What’s with 1031 Exchanges?

photo by www.rentalrealities.com

US News & World Report quoted me in Why 1031 Exchange Investments Are Worth a Look. It opens,

With tax reform nearing final passage in Congress, one of the most underlooked, but potentially overpowering, tax-advantaged investment tools is the 1031 exchange, which was spared major changes in the proposed legislation.

The 1031 exchange, especially when related to real estate investments, is all about “timing and taxes” and the better you manage the two, the more money you can make.

What is a 1031 exchange? By and large, IRS Section 1031 covers “exchanges” or swaps of a specific investable asset (such as real estate) for another. The end game for the taxpayer/investor is to avoid having exchanges listed as taxable sales. But if they’re executed within the confines of a 1031 exchange, taxes are either significantly reduced or eliminated altogether.

The primary benefit of 1031 exchanges related to real estate investments is tax deferral, or avoidance of capital gains taxes on the sale of appreciated investment property, says Kevin O’Brian, a certified financial planner at Peak Financial Services, in Northborough, Massachusetts.
“If held inside owner’s estate at death, the asset would receive a step-up in cost basis to the market value, as of the date of death,” O’Brian says. “Therefore, heirs could avoid capital gains taxes, if sold after inheriting it as well.”
Others note that following IRS guidelines on Section 1031 are a must.
“1031 exchanges allow a real estate investor to sell one property that has appreciated in value and not pay capital gains tax so long as the investor buys another property,” says David Reiss, a professor at Brooklyn Law School. “This is a powerful tax deferral tool that many sophisticated real estate investors use. It is, however, somewhat complicated to pull off and involves some additional costs and planning so it is not for those looking for a quick and easy way to defer capital gains.”
What are the rules for a 1031 exchange? The rules governing 1031 exchanges have to be followed carefully and it makes sense to plan for it with an appropriate team of professional advisors and a reputable 1031 exchange company, Reiss says.
“Generally, the investor needs to sell the property that has appreciated in value; place the proceeds in escrow with an intermediary; and then use those proceeds to buy a replacement property within a certain period of time,” he says. “If the investor fails to follow the requirements for the exchange, he or she may be taxed on the full capital gain.”
Investors should also be sure to use a 1031 exchange company that meets specific criteria. “Not the least of which is that it’s properly insured to protect you in case your funds disappear from escrow,” Reiss says. “This has been known to happen.”

The Cost of Selling Trump’s Empire

photo by KylaBorgPolitico quoted me in Selling His Empire Would Cost Trump Money. A Lot of It. It opens,

Donald Trump’s critics say the only way for him to keep his business interests separate from the public’s interest is to simply get out of business entirely, selling his companies and putting the proceeds into anonymous assets that someone else can manage.

But there’s nothing simple about it: unloading a real estate empire as large as Trump’s is a lengthy, complicated process fraught with ethical pitfalls, one that could end up costing a fortune.

“He has to make a choice,” said David Reiss, director of Brooklyn Law’s Center for Urban Business Entrepreneurship. “How much pain is he willing to take?”

Trump, who’s expected to lay out a plan to address conflicts of interest at a press conference Wednesday, heads a particularly difficult estate to unwind. Forbes has pegged his net worth at $3.7 billion in September, attributing most of that to real property holdings tangled in debt, partnership agreements, management contracts, branding deals and tax deferrals.

Ethics watchdogs say Trump’s cleanest break would be to sell his company to the public, but an initial public offering — especially one that folds in most or all of Trump’s scattered businesses — would be complicated, costly and time-consuming.

“The nature of the business doesn’t lend itself to going public,” said Jan Baran, co-chair of Wiley Rein’s election law and government ethics practice. “Rolling in all the real estate and the royalty contracts and all the other orphans like wineries and steaks, it’s a little hard to imagine any public companies that resemble what his business is, because it’s such a hodgepodge of things. It would take a while, it would take at least a year.”

What’s more, Baran noted, an IPO would require underwriters to raise capital and pull together an offering — raising new concerns about investment firms potentially currying favor with the new administration.

“Are the ethics complainers willing to let Goldman Sachs do the underwriting on this public offering?” he said. “Somebody’s got to put it together.”

Even if Trump chose to skip the IPO and just liquidate his assets via direct sales, he’d face a complex task — and a costly one.

“This would be an extraordinarily difficult situation,” said Neil Shapiro, a law partner at Herrick Feinstein in New York. “It would certainly be unprecedented in terms of somebody liquidating a portfolio of this size. We’re in uncharted territories here.”

The problems start with finding a buyer. The pool of people shopping for, say, a Fifth Avenue skyscraper is small, and only the buyer and seller can say for sure whether the price paid is fair. As such, selling a property raises nearly as many ethical quandaries for Trump as owning it. A buyer looking to curry favor with the next president might pay too much. Another might do Trump a favor by making a quick deal while paying too little.