1031 Exchange Services PRESENTED BY Eric Brecher Esq

1031 Exchange Services PRESENTED BY Eric Brecher, Esq. Certified Exchange Specialist® 1031 Exchange Services (917) 455 -1551

What you will learn today… • Why Exchange? • Exchange Timelines & Rules • Types of Exchanges • 1031 Exchange Recent Developments • The Role of the Qualified Intermediary 10/26/2021 2

Like – Kind Exchanges – The Basics • Tax Code • Property Qualifications • Rules 10/26/2021 3

1031 Exchange – Tax Code • No gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like-kind, which is to be held for productive use in a trade or business or for investment. OR in Layman’s Terms: • A Section 1031 Exchange allows an owner of investment property to exchange property and defer paying federal capital gains tax, depreciation recapture tax and state income taxes if they purchase “like-kind” property following rules and regulations of the IRC. 10/26/2021 4

Why Exchange? Tax Deferral • 20% Federal Capital Gain Tax for assets held > 1 year • 25% Federal Depreciation Recapture Tax • State Income Taxes (if applicable) • 3. 8% Medicare Tax on net investment income Other Advantages of Exchanging • Diversification • Consolidation • Greater cash flow • Estate planning 10/26/2021 5

Qualifying Properties that DO Qualify Properties that DO NOT Qualify Property held for investment, income, or a trade or business, and not primarily for sale. • Rentals homes/condos/coops • Raw land • Retail • Industrial/Warehouse • Office • Agricultural • 30 Year Leases • Easements • NNN & DST’s Stock in trade or other property held primarily for sale. • Stocks, bonds, notes • Other securities or evidences of indebtedness or interest • Certificates of trust or beneficial interests • Choses in action • Partnership Interests • Primary Residence 10/26/2021 6

Qualifying for a 1031 Exchange Raw Land Rental Homes Farms/Ranches Like-Kind Apartments Office Buildings Industrial Commercial 10/26/2021 Retail Properties 7

Qualifying Properties Exchanges that NEVER Qualify • Real property for personal property • Livestock of different sex • Real property in the US foreign real property and vice-versa 10/26/2021 8

Calculating Gain Facts: $1, 000 purchase price $100, 000 depreciation $50, 000 capital improvements $2, 000 sales price Adjusted Basis Purchase Price (Depreciation) + Capital Improvements Adjusted Basis $1, 000 $100, 000 $ 50, 000 $950, 000 Gain Calculation: Sale Price (Adjusted basis) Gain $2, 000 ($950, 000) $1, 050, 000 Taxes: 25% Depreciation Recapture $100, 000 X 25% = $25, 000 20% Fed. Cap Gains (15%x$450 k=$67, 500)+(20%x$600 k=$120, 000)=$187, 50 0 13. 3% CA State Income Tax $1, 050, 000 X 13. 3% = $139, 650* 3. 8% “Medicare Tax” $800, 000 X 3. 8%= Total Taxes Due: $30, 400 $382, 550 *approximation based on assumed top rate 10/26/2021 9

1031 Exchange Rules NAPKIN RULE • All cash proceeds from the sale of the Relinquished Property must be reinvested in the Replacement Property (or pay tax on the difference) • The purchase price of the Replacement Property must be at least as much as the sales price of the Relinquished Property (or pay tax on the difference) • The purchaser of the Replacement Property must be the same as the seller of the Relinquished Property, or be a “Disregarded Entity” • For safe harbor protection, exchange funds should be held by a Qualified Intermediary 10/26/2021 10

1031 Exchange Time Periods The 1031 Exchange time frame begins the day after escrow closes on the relinquished property. From this point, the 180 day count down begins Day 1 180 45 - Day after Escrow closes on the relinquished property 10/26/2021 Deadline to identify replacement property(s) Deadline to purchase replacement property(s) 11

1031 Exchange – Identification Rules • 3 Property Rule Without regard to FMV • 200% Rule Aggregate FMV not to exceed 200% of RP • 95% Rule Acquire 95% of FMV of identified property 10/26/2021 12

Identification Rules - continued • Replacement Property must be designated as such in written document signed by taxpayer and hand delivered, mailed, telecopied, or otherwise sent before the end of the identification period to either: – (1) person obligated to transfer Replacement Property to the taxpayer regardless of whether that person is disqualified; or – (2) any other person involved in the exchange other than the taxpayer or disqualified person • Negligence penalty and/or fraud penalty under IRC 6663; criminal charges for delivery of false documents (backdated letter) • Release of exchange funds - g(6) limits rights to receive, pledge, borrow or otherwise obtain benefits of money or other property before end of the exchange period 10/26/2021 13

Types of Exchanges • Construction Exchanges • Reverse Exchanges • Related Parties • Vacation Homes • Split Treatment Exchanges • DSTs 10/26/2021 14

1031 Mixing Pot of Issues • Rev. Proc. 2013 -17: same sex married persons are now “spouses” for Federal tax purposes • California Reporting: Rev & Tax code 18032 & 24953 effective 1/1/14, if CA RQ exchanged for out of state RP, TP must file annual reporting form with FTB • Seller Financing • Closing Costs 10/26/2021 15

Form 1065 10/26/2021 16

Form 8824 10/26/2021 17

Form 8824 continued 10/26/2021 18

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Qualified Intermediary Role - Initiating an Exchange Security • Security should be a client’s most important concern. Select a Qualified Intermediary that can be trusted with client funds Service • Clients need to work closely with the QI. Make sure they provide top customer service Experience • A client depends on the QI to properly document and facilitate the 1031 Exchange Price • Be sure to look at the amount of the exchange fee, including all hidden costs 10/26/2021 22

Thank You For Attending Eric Brecher, Esq. Certified Exchange Specialist® 917 -455 -1551 City National Bank its affiliates and subsidiaries, as a matter of policy, do not give tax, accounting, regulatory or legal advice. Rules in the areas of law, tax, and accounting are subject to change and open to varying interpretations. You should consult with your other advisors on the tax, accounting and legal implications of actions you may take based on any strategies presented, taking into account your own particular circumstances, including the possibility of a 1031 tax-deferred property exchange. © 2017 City National Bank. All Rights Reserved. City National Bank is a subsidiary of Royal Bank of Canada 10/26/2021 CNB Member FDIC 23