Guest column: Trading to avoid taxing
| Saturday, Aug 29 2009 01:23 PM
Last Updated Saturday, Aug 29 2009 01:31 PM
Images
Farmland is typical of property exchanged for like-kind property through 1031 exchanges. The tax-savings strategy is used to allow an investor to defer payment of capital gains tax. Photo courtesy of Mission Bank 1031 Exchange, Bakersfield.
This corporate airplane is typical of property that may be exchanged for like-kind property through 1031 exchanges. The tax-savings strategy is used to allow an investor to defer payment of capital gains tax. Photo courtesy of Mission Bank 1031 Exchange, Bakersfield.
Billie Sue Records is vice-president and senior exchange officer of Mission Bank 1031 Exchange.
The concept behind a 1031 exchange is a simple one that dates back to the horse swapping days of nearly a century ago. Trade a horse for a horse, or in today’s world, property for like-kind property. The purpose of a 1031 exchange is to allow an investor to defer — or maybe avoid altogether — the payment of federal and state capital gains tax when exchanging like-kind property.
A 1031 exchange, which is provided for in the federal tax code, requires the use of a qualified intermediary. An investor places the proceeds from selling property — a commercial building, or an apartment complex, for example — with the intermediary while searching for like-kind property to obtain in exchange. Like old-fashioned horse-trading, the exchange is done by deferring any capital gains taxes.
While the concept may sound simple, federal and state tax rules governing these exchanges aren’t. And if the rules aren’t followed precisely, the desired tax break will be disallowed, leaving an investor owing the federal Internal Revenue Service and the California Franchise Tax Board a lot of money.
Critical to these exchanges being executed properly is competent advice being given to investors by attorneys and certified public accountants.
Mission Bank 1031 Exchange, the Kern County-headquartered qualified intermediary, is sponsoring a seminar on Sept. 10 to discuss exchanges. Featuring two nationally-recognized experts in the field, the seminar will be held from 8 a.m. to 1:45 p.m. in the Four Points Sheraton on California Avenue.
Participants can receive continuing education credits recognized by both legal and accountancy professional organizations. The cost of the seminar will be $129 for those receiving credits and $49 for those not receiving credits. Information concerning the seminar can be obtained by calling Billie Sue Records at 859-2500 or by e-mailing 1031exchange@missionbank.com.
The tax-saving benefits of 1031 exchanges have long been recognized by investors. But for this very reason, the exchanges are now being targeted by state and federal tax auditors.
The nation’s and California’s economic problems have resulted in a decrease in tax revenues to fund government services. As a result, tax-saving strategies, such as 1031 exchanges, are being targeted with increased scrutiny.
In 2007, the Treasury Department’s Inspector General for Tax Administration reviewed the IRS’s handling of 1031 exchanges and found little oversight was being given to the process. Since then, there has been increased auditing by both federal and state regulators.
If an audit reveals all 1031 rules have not been followed, the exchange will be disallowed and the investor is left to pay state and federal capital gains taxes, plus any penalties and interest assessed.
In addition, some unfortunate investors have made poor decisions in their selections of intermediaries. Exchange proceeds have been placed in risky investments, or held by companies that go out of business. In these sad cases, investors have lost the money from their property sales and have been required to pay capital gains taxes because of their inability to complete their exchange.
The advantages an investor can realize from a 1031 exchange are many. But the transactions are not simple horse trades. They require knowledgeable professionals — accountants and attorneys — and reputable qualified intermediaries that provide safety and security for an investor’s money.
Ralph B. Bunje Jr., the president/principal of Reverse Exchange Services Inc., will be a featured presenter during the Sept. 10 seminar in Bakersfield. Bunje is the past president and current board member of the Federation of Exchange Accommodators. He has served as an advisor to the California Legislature, and as an expert witness in federal and state court cases.
Also presenting will be attorney Paul D. O’Connor, a partner in the Orange County Allen Matkins firm. O’Connor, who specializes in 1031 exchanges, has served as an advisor to Judge William Drennan of the U.S. Tax Court in Washington, D.C.
Sponsorship of the seminar by Mission Bank 1031 Exchange is an effort to protect investors and give Kern County attorneys and accountants up-to-date information for structuring successful transactions.
— Billie Sue Records is vice-president and senior exchange officer of Mission Bank 1031 Exchange.
