Property Type: Land
City: Oak Bluffs
State: Massachusetts
Description: Oak Bluffs, MA-Land-wooded 0.73 corner lot abuts conservation land with protective covenants in the private setting of Vineyard Hills. Town center, bike paths, beaches, Sailing Camp Park and Lagoon Pond are all just minutes away.
Price: $350,000
Contact: (860) 623-6581
In light of our recent partnership, the All States 1031 blog has merged with the Strategic Property Exchanges blog.
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August 2nd, 2011 by phillip
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Congress defers pressing tax issues until December
November 22nd, 2010 by Moore McLaughlinThe lame-duck Congress departed for its Thanksgiving recess with no clear path in sight for dealing with pressing tax issues: extension of the Bush tax cuts; resolving the estate tax problem; patching the alternative minimum tax (AMT); and dealing with extenders, i.e., deciding whether to retroactively extend some or all of the tax provisions that expired at the end of 2009 (including the research credit). What’s more, it looks as if the lame-duck Congress may not resolve these issues until the very last minute, i.e., right before Christmas. On November 18, Senate Finance Chair Max Baucus (D-MT) told members of the press to “get your snow boots on.”
The thorniest issue is the expiring Bush-era tax cuts. The Democrats (and the Administration) want to extend the tax cuts for “non-high-income” taxpayers only. The Republicans want to extend the tax cuts for everyone. The problem is that neither party has the votes to prevail. That inevitably will lead to a compromise of some sort. One possibility is an across-the-board, but temporary, extension of the Bush-era tax cuts for individuals.
Stay tuned to our blog and e-mail alerts for any late-breaking news.
Thank you Veterans
November 11th, 2010 by Alexandra Hart
Especially on Veterans day, we remember and thank all those brave men and women who have served this wonderful country. We are grateful for their selfless bravery and the sacrifices those service members and their families have made to afford us the freedom we enjoy everyday. Thank you Veterans!
New Tax Bill Adds Burden to Property Owners
September 27th, 2010 by Moore McLaughlinAll persons engaged in a trade or business who make certain payments (including rent) in the course of that trade or business of $600 or more in any tax year to another person must report that information to IRS. For payments made after December 31, 2011, payments subject to information reporting will also include amounts in consideration for property and gross proceeds. A taxpayer whose rental activity is a trade or business is subject to this reporting requirement, but, under pre-Act law, a taxpayer whose rental real estate activity was not considered a trade or business was not subject to this reporting requirement.
New law. For payments made after December 31, 2010, the Act provides that, except as provided below, solely for information reporting purposes, a person receiving rental income from real estate will be considered to be engaged in a trade or business of renting property. Thus, recipients of rental income from real estate generally are subject to the same information reporting requirements as taxpayers engaged in a trade or business. In particular, rental income recipients making payments of $600 or more during the tax year to a service provider (such as a plumber, painter, or accountant) in the course of earning rental income are required to provide an information return (typically Form 1099-MISC) to IRS and to the service provider.
The rental property expense payment reporting does not apply to:
… any individual who receives rental income of not more than a minimal amount, as determined under IRS regulations to be issued at some future time;
… any individual (including one who is an active member of the uniformed services or an employee of the intelligence community) if substantially all rental income is derived from renting the individual’s principal residence on a temporary basis;
… any other individual for whom these requirements would cause hardship, as determined under IRS regulations to be issued at some future time.
Neither the term “substantially all” rental income nor “temporary basis” is defined for purposes of this rule. It is unclear whether the taxpayer’s intent will control for purposes of the “temporary basis” test, or whether IRS will set a length of time under regulations or other guidance.
For more information on this new reporting requirement, contact Attorney Moore McLaughlin, owner of All States 1031 Exchange Facilitator, LLC by e-mail at fmm@AllStates1031.com or toll-free at 877-395-1031.
President Obama Signs Financial Reform Bill: a Good Start Toward Federal Regulation of Exchange Facilitators
July 21st, 2010 by Alexandra HartAll States 1031 and the Federation of Exchange Accommodators (FEA), the nationwide §1031 Qualified Intermediary trade association, supports strong regulation of the QI industry.
The Federation of Exchange Accommodators (“FEA”) is pleased to announce that the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) was signed by President Obama today.
The Dodd-Frank Act authorizes the creation of a Bureau of Consumer Financial Protection to be housed within the Federal Reserve. The Bureau is charged with regulating consumer financial products and services. The new law requires the Director of the Bureau to conduct a study and propose legislation and/or regulations to protect consumers using exchange facilitators, also known as Qualified Intermediaries, who facilitate tax-deferred exchange transactions under Internal Revenue Code §1031. The study and recommendations must be completed with 1 year after the new law takes effect, and a program or proposed regulations must be implemented within 2 years after the Director’s report.
The FEA, the trade association representing the exchange facilitator industry, believes that this is an important first step toward assuring comprehensive protection for all consumers. “The FEA especially thanks House Financial Services Committee Chairman Barney Frank and Rep. Mike Michaud and for proposing this provision in the financial reform bill. We are enthusiastic about working with the Bureau of Consumer Financial Protection to develop regulations, especially with respect to the security of client funds held by exchange facilitators,” commented Suzanne Goldstein Baker, chairperson of the FEA’s Federal Legislative Committee.
FEA President David Gorenberg echoed this sentiment, “This is a great beginning. However, there is much work to be done to achieve our goal of comprehensive federal regulation that will cover all exchange clients and transactions.” During the legislative process, the FEA communicated to legislators its support for the bill, along with technical concerns that many transactions will not fit the definitional scope of the Consumer Financial Protection Act of 2010, incorporated within the Dodd-Frank Act, and the need for a broad solution. “We are looking forward to working with the Director and the legislative sponsors to identify and suggest regulations or legislation that will not be limited to transactions solely involving individuals engaged in exchanges for ‘personal, family or household use,’” stated Ms. Goldstein Baker. “The FEA will work to ensure that all taxpayers, regardless of whether they are individuals or business entities, benefit from the same mandatory safeguards that protect consumers,” added Mr. Gorenberg.
The FEA is a robust supporter of federal regulation of its industry to require prudent funds management standards and other protections for its clients. In 2007 the FEA petitioned the FTC for regulatory oversight and submitted to it a comprehensive draft regulation. The FTC denied the petition, opining that there was no evidence of pervasive fraud throughout the industry and thus, the burdens of regulation would outweigh the potential benefits. The FEA has since been actively involved in passing state legislation to regulate exchange facilitators. The FEA drafted a “model law” which the states of California, Colorado, Maine, Nevada, Oregon, Virginia and Washington have adopted with slight variations. The FEA has also submitted to the Secretary of the Treasury and the Internal Revenue Service a proposed amendment to Treasury Regulations which would impose reasonable, understandable standards of prudent funds management requiring that funds held by Qualified Intermediaries be invested in a manner that maintains liquidity and preserves principal.
For more information, please contact Alexandra Hart at All States 1031 toll free at (877)395-1031 ext. 217 or email AHart@AllStates1031.com
New law just signed in New Hampshire affecting 1031 exchangers
July 14th, 2010 by Alexandra HartBreaking news from the Federation of Exchange Accommodators (FEA):
SB 483 signed into law in New Hampshire!
The FEA has received confirmation that the New Hampshire Governor has signed SB 483 into law in that state. The new law amends prior law which would deprive taxpayers Section 1031 tax deferral on a state level if they purchased replacement property in the name of a new entity, notwithstanding that the acquiring entity was a disregarded entity. The typical situation would be that in which a taxpayer was required by a lender or TIC sponsor to acquire a replacement property in the name of a new single member LLC. The State of New Hampshire began disallowing exchange treatment on those transactions in 2008 and began to audit previously closed transactions as far back as 2004, without notice either to taxpayers or to the professionals in the industry. The new law makes it clear that exchange treatment will not be affected by taking title in the new entity as long as the entity is a single member LLC, revocable trust or other entity which is disregarded for federal income tax purposes. The amendment eliminates the “claw back” efforts to 2004. This ammendment is great news for New Hampshire residents or property owners who want to defer taxes with a 1031 exchange while protecting their assets in various pass through entities.
For more information, please contact Alexandra Hart at All States 1031 toll free at (877)395-1031 ext. 217 or email AHart@AllStates1031.com
New law extending homebuyer credit closing date and IRS guidance on it
July 6th, 2010 by Moore McLaughlin
On July 2, 2010, President Obama signed into law H.R. 5623, the “Homebuyer Assistance Improvement Act of 2010″ (the Act), which provides first-time homebuyer credit relief to taxpayers who could not meet a key June 30, 2010 closing date. The Senate passed the Act on June 30, 2010, by unanimous consent, and the House of Representatives passed it on June 29 by a vote of 409-5. On the same day that it was signed into law, the IRS issued a reminder that special filing and documentation requirements apply in claiming the homebuyer credit, including the information that must be provided by those taxpayers eligible to take advantage of the new law relief.
The cost of the closing reprieve is fully offset by expanding the bad check penalty under Code Sec. 6657 to cover electronic payments, and providing for disclosure of prisoner return information under Code Sec. 6103(k)(10) to state prisons.
Relief for First-Time Homebuyers Unable to Meet Closing Deadline
The Code Sec. 36 first-time homebuyer credit generally is equal to the lesser of $8,000 ($4,000 for a married individual filing separately) or 10% of the principal residence’s purchase price. However, for purchases after November 6, 2009, a taxpayer (i.e., a “long-time resident”) may claim the homebuyer credit if he (and, if married, his spouse) maintained the same principal residence for any 5-consecutive year period during the 8-years ending on the date that the taxpayer buys the subsequent principal residence. The maximum allowable homebuyer credit for such taxpayers, who are treated as first time homebuyers for purposes of the first-time homebuyer credit, is $6,500 ($3,250 for a married individual filing separately), or 10% of the purchase price of the subsequent principal residence, whichever is less.
For purchases after Nov. 6, 2009:
… the first-time homebuyer credit phaseout range is between $125,000 and $145,000, and for those filing a joint return, it’s between $225,000 and $245,000.
… the first-time homebuyer credit cannot be claimed for a home if its purchase price exceeds $800,000; and
… a number of anti-abuse provisions apply. For example, dependents cannot claim the first-time homebuyer credit; a purchaser must be at least 18 years of age on the date of purchase; and the definition of a qualifying purchase for first-time homebuyer credit purposes is amended to exclude property acquired from a person related to the person acquiring the property or the spouse of the person acquiring the property, if married.
The first-time homebuyer credit applied to a principal residence bought before May 1, 2010 and, under pre-Act law, to a principal residence bought before July 1, 2010, by a person who entered into a written binding contract before May 1, 2010, if the purchase closed before July 1, 2010. (Certain service members on qualified official extended duty service outside of the U.S. get an extra year to buy a qualifying home and get the credit.)
New law. The Act provides that if a written binding contract to purchase a principal residence was entered into before May 1, 2010, to close on the purchase of a principal residence before July 1, 2010, the credit may be claimed if the purchase is closed before October 1, 2010. (Code Sec. 36(h)(2), as amended by Act Sec. 2(a)). Thus, this extension allows homebuyers who signed a contract no later than the April 30th deadline, intending to close before July 1, 2010, to complete their closing by the end of September and still qualify for the credit. Conforming amendments are made for purposes of the longer periods for those service members on qualified official extended duty service outside of the U.S. (Code Sec. 36(h)(3)(B)).
Required documentation. In IR 2010-80, the IRS reminds taxpayers that special filing and documentation requirements apply to anyone claiming the homebuyer credit. To avoid refund delays, those who entered into a purchase contract on or before April 30, but closed after that date, should attach to their return a copy of the pages from the signed contract showing all parties’ names and signatures if required by local law, the property address, the purchase price, and the date of the contract.
Besides filling out Form 5405, First-Time Homebuyer Credit and Repayment of the Credit, all eligible homebuyers must also include with their return one of the following documents:
… A copy of the settlement statement showing all parties’ names and signatures, property address, sales price, and date of purchase. Normally, this is the properly executed Form HUD-1, Settlement Statement. While the Form 5405 instructions indicate that a properly executed settlement statement should show the signatures of all parties, IRS recognizes that the elements of the settlement document may vary from jurisdiction to jurisdiction and may not reflect the signatures of the buyer and seller. The settlement statement that must be attached to the return is considered to be properly executed if it is complete and valid according to local law. In locations where signatures are not required, the IRS encourages the buyer to sign the settlement statement prior to attaching it to the tax return even in cases where the settlement form does not include a signature line.
… For mobile home purchasers who are unable to get a settlement statement, a copy of the executed retail sales contract showing all parties’ names and signatures, property address, purchase price and date of purchase.
… For a newly constructed home where a settlement statement is not available, a copy of the certificate of occupancy showing the owner’s name, property address and date of the certificate.
… A taxpayer who entered into a binding contract before May 1, 2010 (and who closes by July 1, 2010) must also attach pages from the signed contract showing all parties names and signatures, the property address, the purchase price, and the date of the contract.
… A taxpayer claiming the credit as a long-term resident of the same main home must attach copies of one of the following: Form 1098, Mortgage Interest Statement (or substitute statement), property tax records, or homeowner’s insurance records. These records should be for 5 consecutive years of the 8-year period ending on the purchase date of the new main home.
Options for claiming the credit. IR 2010-80 also reminds taxpayers that there are three options for claiming the credit on a qualifying 2010 purchase:
… If a 2009 return has not yet been filed, a taxpayer can claim the credit on Form 1040 for the 2009 tax year. Though such a return cannot be filed electronically, taxpayers can still use IRS Free File to prepare their return. The returns must be printed out and sent to IRS, along with all required documentation. (Taxpayers can use direct deposit for their refunds.)
… If a 2009 return has already been filed, a taxpayer can claim the credit on an amended return using Form 1040X.
… Whether or not a 2009 return has been filed, a taxpayer can wait until next year and claim the credit on a 2010 Form 1040.
The three-month extension of the closing date is intended to provide tax relief for those who could not close on time because of backlogs at lenders and federal programs involved in homebuyer loans. In the words of the Act’s supporters, the three-month extension “will give time for all the new mortgages to be processed and not punish those homeowners who have been delayed through no fault of their own.”
Bad Check Penalty Extended to Electronic Payments
Under Code Sec. 6657, subject to a good faith and reasonable cause exception, if a check or money order is used to pay any amount due under the Code and the amount is not duly paid on presentation, the person tendering the check or money order is subject to a penalty equal to 2% of the amount of the check or money order. If the amount of the check is less than $1,250, the penalty is $25 or the amount of the check, whichever is the less.
New law. For instruments tendered after July 2, 2010, the Act expands the bad check penalty under Code Sec. 6657 to cover electronic payments. (Code Sec. 6657, as amended by Act Sec. 3)
Disclosure of Prisoner Return Information to State Prisons
Under Code Sec. 6103(k)(10), to the extent necessary for effective Federal tax administration, before 2012, the IRS may disclose to the head of the Federal Bureau of Prisons return information of an individual incarcerated in a Federal prison that IRS has determined may have filed or facilitated the filing of a false return
New law. For disclosures made after July 2, 2010, the Act also authorizes the disclosure of return information of an individual incarcerated in a State prison to the head of any State agency charged with the responsibility for the administration of prisons. (Code Sec. 6103(k)(10), as amended by Act Sec. 4).
For more information on this new law, contact All States 1031 Exchange owner and tax attorney/CPA Moore McLaughlin at fmm@AllStates1031.com or by phone toll-free at 877-395-1031.
No depreciation deductions or like-exchange treatment for equipment held for rent or sale
July 1st, 2010 by Moore McLaughlin
In Chief Counsel Advice (CCA) 201025049 dealing with equipment for rent or sale, the IRS has concluded that a taxpayer could not demonstrate that the equipment was devoted to use in its trade or business and that it looked to such use of the equipment to recover the cost of the equipment. Instead, the taxpayer held the equipment primarily for sale and, as a result, it could not claim depreciation deductions for the equipment and could not treat exchanges of the equipment as like-kind swaps under Code Sec. 1031.
Background. Under Code Sec. 167(a), taxpayers may claim a depreciation deduction for the exhaustion, wear and tear of property used in a trade or business or held for the production of income. However, under Reg. §1.167(a)-2, depreciation deductions can not be claimed for inventories or stock in trade.
Under Code Sec. 1031(a)(1), gain or loss is not recognized on the exchange of property held for productive use in a trade or business or for investment if the property is exchanged solely for property of like kind which is held either for productive use in a trade or business or for investment. Nonrecognition treatment is not allowed under Code Sec. 1031(a)(2)(A) for an exchange of property that is stock in trade or other property held primarily for sale.
Facts. Corp X distributes, sells, rents, services, and finances an unspecified type of equipment. It orders the equipment directly from the manufacturer and identifies certain equipment as rental property before receiving it from the manufacturer. When it receives the equipment, Corp X capitalizes the cost of the equipment that has been designated as rental property and claims depreciation deductions on this equipment from the time it is available for rent. Apparently, Corp X capitalizes the cost of equipment other than designated rental property as “inventory” (as defined in Code Sec. 471) upon the receipt of the equipment from the manufacturer. Corp X’s rental equipment is available for rent by the hour, week, or month, and it reserves the right to withdraw the rented equipment during the rental period and substitute similar equipment. The rental agreements permit a renter to buy the rented equipment, but the information provided IRS does not indicate the amount of rent, if any, that would be applied against the purchase price in the event a renter buys the equipment. However, Corp X has indicated that the sales price would be the subject of further negotiation between it and the renter/purchaser.
Corp X structures its sales of property designated as rental equipment as like-kind exchanges under Code Sec. 1031. It negotiates sales with customers and assigns the sales contracts to a qualified intermediary (QI). Corp X then orders replacement property from a manufacturer and assigns its rights to acquire the equipment to the QI. The trustee under the exchange agreement collects the proceeds from the sale of the relinquished property and makes disbursements for purchase of the replacement property on Corp X’s behalf. The replacement property is assigned an order number and is entered into Corp X’s fixed asset depreciation system. Corp X sends a monthly statement to the QI and the manufacturer informing them of the replacement property and includes a statement to the effect that under Code Sec. 1031, Corp X has assigned its rights to acquire the equipment to QI.
An analysis of Corp X’s Year 1 fiscal year results shows that 91% of its income was generated from sales while 9% was generated from its rental operation. Also, a substantial amount of the equipment designated as rental equipment was sold by Corp X before the equipment generated any rental income.
Neither depreciation nor tax-free swap treatment is available. The CCA says that where an asset can function as both merchandise held for sale and as an asset used in a trade or business, the taxpayer’s primary purpose for holding that asset determines whether that asset is inventoriable. On the facts, the CCA concludes that Corp X’s equipment should be treated as inventory held primarily for sale to customers in the ordinary course of business. While Corp X does rent or hold some equipment for rent, it did not show that the equipment is actually devoted to use in its business and that it looks to consumption through this use to recover the cost of the equipment. A significant fact leading to the CCA’s conclusion is that a substantial amount of the equipment designated as rental equipment was sold by Corp X relatively soon after acquisition and before the equipment generated any rental income. Based on the available facts, the best that could be said is that for a relatively short period, Corp X rents or holds for rent some of its equipment pending the sale of that equipment.
As a result, the CCA concludes that Corp X cannot depreciate its equipment under Code Sec. 167. What’s more, because it holds the equipment primarily for sale, Corp X’s exchanges are not eligible for tax-free swap treatment because of Code Sec. 1031(a)(2)(A).
For more informaiton regarding this ruling or other 1031 exchanges issues, contact Alexandra L. Hart at AHart@AllStates1031.com or by phone toll-free at 877-395-1031.
Possible Extension of Homeowner Tax Credit
June 29th, 2010 by Moore McLaughlinThe following is an e-mail request courtesy of the Greater Fall River Association of Realtors®:
Thank you for helping to get the word out and boost our participation on the NAR Call for Action this week and the push for the extension of flood insurance and rural housing loans as well as the closing deadline of the homebuyer tax credit.
The good news is we boosted our Call for Action response numbers from 7 percent earlier in the week to 12 percent today. President Sears’ reminder emails to all m
embers who had yet to respond, and to all Brokers to urge their agents to respond, had a significant impact. This Call for Action is still live for members to respond to.
The bad news is the Senate has not voted on the bill. The latest update from NAR Government Affairs is copied below, along with an article explaining the impasse in the Senate.
FROM: NAR Government Affairs
NAR is working very closely with key Members of Congress and the Senate, and Senior Congressional Staff on two issues of critical importance to the membership: an extension of the June 30, 2010 deadline for closing contracts eligible for the Homeowner Tax Credit, and a reinstatement of the National Flood Insurance Program.
Here are the latest details on the Tax Credit Closing Deadline:
Our best advice to members with questions and concerns is to proceed as if the June 30, 2010 date is binding.
NAR is pursuing all possible options with senior congressional staff to determine what other legislation may be available for passing a June 30 extension. Each of the possible options face difficult obstacles, but NAR’s efforts to clear the way are on going.
The Senate will NOT have any votes today (Friday, June 25) this will push the Tax Credit Extension deadline to the week of June 28, 2010.
Should Congress extend the date, information will be posted on www.realtor.org/government_affairs as soon as it happens.
The final outcome will be posted on www.realtor.org/government_affairs on July 1, 2010.
Here are the latest details on the national Flood Insurance Program:
The Senate will NOT have any votes today (Friday, June 25) this will push the consideration of H.R. 5569 (National Flood Insurance Program Extension Act of 2010) to the week of June 28, 2010.
NAR is working with Senate leadership in both parties to urge the Senate act quickly to pass H.R. 5569.
Additional information is available at http://www.realtor.org/government_affairs/natural_disaster
Filibuster halts bill boosting jobless benefits, aid to states
By Lori Montgomery, Washington Post | June 25, 2010
WASHINGTON - Senate Democrats yesterday abandoned efforts to provide more assistance to state governments and extend emergency unemployment benefits for millions of jobless workers, leaving in limbo President Obama’s push for more spending to bolster the economy.
The decision came after the Senate failed again to muster 60 votes to advance a package of tax cuts and emergency economic provisions. Senator Ben Nelson, a Nebraska Democrat, joined a united Republican caucus in voting to block the measure, citing concern that even the latest slimmed-down version would expand bloated budget deficits. The package fell short, 57-41.
Senate majority leader Harry Reid, Democrat of Nevada, blamed Republican intransigence for killing the measure and dismissed talk of continuing negotiations, saying the only path forward would require Republican compromise.
“We’ve tried and tried. This is our eighth week on this legislation,” Reid said, urging reporters to direct questions about the measure’s fate to Senate minority leader Mitch McConnell, Republican of Kentucky. “We are here. We’re willing to work.”
McConnell, meanwhile, blamed Democrats for the impasse. “The principle they’re defending here is not some program,” he said. “The principle Democrats are defending is that they will not pass a bill unless it adds to the debt.”
For Massachusetts, the vote could have widespread consequences. Emergency jobless benefits, which provide up to 99 weeks of support, expired June 2. About 30,000 laid-off workers in Massachusetts have already lost benefits; up to 100,000 would eventually be affected.
The bill also would have supplied a $16 billion boost in Medicaid funding for states, which would mean about $500 million for Massachusetts, according to the Center on Budget and Policy Priorities. That figure is lower than an earlier proposal, which would have supplied a $24 billion boost, or $760 million for Massachusetts.
Governor Deval Patrick and state legislative leaders had expected that money in their budget projections. Without the federal help, the Massachusetts House and Senate passed a stripped-down budget last night that cuts aid to communities.
The US Senate version also had funds for summer jobs programs, a program championed by Senator John F. Kerry.
“This is one of the worst moments I’ve seen in 25 years in the United States Senate,” the Massachusetts Democrat said after the vote.
Other senior Democrats said they are likely to try again to attract GOP support for the measure, which Obama has called critical to propping up the nation’s still-fragile economic recovery. But after four months of talks, frustrated senior Democrats said they would probably delay further action.
“People are in the mood of letting the dust settle before finding the next step,” said Senate Budget Committee chairman Kent Conrad of North Dakota.
The legislation would have increased budget deficits by $33 billion over the next decade.
The US House did pass a bill yesterday that spares doctors a 21 percent cut in Medicare payments. The measure, already passed by the Senate, would delay cuts six months while lawmakers work on a permanent solution. The bill goes to Obama for his signature.
Matt Viser of the Globe staff contributed to this report.
Thanks again and have a wonderful weekend,
Brian
Brian Doherty
Local Government Affairs Coordinator
Direct Phone: (781) 839-5510
Direct Fax: (781) 839-5560
IRS rules swap of emissions credits is tax-deferred Sec. 1031 exchange
June 29th, 2010 by Moore McLaughlinPrivate letter ruling 201024036 issued recently by the IRS concludes that the swap of two different types of emissions credits will be a tax-deferred exchange under Code Sec. 1031.
Background. In general, under Code Sec. 1031, no gain or loss is recognized on the exchange of property held for productive use in a trade or business or for investment if the property is exchanged solely for property of a like kind which is held either for productive use in a trade or business or for investment, if statutory identification and receipt time limits are met. “Like kind” refers to the nature or character of the property and not to its grade or quality, and one kind or class of property can’t be exchanged for property of a different kind or class. (Reg. § 1.1031(a)-1(b))
Intangible personal property is of like kind to other intangible personal property only if (1) the nature or character of the rights involved are of like kind (e.g., a patent is of like kind to a patent and a copyright is of like kind to a copyright) and (2) the nature or character of the underlying property to which the intangible personal property relates is of like kind. For example, an exchange of a copyright on a novel for a copyright on a different novel is a like-kind exchange, but an exchange of a copyright on a novel for a copyright on a song is not. (Reg. § 1.1031(a)-2(c)) Under Rev Proc 92-91, 1992-2 CB 503, Q&A 5, emission allowances are like-kind property for Code Sec. 1031 purposes.
Ground Level Ozone (Smog)
Facts. The concentration of ground level ozone (i.e., smog) in Region often exceeds permissible air quality standards established by the Environmental Protection Agency (EPA). Ground-level ozone is principally created by two types of pollutants: nitrogen oxide (”NOx”) and volatile organic compounds (”VOCs”). NOx is produced during combustion of natural gas. VOCs are organic chemical compounds that evaporate under specific conditions. A program set up by a Region government agency we’ll call Authority develops and implement air pollution control measures in Region. To improve Region’s air quality and bring the area into compliance with state and federal law, Authority has established a program to review and control emissions in Region. Under this program, businesses that take measures to reduce their emissions of pollutants, for example by installing emission reduction equipment, may apply for and receive emission reduction credits. These credits are used by the holder to “offset” emissions that would otherwise exceed permitted levels. Each credit is a grant to the holder of the right to emit a specified amount of the pollutant per year for an indefinite period of time. Credits may be transferred temporarily or permanently. Credits for reducing ozone are designated by Authority as either NOx or VOCs credits.
Apart from the underlying pollutant, the terms and conditions of the two types of credits are identical. NOx credits may be used to offset VOCs emissions and VOCs credits may be used to offset NOx emissions, as long as the holder of the credits demonstrates that using the credits in this way will not cause or contribute to a violation of state or federal air quality standards.
Sub is a wholly owned subsidiary of Parent and a member of Parent’s consolidated group. Sub holds NOx credits for productive use in a trade or business or for investment. Parent anticipates the future need for VOCs credits in order to meet emission standards related to an undisclosed project. Authority has historically granted permission to use NOx credits to offset VOCs emissions, but this interpollutant use of credits is not economically optimal for Parent because the NOx credits are more valuable due to their relative scarcity. From a business perspective Parent would prefer to exchange NOx credits for VOCs credits held by unrelated third parties. This would generally allow Parent to emit a greater amount of VOCs than if it obtains authorization to use its NOx credits to offset its VOCs emissions.
Sub’s NOx credits exceed its needs. Parent proposes to cause Sub to distribute its NOx credits to Parent. Thereafter, Parent will swap the NOx credits it acquires from Sub for VOCs credits held by unrelated third parties. Parent would then use the VOCs credits to offset emissions from its trade or business.
Favorable ruling. Parent asked for a ruling that the exchange of emission credits was tax-deferred under Code Sec. 1031 and IRS responded positively. It ruled that the NOx and VOCs credits are like-kind property for Code Sec. 1031 purposes. It also ruled that Parent is considered to have, prior to the exchange, held the NOx credits for productive use in its trade or business. IRS concluded that gain or loss won’t be recognized on Parent’s exchange of NOx credits for VOCs credits immediately following the distribution of the NOx credits from Sub, provided all other Code Sec. 1031 requirements are met.
For more information regarding this PLR or any other 1031 questions, contact Alexandra L. Hart by e-mail at AHart@AllStates1031.com or by phone toll-free at 877-395-1031.