nebraska, Colorado, North Dakota, South Dakota, Minnesota, Wisconsin, Illinois, and all other states.

INTEGRITY. PRECISION. SECURITY.

Copyright © 2008 By Ken Tharp, All Rights Reserved. * The Farm Bill Does Not Alter the Definition of “Like-Kind” in Regards to Section 1031 Exchanges *

Now that things look to be settled on the Democratic side of things, how do the two candidates look at the current capital gain tax rates? Both candidates seem to be focused on “change” at the moment; does that extend to the capital gain tax rate?

The presumptive nominee on the Republican side, Senator John McCain, expresses the intent to leave the rate at its current level of 15%, which was reduced from 20% in the Income Tax Act of 2003.

The as-of-last-night-presumptive nominee of the Democrats, Senator Barack Obama said early in the campaign that he would move to raise capital gain taxes to at least 20% and not more than 28%. At one point during the debate in Philadelphia, Obama said, “…I would look at raising the capital gain tax for purposes of fairness.”

In the past decades, raising the capital gain tax rate has resulted in decreased revenues. By the same token, when the capital gain rate decreased, revenues increased. Even though Obama’s intentions, if enacted, would in all likelihood result in more taxpayers who were interested in performing tax-deferred exchanges, I cannot support an increase in the tax rates for capital gains. If you have an opinion, please let me know in the comments section.

Regardless of whether the capital gain tax rate is reduced, increased, or left the same, Section 1031 tax-deferred like-kind exchanges will continue to help taxpayers avoid paying those taxes today. It is very common for people to have questions about 1031 exchanges. Please feel free to ask us any questions that you might have about the process.

Ken Tharp

Providing Qualified Intermediary services for Section 1031 tax deferred exchanges all over the United States. Headquartered in Iowa, our services are available in Missouri, Kansas, Nebraska, Colorado, North Dakota, South Dakota, Minnesota, Wisconsin, Illinois, and all other states.

INTEGRITY. PRECISION. SECURITY.

Copyright © 2008 By Ken Tharp, All Rights Reserved. * The Presidential Election and the Potential for Change in Capital Gain Rates *

Before I leave my office for the day, I want to make you aware, if you are not already, of the National Moment of Remembrance scheduled for Monday, May 26 at 3:00 PM.

The following information is from www.remember.gov:

Memorial Day Event

The National Moment of Remembrance, established by Congress, asks Americans wherever they are at 3 p.m., local time, on Memorial Day to pause in an act of national unity (duration: one minute).The time 3 p.m. was chosen because it is the time when most Americans are enjoying their freedoms on the national holiday. The Moment does not replace traditional Memorial Day events; rather it is an act of national unity in which all Americans, alone or with family and friends, honor those who died for our freedom. It will help to reclaim Memorial Day as the sacred and noble holiday it was meant to be. In this shared remembrance, we connect as Americans.

How to Participate

Wherever you are, observe the Moment at 3 p.m., local time, on Memorial Day. Ask others to remember—relatives, friends, church, neighborhood, or co-workers to observe the Moment at places such as your neighborhood, local pool, picnic grounds, etc., for one minute of Remembrance. Participation can be informal as ringing a bell three times to signify the Moment.

Why

To provide a time of Remembrance for America’s fallen and to make a commitment to give something back to our country in their memory. To have Americans participate in an act of national unity and demonstrate gratitude and respect for those who died for freedom since the founding of our Nation. To provide a sense of history to our citizens and ensure that younger generations understand the sacrifices made to preserve our liberties.

Background

The idea for the Moment was born when children touring the Nation’s Capital were asked by the Commission’s Director what Memorial Day means. They responded, “That’s the day the pool opens.” A Gallup Poll revealed that only 28% of Americans know the meaning of this noble holiday. The White House Commission on Remembrance was established by Congress (PL 106-579) to promote the values of Memorial Day by acts of remembrance throughout the year. The major initiative of the Commission is the National Moment of Remembrance.

Please pass this on and remember to remember on Monday. We all owe these heroes so much more than 60 seconds of our time.

Ken Tharp

Copyright © 2008 By Ken Tharp, All Rights Reserved. * Memorial Day - A National Moment of Remembrance * 

One of my favorite explanations for why the Internal Revenue Service allows taxpayers to sell a property and defer the capital gain tax on the sale of that property through the use of a Section 1031 like-kind exchange contains the words in the subject of this article.

The explanation goes like this: the IRS allows the taxpayer to defer the payment of capital gain taxes on the sale of a property in an exchange because the investment itself does not change, merely the form of the investment changes. When you think about that, it is really quite incredible that this great wealth-building tool is available to us. Investor Jones invests $10,000 to purchase a $100,000 duplex. After ten years, he sells the property within a Section 1031 tax-deferred exchange and purchases an 8-plex. He might have increased his equity in the duplex to $40,000 during those ten years and paid $400,000 for the 8-plex, but the IRS does not recognize the gain if done properly because only the form of the investment changed, not the investment itself. In another ten years (or sooner, if he chooses), Investor Jones can repeat the process. In fact, he can defer his capital gain taxes for his entire life if he wishes. And at his death, his heirs inherit his properties at their “stepped-up basis.” (I.e., their fair market value at the time of his death.) If those heirs choose to sell at that time and the properties sell for their fair market value, there is no capital gain tax to be paid because there was no gain from the stepped-up basis.

Section 1031 is an amazing benefit that is available to all taxpayers who own property purchased for investment or used in the pursuit of a business or a trade. Be sure that you and your clients are taking advantage of this benefit when a desire to change the form of an investment occurs.

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If you have questions about Section 1031 like-kind tax-deferred exchanges, please consider IOWA EQUITY EXCHANGE as your source for answers. We handle all types of exchanges. Experience The Power of the Tax-Deferred Exchange! Contact us at your convenience for prompt, accurate information. Please think of us for your next exchange.

Ken Tharp

Providing Qualified Intermediary services for Section 1031 tax deferred exchanges all over the United States. Headquartered in Iowa, our services are available in Missouri, Kansas, Nebraska, Colorado, North Dakota, South Dakota, Minnesota, Wisconsin, Illinois, and all other states.

INTEGRITY. PRECISION. SECURITY.

Copyright © 2008 By Ken Tharp, All Rights Reserved. * Merely the Form of the Investment Changes… * Contact Ken Tharp for information on Section 1031 tax-deferred exchanges anywhere in the United States.

Are your income properties a business, an investment, or both? I suspect most property owners would say they are both. That’s how I feel about mine. They certainly qualify as a business, but the primary reason I bought them was as an investment for the future.

Why does this matter? Because unless you own income property strictly as a business, you should be concerned with maximizing the investment quotient of your properties. How can this be done? There are several answers to that question, but one in particular is of interest to me in this article.

Off the top of my head, I can think of these ways to maximize your investment in your properties: 1) keep them well-maintained; 2) keep them rented to good tenants who pay regularly; 3) do what you can to lower expenses.

In addition to these and other “nuts and bolts” ways to maximize your investment, the investor should consider whether his equity is being well-utilized. Let’s define the term “investment” for purposes of this article as “the difference between a property’s value and the debt on that property.” Using this definition, “investment” is another word for “equity.” (There are two articles about increasing one’s return on equity in my blog postings: Ways to Increase Your Return on Equity and Return on Equity, in case you would like to read more about my opinion on this subject.)

Here’s an important thing to keep in mind that many overlook: As time passes, the value of your property increases (in a normal market!) and the amount of your debt decreases. Obviously, this means that your equity in the property rises. While the income from the property may also rise (usually the expenses rise, too), typically when net income is compared to equity, return on equity decreases over time.

What can be done about this phenomenon? After all, we all like that high percentage of return on equity that we got when we first bought that property, right? The answer is that you have to release some or all of that equity to work for you in another way. Refinancing the property can release a fair amount of the equity in your property, but not all of it. Usually a lender will require that the investor maintain 20% or so of his equity in the property during a refinance. Sometimes that’s okay. Another alternative to release equity is to sell the property and reinvest in a more expensive property. The problem with this is that a significant portion of your equity is going to go to the Internal Revenue Service in capital gain taxes and depreciation recapture, and to your state if state capital gain taxes apply.

The solution to releasing your equity to go to work for you elsewhere is found in Section 1031 of the Internal Revenue Code, which allows you to sell your property, defer all of your capital gain taxes and depreciation recapture, and put your equity to work in new property that will generate a higher rate of return.

If you have questions about exchanging, please let us know. We handle all types of exchanges. Experience The Power of Tax-Deferred Exchanges!

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Please consider IOWA EQUITY EXCHANGE as your source for answers to your questions about Section 1031 like-kind tax-deferred exchanges. Contact us at your convenience for prompt, accurate information. Please think of us for your next exchange.

Ken Tharp

Providing Qualified Intermediary services for Section 1031 tax deferred exchanges all over the United States. Headquartered in Iowa, our services are available in Missouri, Kansas, Nebraska, Colorado, North Dakota, South Dakota, Minnesota, Wisconsin, Illinois, and all other states.

INTEGRITY. PRECISION. SECURITY.

Copyright © 2008 By Ken Tharp, All Rights Reserved. * Are Your Income Properties a Business, an Investment, or Both? * Contact Ken Tharp for information on Section 1031 tax-deferred exchanges anywhere in the United States.

 

Did you know that after you use a Section 1031 exchange to acquire new property, you will face the same tax-related issues when you decide to sell that property? Is there any way around paying capital gain taxes when you sell your property? With the issuance of Rev. Proc. 2008-16 and some advance planning, there are now two answers to that question instead of one. The one answer we always used to have was, "Yes, there is a way, but you have to die to accomplish it." (When a property owner passes away, property owned passes to heirs at a stepped-up basis, i.e., the value of the property at the time of death. If the heir(s) sell for that value, there is no capital gain. Helpful for your heirs, but not too much that you can do with it.) That answer isn't one that most people want to hear. Now, however, there's a new, more acceptable answer in the affirmative.

Let's assume that Mr. and Mrs. Jones own a farm worth $800,000 that has a tax basis of $200,000. (Substitute "apartment building," "business location," or whatever fits your situation for "farm.") Further, let's assume that Mr. and Mrs. Jones do not live on this farm, so there is no personal residence exclusion available to shelter some of their $600,000 capital gain if they were to sell. They're not too thrilled with the prospects of being taxed on a $600,000 capital gain on this year's taxes, but they do want to sell. What to do? How about this:

1. Mr. and Mrs. Jones sell their farm as the relinquished property in a Section 1031 exchange.
2. As their replacement property in the exchange, they acquire two vacation houses, each worth $400,000 (House #1 and House #2)
3. Mr. and Mrs. Jones rent the two properties in accordance with the new IRS Revenue Procedure 2008-16, which sets clear requirements for vacation home property to qualify for a tax-deferred exchange.
4. After a period of time (at least two years to satisfy the requirements of Rev. Proc 2008-16), Mr. and Mrs. Jones sell their residence using the personal residence exclusion provisions of Section 121 of the Internal Revenue Code and move into House #1.
5. After occupying House #1 for a period of at least two years to establish it as their personal residence, Mr. and Mrs. Jones sell it using Section 121 to exclude their capital gain and move into House #2. (I think you can finish the steps yourself.)

Can we quantify the benefits of such a strategy? Mr. and Mrs. Jones exclude the original $600,000 of capital gains from taxation. In addition, they can shelter the appreciation of their vacation homes over the period of time they own them (to the extent of the $500,000 limit on each residence). This strategy results in three interrelated benefits:

• The exiting of the business of owning the farm land (or apartment house, or whatever),
• The exclusion of otherwise taxable capital gains, and
• A potentially large addition to their liquid assets for retirement.

Is this legal? Darned straight it is.It may or may not be something that you or your client would ever want to actually implement, but perhaps it will help you better realize the tremendous benefits that Section 1031 of the Internal Revenue Code affords us all when we plan properly.

(We strongly urge you to consult your tax advisor to see how this exit strategy could apply in your situation.) 

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Please consider IOWA EQUITY EXCHANGE as your source for answers to your questions about Section 1031 like-kind tax-deferred exchanges. Contact us at your convenience for prompt, accurate information. Please think of us for your next exchange.

Ken Tharp

Providing Qualified Intermediary services for Section 1031 tax deferred exchanges all over the United States. Headquartered in Iowa, our services are available in Missouri, Kansas, Nebraska, Colorado, North Dakota, South Dakota, Minnesota, Wisconsin, Illinois, and all other states.

INTEGRITY.  PRECISION.  SECURITY.

Copyright © 2008 By Ken Tharp, All Rights Reserved. * Section 1031 Exchanges - Tax-Deferred or Tax-Free? * Contact Ken Tharp for information on Section 1031 tax-deferred exchanges anywhere in the United States.

 

 

 

On April 17, 2008,  the Iowa Landlord Association will sponsor the 2008 Spring Educational Seminar and Trade Show at the downtown Holiday Inn, 1050 6th Avenue, in Des Moines. The event starts at 8:00 A.M. and runs until 3:30 P.M. The speakers and their subjects are as follows:

• Dave Sollenbarger, ILA Director and Past-President – Introductions and ILA Update
• Tom Good, Iowa Civil Rights Commission – “Fair Housing / Discrimination”
• Joe Kelly, Lobbyist – Legislative Updates for 2008
• Gordon Kratz – “Effective Communication Techniques”
• Ron Bugennagen – “The GREEN rewards of Energy Efficient Rental Housing Clinic”
• Mark Hanson, Attorney – Legal Issues
• Officer Larry Rogers, D.M. Police Department – “Crime-Free Housing”

Iowa Equity Exchange will be present at the event as a vendor/exhibitor. Please stop by our table and register to win a $25.00 gift card to Best Buy! It promises to be a fun- and fact-filled day! More information can be obtained on the ILA web site.

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Please consider IOWA EQUITY EXCHANGE as your source for answers to your questions about Section 1031 like-kind tax-deferred exchanges. Contact us at your convenience for prompt, accurate information. Please think of us for your next exchange.

Ken Tharp

 

Providing Qualified Intermediary services for Section 1031 tax deferred exchanges all over the United States. Headquartered in Iowa, our services are available in Missouri, Kansas, Nebraska, Colorado, North Dakota, South Dakota, Minnesota, Wisconsin, Illinois, and all other states.

INTEGRITY.  PRECISION.  SECURITY.

Copyright © 2008 By Ken Tharp, All Rights Reserved. * Iowa Landlord Association Event on 4/17/08 * Contact Ken Tharp for information on Section 1031 tax-deferred exchanges anywhere in the United States. 

 

A few weeks back, the Internal Revenue Service and the Tax Division of the Justice Department took action to encourage potential exchangers to comply with the rules of Section 1031. (In reality, the IRS had little choice given the blatant fraud that was allegedly perpetrated.)

A gentleman named William Franklin Jones of Park Rapids, Minnesota, is accused of reporting bogus Section 1031 tax-deferred like-kind exchanges of property that he owned. The allegations contained in the indictment indicate that Mr. Jones sold property that he owned, initiated a Section 1031 tax-deferred like-kind exchange, identified replacement property that he already owned, then “purchased” the property he had identified, allowing him to take the cash from the sales tax-free, a flagrant violation of the rules of Section 1031.

The scheme: Mr. Jones has not been convicted as of this date, so he is entitled to the presumption of innocence. That being said, the scheme went something like this: Mr. Jones sold properties that he owned. The funds from the sale of those properties were placed into exchange accounts held by a qualified intermediary. (It is unclear whether the intermediary was part of the scheme or was unaware of what was taking place.) Mr. Jones then proceeded to identify his replacement properties, which were actually properties that he already owned. The “sellers” of those properties were actually friends of Mr. Jones. Those “sellers” signed Quit Claim Deeds transferring the properties to Mr. Jones. The qualified intermediary who was holding the funds transferred those funds into accounts that Mr. Jones opened in the names of the “sellers.” The net effect of these actions was to allow Mr. Jones to sell his properties and avoid the capital gain taxes that should have been paid on those sales, end up with the cash in his own pocket (with the assistance of his friends, the “sellers”), and wind up owning the other property that he actually already owned.

Hardly proper, and hardly something that the IRS could ignore once they learned of it. Mr. Jones now faces 21-27 months in the Graybar Hotel for his attempts to avoid the $90,000 in taxes he should have paid.

A word to the wise—Section 1031 tax-deferred like-kind exchanges are a powerful tool for the creation of wealth, but do not abuse them.

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Please consider IOWA EQUITY EXCHANGE as your source for answers to your questions about Section 1031 like-kind tax-deferred exchanges. Contact us at your convenience for prompt, accurate information. Please think of us for your next exchange.

Ken Tharp

 

Providing Qualified Intermediary services for Section 1031 tax deferred exchanges all over the United States. Headquartered in Iowa, our services are available in Missouri, Kansas, Nebraska, Colorado, North Dakota, South Dakota, Minnesota, Wisconsin, Illinois, and all other states.

INTEGRITY.  PRECISION.  SECURITY.

Copyright © 2008 By Ken Tharp, All Rights Reserved. * IRS Subtly Encourages Compliance – An Example * Contact Ken Tharp for information on Section 1031 tax-deferred exchanges anywhere in the United States.