These notes are not stand alone ! They are intended for use in conjunction with the class

 NON - CONCURRENT EXCHANGE SAFE HARBOR RULES

For:  INDIVIDUAL  TAX PAYERS

Who else can do Exchanges?

Corp.,   Partnership,   LLC    (all or none rule)

Tenant in Common Owner

Related Parties

•   DEFER    INCOME TAX

•   INCREASE    INVESTMENT   $$

•   Our Clientís $22,500 Tax Problem

•    Not Tax Class

•   Not  Legal Class

                   A  Marketing Class

MORE DISCLAIMERS

You Need:

• SUPPORT  OF  BROKER

• CPA  ADVICE

• ìDOCUMENTSî

WEíLL SUGGEST & ASSIST Mr. & Mrs. Pigg WITH   A NON - CONCURRENT EXCHANGE

BEFORE  WE  GO  TOO  FAR WHATíS  IN IT  FOR  US ?  THE R.E.  LICENSEE $ $ $ $ $

SELL PIG FARM AT $ 180,000 GET    $ 9,000

 HELP BUY THE CAT HOUSE AT $ 360,000
GET $ 18,000

EARN $ 27,000 

 ADDENDA TO:

• LISTING

• SELL PIG FARM

• BUY CAT HOUSE

 WHO ARE THE PLAYERS

• R.E. LICENSEE  &  Broker

• ATTORNEY

• ACCOUNTANT

• FACILITATOR

• OUR ìCLIENTî  &  Md. AGENCY

• BUYER OF PIG FARM

• SELLER OF CAT HOUSE

BRIEF OVERVIEW OF THE   PROCESS

 Normal Process

Sell,  Hold Money,  Buy     

BRIEF OVERVIEW OF THE   PROCESS

 WE LIST PIG FARM

 PIG FARM UNDER CONTRACT

•  Funds ASSIGNED TO FACILITATOR ñ not our job!

• Piggs  SETTLE  with  BUYER

•  FACILITATOR  HOLDS  MONEY   ( $ 95,000 )

•  WE GET PAID

•  OUR  CLIENT  IDENTIFIES THE  CAT  HOUSE

•  CONTRACT  TO  BUY  CAT HOUSE

•  WE HELP  M/M PIGG TO GET A  NEW MORTGAGE

• FACILITATOR  USES $ 95,000 TO  BUY  CAT HOUSE

•  OUR  CLIENT GETS DEED  FOR  CAT  HOUSE

• WE  GET  PAID 

• TAX  FREE IS  REALLY TAX  DEFERRED 

  • SAYING ìTAX FREEî ILLEGAL OR   UNETHICAL?

LIKE KIND

• REAL PROPERTY  FOR  REAL PROPERTY

• IMPROVED   AND  UNIMPROVED

• FIXTURES  &  LEASEHOLDS OVER  30 YEARS  REMAINING

CLASSIFICATIONS OF R.E. HOW TAX PAYER USES   PROPERTY

 

• INVESTMENT / INCOME   YES

• TRADE / BUSINESS              YES

• RESALE  TO  CUSTOMERS   NO

• PERSONAL  RESIDENCE       NO

• SECOND HOME                        NO

• Can I Change the ìUseì of a Property?

BOOT

• CASH

• PERSONAL  PROPERTY

• MORTGAGE  Relief

• USUALLY  TAXABLE

RECOGNIZED:  GAIN  SUBJECT   TO TAX    NOW

You Recognized the IRS  AGENT  AT  CLOSING He wants the   $$$ Now !

REALIZED  GAIN: PROFITî  BUT  NOT  YET SUBJECT  TO  TAX

What is BASIS

*  COST  OF  ACQUISITION

*BY  GIFT

*INHERITANCE

ADJUSTED   BASIS

*ORIGINAL BASIS

*PLUS  IMPROVEMENTS  MADE

*LESS  DEPRECIATION TAKEN

SAMPLE  WORKSHEET SHOW  TO  A PROSPECTIVE  CLIENT Reviewed by BROKERíS  CPA !!

INCOME TAX LIABILITY

*SALE  PRICE  PIG FARM   $ 180,000

*LESS  SELLING  COSTS     $ - 10,000

*ADJUSTED  SELLING  PRICE $ 170,000

*Adjusted Sale Price     $ 170,000

*Less  Original  Basis    $ 120,000

*Gain   Taxed at  @  15%     $ 50,000

            Cap. Gain Tax on Sale    $ 7,500

*Depreciation Taken $  40,000

*Dep.   Tax  @  25%    $ 10,000

*Total Tax IRS at Least  $  17,500

*State Income Tax       $    5,000

TOTAL TAX - IF ìSOLDî    $22,500

Effect of a Sale is EVERY DOLLAR of Purchase Price

 OVER $ 80,000 IS TAXABLE

Bought Pig Farm $ 120,000

less depreciation  $ - 40,000

Adjusted Basis     $   80,000

Every Dollar Over $   80,000 Taxable

$   170,000    ADJ. SALE P.

   -   80,000    ADJ. BASIS

      $90,000  Subject to Tax

 Depreciation  &  Capital GAIN

Depr.      taxed   @    25%     Gain       taxed    @    15%

NEXT  STEP  HOW  MUCH  CASH  DO  YOU  GET  AFTER  IRS ?

3 examples with different  Mortgage Amounts

FUNDS FOR REINVESTMENT
Existing loan Example #1

*SALE PRICE        $ 180,000

*SELL COSTS        -   10,000

*LESS MORTGS   -   75,000

*BEFORE TAX  CASH OF  $ 95,000

*LESS  TAX  LIABILITY  OF  $  22,500

*CASH  AVAILABLE  TO REINVEST   $  72,500

$ 72,500 CASH DOWN AT 25%   ONLY ALLOWS
FOR A   $ 290,000 PURCHASE PRICE

TAX DEFERRED  $ 95,000  AT  25 %  ALLOWS  $ 380,000
$ 22,500 as 25% dwn.  = $ 90,000 more purchase power

Remember Remaining Loan Balance at Time of Sale

 Has No Effect on the Amount of  Income Tax  Owed By Seller

#2         SALE   VS   EXCHANGES
SALE PRICE             $  180,000

*LESS COSTS               -  10,000

*LESS MORTGAGE    -  15,000

*CASH                          $  155,000

*LESS  TAX    $   22,500

* $  132,500  AVAILABLE

$ 132,500  @  25 %     $ 530,000

$ 155,000  @  25 %  $ 620,000

$ 90,000 X 5% Commission= $4,500

# 3   SALE  VS. EXCHANGE

 

* SALE PRICE            $ 180,000

* LESS COSTS                 10,000

* MORTGAGE             -  150,000

* CASH                         $  20,000

* STILL OWE               $  22,500

* CASH  AVAILABLE  ( $ 2,500)

New purchase at $360,000 and  3 %  GROWTH   FACTOR

$ 360,000  @  3 %  GROWTH YIELD    $ 10,800 PER  YEAR

$ 290,000 = yield $ 8,700
 $ 2,100 yr / $22,500  tax saved= 9%

BASIS IN NEW PROPERTY

*ADJUSTED  BASIS Pig Farm

*PLUS  CASH ( Boot ) GIVEN

*PLUS  NEW  MORTGAGE

*LESS  CASH ( Boot ) RECEIVED

*LESS  OLD  MORTGAGE  RELIEF

Equals  BASIS IN NEW PROPERTY

NEW  BASIS   WITH  NUMBERS

*$ 80,000    ADJ BASIS  FROM  PIG FARM

*- 0 -        PLUS  BOOT  GIVEN

*$ 270,000   PLUS  NEW  MORTGAGE

*-0-         LESS   BOOT  RECEIVED

*$  75,000    LESS   OLD  MORTGAGE RELIEF

 $  275,000   NEW BASIS NEW   DEPRECIATION  

 ACCOUNTANT  DOES  THIS

*$ 275,000 LAND & BUILDING

$ 360,000 is Purchase price ( not basis )

*LAND AT 33 %   =   $  90,000

*BLDS   AT 67 %   =  $ 185,000

 39 YEAR  =   $  4,725 + / -   DEPRECIATION

 ìTRADE   OFFî  LOWER  DEPRECIABLE  BASIS  FOR  NO  CURRENT  TAX   TO  IRS

NOTE:   Owner Financed  Installment Sale  Instead of 1031 Exchange
IRS Taxes at 25% for Depreciation Until Exhausted

Then at 15% Capital Gain

Owner Financed   $ 325,000 sale price

Bought                  $ 200,000

Depreciation         $ - 50,000

Adjusted Basis     $ 150,000

When you sell it  Everything over $ 150,000 taxed at either  15%  or  25%

$ 50,000 Dep.  at   25%

Owner Financed
$ 325,000 sale price

Sold                                        $ 325,000

Bought                                   $ 200,000

Cap Gain                                $ 125,000

Cap Gain taxed at  15%

$ 18,750

Owner Financed
$ 325,000 sale price

Sold                        $ 325,000

Less                        $ 150,000  Adj. Basis

Taxable           175,000  taxable

If  Not Installment Sale

$ 125,000  15% cap tax  -- $ 18,750

$ 50,000    25% dep. tax -- $ 12,500

Tax due is $ 31,250

Owner Financed with 20% down

*Sale Price $ 325,000

*20% down payment

*$ 65,000 Down

*$ 260,000 loan

*$ 2,000 month P & I

20% down

Ratio Adjusted Basis /  Sale PRICE 

150,000 / 325,000 = .45 (rd) 45%  Not taxable

175,000 / 325,000 = .54 (rd)

55% of everything is taxable Upon receipt

Owner Financed    20% Down

55% of everything is taxable upon receipt

$ 65,000 Down Pmt. X 55% =  $ 35,750 of D P   is   Taxable

$ 35,750 X 25%  Dep.  rate =    $  8,900  tax    in year received

P & I     $ 2,000 /Mo.

$ 1500   Interest   taxable as ordinary Income

$1,500  X  28% tax rate  $ 420 tax to IRS

Owner Financed
P & I     $ 2,000 / Mo.

$ 1500   Interest  taxable as ordinary Income

$ 500  Principal  55%  of $ 500  is  Taxed

Taxed at  25% Dep.  rate first  $ 125 is tax

P & I     $ 2,000 / Mo.

$ 2,000  monthly P & I

                -  545      ($420 and $ 125)  Total Tax - 1 month

             $ 1,445     spendable

Can not combine Installment sale with 1031 Exchange

THE  SALES PROCESS

YOU  MEET  A  PROSPECT and  MAKE  YOUR  LISTING  PRESENTATION

YOU  DISCUSS  1031  EXCHANGE

 LISTING REQUIRES :

*LISTING  ADDENDUM

*WHEN  TO  PUT  IT  IN !

*WHY  PUT  IT  IN NOW

ìRemember Our Objectiveî    WHAT IF THEY CHANGE THEIR MINDS ?

*NO  OWNER  FINANCING

  
OPEN  THE   LISTING  FILE  ìData Baseî or  ìCHECKLISTî  SYSTEM

 GATHER   NORMAL   DATA  FOR THIS  TYPE  OF  LISTING

BROKERíS ìCYAî     THANK YOU  FOR LISTING LETTER

THEN LICENSEE MUST   Fax   E-mail   MAKE A PAPER TRAIL  !

Why ?   What did you do October 12, 2002 ?  

 
 CONTRACT  TO  BUY  FARM

*SELLER  MAY  ASSIGN

*BUYER  GETS  GOOD  TITLE

*BUYER  WILL  SIGN  PAPERS

*Audit risk to Buyer

 
ASSIGNED TO FACILITATOR

Questions your client will ask

*HOW  DO I  FIND A  FACILITATOR?

*WHO  HAS  MY  $$$$

*WHO  WRITES  THE AGREEMENT

*WHATíS  IN  THE  AGREEMENT

WHATíS in the Agreement ? 

* IDENTIFY THE PARTIES

* PARTIES NOT RELATED

* WHERE  HOLD  $$$

* IF NOT IDENTIFY in 45 days

* IF GO PAST  180 DAYS

 
 CONTRACT  TO  BUY  FARM SELLER  needs TO  CONTROL  Closing DATES

 SETTLE ìDISPOSEDî PROPERTY  12 / 25 / 02

  
 45  DAYS  TO IDENTIFY      2 / 6 / 03

180 DAYS TO ACQUIRE      MID - JUNE,  2003

 BUT  BEFORE  FILING  DATE FOR  TAX  RETURN including extensions

Identify    v. Contrac

*WHAT  IS  ìIDENTIFICATION

*WHO  WRITES   IDENTIFICATION  NOTICE

*WHAT  ABOUT  ìMURPHYî   &  THE  45  DAY  RULE

CONTRACT  TO  ìACQUIREî REPLACEMENT

*BY  THE BUYERS

*NO  EXTRA  COST TO   SELLER

*SELLER AGREES  TO  SIGN  PAPERS

* AQUIRED  PROPERTY  MUST   BE  SETTLED  BEFORE DAY 180 

 

TRADE  MULTIPLE  PROPERTIES ?

*MULTIPLE  PROPERTIES OUT

* MULTIPLE  PROPERTIES ACQUIRED

* LIST  REASONS  TO  EXCHANGE

* MAKE A STANDARD BROCHURE

*FINDING A    CPA

 

*NOT  ìCAN YOU ì   BUT  HOW  MANY  HAVE  YOUî

Does who we work for, affect what we can tell the other parties?

*DISCLOSURE  OF  MATERIAL  FACTS

*ENVIRONMENTAL  DISCLOSURES

* 

Regular Exchange Review

*Identify within 45 days of closing

*Purchase before 180^th day of closing

*Neutral facilitator

*Donít touch or control cash

*All cash into new property   ìBuy up,   mortgage up   &   spend all the cashî

  Reverse rules

*Sell & close old property before 180^th day of closing on new property

*Facilitator must hold title

*Facilitator must take  depreciation

*Increased IRS reporting requirements means higher costs Avoid a reverse ñ Delay Closing

*Make purchase of new contingent on sale of relinquished property

*Close later on new property, try to motivate seller with:

ñIncreased earnest money

ñPart of earnest money nonrefundable

ñIncrease purchase price

Avoid a reverse

*Aggressive marketing of old property

ñLower listing price

ñAgree to terms of an existing offer seller may have

ñRemember : no owner financing