§1031 Exchange Intermediary

I hope you're hanging in there with me on this subject. It seems like there's a new development every day or so now.

Yesterday I posted on the fact that Congress is back in session and the Farm Bill is something that they will be working on putting together as soon as possible, given that the spring planting season will be upon us before long. Here's today's news:

On Monday (yesterday), there was a revision issued in relation to estimated revenues to be raised by the reclassification of like-kind status regarding subsidized farm land. The original estimate was an increase of $27 million over ten years. The revision that was issued yesterday increased that estimate to $281 million, more than ten times as much as the original estimate. That is bad news for the future of the subsection of the bill that relates to Section 1031. In English, what that all means is that in order to have the provision removed from the bill, the House and the Senate will have to come up with some other manner within the bill to compensate for that $281 million. That will necessitate either a tax increase of some sort or the reduction or elimination of a tax benefit that is contained somewhere else in the bill. Obviously, that will make removing the language changing the definition of like-kind even more difficult than it was before.

Even more reasons to call those senators and representatives... have you made your call yet? 

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 Next Verse... Today's Update on the Farm Bill * Contact Ken Tharp for information on Section 1031 tax-deferred exchanges anywhere in the United States.

As part of a continuing effort to keep you up to date on the implications that the Farm Bill currently being considered in Washington, DC. may have on Section 1031 tax-deferred exchanges, here's the latest: As you know if you have read my two previous blogs on this subject (the original and the update), the Farm Bill passed through the Senate in mid-December 2007 with one very important subsection (Section 12504) that would redefine the concept of like-kind in regards to Section 1031 tax-deferred exchanges. The essence of the change is to redefine all farm land that receives any government subsidy as non-like-kind to other farm land and other previously-considered like-kind real property, which includes all real property that is held for investment or used in the pursuit of a business or trade. The implications of this change to farmers who have owned their property for many years and would now seek to sell their property in order to retire would be horrendous. They either would be unable to sell entirely or would be faced with the prospect of giving up the very subsidy that the government essentially forced them to accept and deflating the value of their land accordingly in order to be able to exchange out of it into a more appropriate investment for their retirement years.

The House version of the Farm Bill has no such language regarding Section 1031 tax-deferred exchanges. In fact, it is completely silent on the subject of Section 1031 exchanges.

As you probably know, bills that make their way through Congress have to be reconciled between the two houses before they are sent to the President for his consideration. So the two houses will have to meet and work out the differences between the two versions. This could begin happening as early as mid-January when the members return from their Christmas/holiday breaks. The objective will be to hammer out a compromise in early 2008 in order to get the new bill enacted in time for spring planting season.

You can rest assured that the association to which Iowa Equity Exchange belongs, the Federation of Exchange Accommodators, will be working hard to oppose the provision that the Senate has passed. (The Federation of Exchange Accommodators is a national association dedicated to the Section 1031 tax-deferred exchange industry, its Qualified Intermediaries, the protection of the public, and the furtherance of the industry in general.) As I mentioned in the previous blogs, if you are so inclined, please send your congressional representatives a letter, give their offices a call, or send them an email to express your opinion about this potentially disastrous alteration to Section 1031 tax-deferred exchanges.

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.

Part of a successful Section 1031 tax-deferred exchange is meeting the requirement that potential replacement properties be properly identified within forty-five calendar days after the closing of the relinquished property.

Time out for definitions:  Replacement property = the properties that an exchanger would consider purchasing to replace the ones s/he is selling; Relinquished property = the property or properties that the exchanger is selling.

Some property owners who have thought about starting a Section 1031 tax-deferred exchange are concerned about the 45-day period being too restrictive. For that matter, many exchangers who have both successfully and unsuccessfully attempted an exchange feel the same way. I can remember a time or two when I've had similar feelings in my own exchanges. Let's break it down, though...

While it is true that once the 45-day clock starts to tick, the only thing that can extend that clock is a Presidentially-declared disaster area (and I, for one, would hate to count on that happening in my particular area to gain some extra time), in reality most exchangers have quite a bit longer than 45 days. Here's why I say that:

No one decides to do a tax-deferred exchange in a vacuum. What I mean is, when you decide to sell a property with the intention of reinvesting the proceeds through an exchange, you are aware that you're doing it. So you start your marketing process today, let's say. Along with your marketing, you are likely thinking about what you would like to buy with the proceeds, so you start looking. In most cases, it takes some time to find a buyer for your property. Let's say it takes 30 days to get a contract on the property you're selling. How long does it take after that to close the sale? Again, in most cases, probably another 30 days at least. In today's somewhat slower market, are those two estimates optimistic? Maybe so, but let's go with them. That's 60 days that are available before the 45 days starts.

So what would you do if you found a property that you wanted to buy prior to the time you had a contract on the one you were selling? You have a couple of options. One would be to employ what is known as a reverse exchange, which I suggest we leave to another blog down the road. What I suggest might be the simplest solution would be to attempt to put together a purchase agreement that is subject to the sale of your relinquished property. 

To conclude, with proper planning, the 45-day identification period does not have to seem quite so troublesome as it might outwardly appear.  

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.

The acquisition of land in West Des Moines for the United States headquarters of London-based Aviva was finalized recently. Aviva is the fifth-largest insurance group in the world based on gross worldwide premiums as of 12/31/06. Aviva US is ranked #1 in sales of "indexed life insurance," which appears to be one of the new code words for whole life policies.

The new facility will house Aviva's 360,000 square foot office building and corporate campus. It will be located on the southwest corner of the intersection of Jordan Creek Parkway and Mills Civic Parkway. That makes the new facility situated about 2.5 miles west of my company's headquarters lavish headquarters, which are slightly smaller than Aviva's proposed construction. 

Des Moines continues to be a major headquarters for the insurance industry, and this is further evidence.

Wonder if there was a Section 1031 exchange involved in acquiring the land? I'm pretty sure there was one involved for the seller of the land...

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.

As an Iowan, I think I owe it to the rest of you to try to give you some idea of what's happening in this state with everybody and his brother (or sister) trying to become the presidential nominee for their particular party. Let me give you a summary of the situation - IT'S NUTS!!

The caucus is this Thursday night, and after that we can all go back to being normal, boring Iowans, and the national media can forget about us. This morning, our house received no fewer than three phone calls before noon, all from very nice people purporting to be conducting a "survey" for one reason or another. It's gotten to the point where they don't even care whether you're a registered Republican, Democrat or independent. Someone on another phone call (not one of the "survey" calls) just launched into asking me "If the caucus were held today, would you support Hillary Clinton, Barack Obama, John Edwards, Bill Richardson, Chris Dodd, Joe Biden, or Dennis Kucinich?" without even asking me if I was a Democrat, which I'm not. I had to break it to her that I wasn't very likely going to be supporting any of them, since I wouldn't be at a Democratic caucus. She said thanks and hung up, without even trying to persuade me to go. So what did she glean from that phone call, I wonder?

Chris Dodd's sister came to our door a few days ago, along with some other family members. My wife and I met Mitt Romney and his wife, Ann, at the Des Moines Art Festival this summer; they weren't campaigning, they were browsing. For the past month, every time the phone or the doorbell has rung, I've fully expected it to be a political call.

Wow, I just thought about the mail... that's a whole different story. Every day, five, six, seven pieces of political mail show up in our mailbox. Fourteen medium-sized trees were felled to provide the paper that has been delivered to our house alone during this campaign. (Okay, I made that up, but you get the point.) 

So what's the point of this blog? Just this - for those of you who think a national primary might be a better solution than our present system, just be careful what you wish for! Right now, you've managed to dump all of this off onto Iowa, New Hampshire, and a few other "carefully selected" states. A national primary would mean that we'd all be drawn into the madness!

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.

The headline in the Des Moines Register Business section today says, "Home prices fall by a record 6.7%." That's in October year-over-year terms, according to the article. The story also notes that October was the 23rd consecutive month during which prices either fell or grew more slowly than they did in the previous month. 

According to this article, the previous record decline was 6.3% in April of 1991. On another sunny note, an economist named Patrick Newport with an outfit called Global Insight says that home prices could fall another 10% over the next 12-18 months.  

Okay, so that wasn't very much fun to read, was it? Let's see if we can find anything positive. Here's something in a sidebar that says Des Moines-area home prices declined less than 1% in November from a year ago. Still a decline, but not nearly so much as the national average. I have a feeling that is pretty much the case in the midwest at large. Places like Nebraska, Missouri, Minnesota, Illinois, North and South Dakota, Kansas, Indiana, Wisconsin, and the like, are a lot like Iowa - we tend to kind of poke along at a reasonable appreciation rate of 3-4% per year on average. We don't have the wild swings of 10-20% up or down annually like the coasts. Is that a good thing? Well, it sure makes projecting an investment forward a little easier.

Here's another thought, and it's related to my business of Section 1031 tax-deferred exchanges. An exchanger is, by definition, both a buyer and a seller. When the market is down, he or she can take advantage of the situation as a buyer; when the market is up, he or she stands to receive more for the property being sold. Is that a win-win? Well, it's at least an "okay-okay." If you're a smart buyer and a smart seller, it can be a win-win every time. If you're a real estate agent reading this, think about the possibility of trying to find an investor to work with during this market lull, and bring up the idea of an exchange. It could result in both a listing and a sale for you! And if you need a Qualified Intermediary, think about Iowa Equity 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.

I feel like I'm just getting started here at activerain, but I wanted to wish anyone who reads this a very Merry Christmas (a day late), a Happy New Year, and happy holidays regardless of what you happen to celebrate. Special wishes to anyone who is spending the holidays away from home serving in the military or in public service of any sort. Be safe and come home soon. 

Here's wishing a wonderful 2008 to all regardless of the market conditions. Remember the words of someone who's on the radio quite a lot: something along the lines of "There may be a recession going on, but I choose not to participate in it!"

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.

According to the Des Moines Register, Iowa farmland prices set a record this year for the fifth year in a row. The average price of farmland in Iowa is now $3,908 per acre. This is based upon an annual survey conducted and released by the Iowa State University Extension.

Here’s the big news - $3,908 per acre is a 22% increase over last year’s average, which is the largest one-year increase since 1976. Pretty sweet ROI, huh?

Why would this be, in this era of slow real estate markets? Two reasons, according to the survey respondents:

1. Higher corn and soybean prices due to demand for ethanol and for export, and,
2. Low interest rates.

Factoid from the article: about 2 out of 3 acres of Iowa cropland are owned by Iowa residents.

So, will this sort of increase in value continue? According to Michael Duffy, the ISU economist who conducts the study, “We’ll see a strong land market in Iowa for at least five years… I don’t think this demand will diminish in the near future. I don’t see anything that can cause a downturn.” On the other side of the coin, Tom Huston, who was superintendent of banking in Iowa during the farm crisis of the early 1980s, says that land prices are reaching a point where they might not be justified by the revenue the land can generate, which was one of the reasons for the problems in the 1980s, when average per acre values fell from $2,147 in 1981 to $787 in 1986. Right now, it seems like ethanol is the key—if demand continues to be strong, land values may be held up by that strength.

Another factoid: only 25% of Iowa farmland carries any debt. Wow!

When values are adjusted for inflation, it’s interesting to note that we are not all that near the high point of yesteryear. In 1979, prior to the farm crisis, Iowa farmland values averaged $5,564 per acre (again, adjusted for inflation).

Final factoid: Sixty percent of farmland purchasers in 2007 were farmers, which is about the same percentage as last year. Also remaining about the same were the percentages of investors buying (35%), and “others/beginning farmers” (5%).

The survey falls in line with two other surveys that were released recently: the Chicago Reserve Bank’s survey showing an October to September increase of 21%, and an Iowa farm real estate brokers’ survey of its membership, which showed an increase of 20.7% over roughly the same period as the Chicago survey.

Anybody want to buy some Iowa farmland? If so, see Jason Smith!

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.

A little over a month ago, I wrote a blog about Section 12504 of the Farm Bill that was under consideration by the Senate at the time. (You can read it here.) The focus of the blog was the general impact on Section 1031 that a particular subsection of the bill might have. The gist of the whole thing was that the proposal sought to redefine the concept of "like-kind" property, which until now has had a very broad definition when it comes to real estate.  (You can exchange raw land for an apartment building, three rental houses for an industrial building, an office complex for a farm, etc.) The provision within the Farm Bill would make it so any land that has been receiving government subsidies (which includes the farms of nearly all family grain farmers) would no longer be considered like-kind to other real estate held for investment or used in the pursuit of a business or trade. The supposed purpose behind this provision is to help keep land prices down because so much land is being purchased through 1031 exchange proceeds, although I don't know how true that is. The other factor involved might be an intention to reduce the amount of ground under subsidy programs (because a farmer can opt out of the subsidy program and have his land then qualify for an exchange). The problem, as mentioned in my first blog, is that the entire concept does little beyond punishing the family farmer for accepting a subsidy that was virtually forced on him in the first place. Now the farmer with no actual heirs, or none willing to take on the burden of the farm, who has worked his entire life in agriculture, all of a sudden has his primary means of the disposition of his land (a Section 1031 exchange) taken away from him. So much for helping the family farmer...

THE NEW INFORMATION

I am unhappy to report that the Farm Bill that has now passed out of the Senate has done so with the provisions regarding Section 1031 pretty much intact. The bill now goes to the House of Representatives, where reason may prevail. Beyond that, should it get through that body, the President has promised a veto of the bill, so we can hang our hats on that for the time being. But once again relating to my first blog on the subject, the crux of the matter is that Congress is now considering Section 1031 of the Internal Revenue Code as low-hanging fruit as to the possibility of raising additional tax dollars. In other words, if they can change the definitions contained within Section 1031 through the Farm Bill, what's to stop them changing other aspects of the exchange process to further restrict our alternatives?

ACTUAL LANGUAGE FROM THE BILL:

For those of you who enjoy this sort of thing, here is the language from the bill itself:

Section SEC. 504. MODIFICATION OF SECTION 1031 TREATMENT FOR CERTAIN REAL ESTATE.

(1) IN GENERAL - Unimproved agricultural real property and improved real property are not property of a like kind.

(2) UNIMPROVED AGRICULTURAL REAL PROPERTY - For purposes of this subsection, the term unimproved agricultural real property means real property -

(A) which is unimproved;

(B) which is used for farming purposes (within the meaning of section 2032A(e)(5)); and 

(C) with respect to which a taxpayer receives, in the taxable year in which an exchange of such property is made, any agriculture program payments or Com-modity Credit Corporation loans.

(3) EXCEPTION- Paragraph (1) shall not apply with respect to any unimproved agricultural real property which, not later than the date of the exchange, is permanently retired from any program under which any payment, loan, or benefit described in paragraph (2)(C) is made.

If you are so motivated, contact your representatives to let them know how you feel about what I consider to be an attack not only on farmers, but on the very essence of Section 1031 of our tax code.

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.

Something interesting happened last week, and it turned out to be a lot of fun. I had the opportunity to visit by phone with another ARer, Jason Smith. Jason is exactly the kind of real estate agent I like to deal with when I need someone to represent me: the kind that is interested in broadening his horizons and learning about new things. Jason had asked me some questions about Section 1031 exchanges, and the two of us just decided that it made the most sense to get on the phone and talk about things. 

One of the things that I enjoy doing is making Section 1031 exchange presentations to real estate offices around metro Des Moines, and even outside of the immediate metro area. Usually they're given at the beginning or end of a sales meeting. The purpose of the presentation is to provide agents with the basics about Section 1031 exchanges and make them aware of what they need to know to properly represent their sellers of property that might qualify for an exchange. With Jason, what I did was email him the powerpoint presentation that I use for the sales meetings. Then we both opened up the powerpoint and went through it together. It was great, because Jason could stop me and ask questions or for more information about a particular subject. I think it was beneficial for him, and it was great for me to get to know him a little and be able to provide some education one-on-one. The whole thing took about 45 minutes, but part of that was just chit-chatting about the business and what was going on in our two worlds. The other cool thing about my friendship with Jason is that I know that over time, I'll learn a lot from Jason about farmland, the Loess Hills, and recreational land sales.

If there are any other ARer's out there who would like to have a one-to-one conversation about Section 1031 exchanges, just send me an email. I'll be happy to spend some time with you, too. And if your office would like to schedule a presentation at a sales meeting, let me know. We're set up to do remote presentations, too. 

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.