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Posted on Mon, 01/23/2012 - 10:55 AM by
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A 1031 construction exchangeenables the taxpayer to defer federal and state capital gains and recapture depreciation taxes on the sale of existing property, and construct improvements to a replacement property. In what is known as a 1031 tax deferred exchange, a construction exchange of equal or greater value to the old or relinquished property is quite common. Internal Revenue Code Section 1.1031Long known as a viable tax deferral strategy, the Internal Revenue Code (IRC) §1.1031 states no gain or loss is recognized when property held for trade, business or investment is exchanged for like-kind property held for trade, business or investment. No gain is recognized means the tax obligation is postponed, delayed or deferred until the replacement property is sold. Real property can be exchanged for any real property given the duration of interest, being recognized as real property by the state and if located in the United States, the real property is exchanged for property held in the United States. International real property is eligible for 1031 exchanges when exchanged for any real property located overseas. ExamplesGiven the timeframe to complete the construction exchange is 180 calendar days starting the day after the closing on the replacement or relinquished property, planning is critical. Weather can delay construction and the only 1031 eligible extensions include Presidentially declared disasters such as floods, tornadoes and hurricanes, or if the taxpayer is in a declared combat zone. Examples of a construction exchange include:
Land or real property already owned can also be improved in a leasehold improvement exchange. The property to be improved must be owned by a related party at least six months prior to the start of the exchange. In addition, the improved property must be leased for at least two years following the end of the exchange by the related party (landlord) and the taxpayer at fair market rent. If the relinquished property sold for $500,000, then a possible 1031 exchange could be the purchase of land for $150,000 and improvements of $350,000 or more. For the improvements to be eligible for the tax deferral, the materials and services must be affixed to the property by the 180th calendar day. If not, the percentage complete is determined and will represent the gain deferred. Another option is a non-safe harbor construction exchange where the completion date can be beyond the 180th calendar day. Related articles of interest include:
Contact our office should you have a question, or post your comments below. Let us know what you think about the content. MORE NEWS FROM BLUEMAUMAUTaxes and the DeficitNormally, this column is supposed to cover the tax changes over the prior year and how they impact the hospitality industry. Last year, we commented about how 2010 was an interesting year but little in the tax field had passed. 2010 was all about health care reform, the change in control of the House and the rise of the tea party. It was a very political and partisan year. If anything, 2011 was worse. Never has so little been accomplished by so many. Brinkmanship was the key word for 2011. It will be known more for what did not occur rather than what did. It is not unusual for partisan politics to take center stage in an election year. While 2011 was not, the race for the Presidency and control of the House and Senate began before all the winners from 2010 were known. National Press Writes about Restaurant FranchisingOn May 18th, the national press, both The New York Times and The Wall Street Journal, wrote about restaurant franchising. Some additional notes are warranted. Mediation: Good, Bad or It Depends?Mediation is often touted as the greatest thing since sliced bread for faster, fairer, and cheaper dispute resolution. Is it? Going International? Don’t Forget One Important ThingFranchisors that are considering exporting their franchise concept to other countries are advised to prepare by following a checklist of key items. However, there is one area that is often overlooked or shortchanged in the process. Going Green Costs Franchisees Much GreenBeing forced to buy imaginary products is just one of the nonsensical results of government policy affecting franchisors and franchisees. RELATED SMALL BUSINESS NEWSMobile Franchises: Do You Like Cars? Hot Franchise Topic: Getting a LoanIt seems like the entire franchise industry is focused on funding, and with good reason; franchise loans are still a bit challenging to secure. Good News, U.S. Hotel Profit RecoveryAccording to the new PKF Trends survey, the U.S. lodging industry produced a 12.7% profit growth in 2011. 80.5% of participating hotels enjoyed an increase in total revenue while 72.3% achieved growth in profits. The recently released 2012 edition of Trends presents data from a sample of nearly 7000 financial statements of United States hotels. For the Trends report, hotel profits are defined as net operating income (NOI) before deductions for capital reserves, rent, interest, income taxes, depreciation and amortization. Federal Court Invalidates "Quickie" Union Election Rule, For NowOn May 14, 2012, the U.S. District Court for the District of Columbia set aside a controversial final rule of the National Labor Relations Board ("NLRB") that was designed to make it easier and faster for unions to hold organizing elections. Chamber of Commerce of the United States of America, et al. v. NLRB, Case No. 11-02262 (D.D.C. May 14, 2012). Business groups are hailing the decision, but the celebration may be short lived. Because the ruling was essentially decided on a procedural point, the NLRB may seek to resurrect the rule, which creates a very short window for union elections, and leaves employers with little time to react to an organized union campaign. Field Representatives Coach Franchisees to Victory
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