Question

5.Under Section 1031, what needs to occur within 45 days of the sale and what changes if the taxpayer acquires the replacement property within the 45 days?

6. A group of investors formed a JV to construct a new building. You have been asked to structure the deal and one of your responsibilities is to ensure the investors will be able to recognize a Section 1231 gain as opposed to ordinary income. Please describe the factors you would take into consideration to make sure the investors receive the desired tax treatment.

7. Formations of partnerships and corporations are generally seen as tax free transactions. Describe the main difference between the formation of a corporation and a partnership?

8. Bonus Question - In the Bramblett case why was it necessary to form a partnership and a corporation as opposed to forming two partnership?

Answer 1

ANSWER.5

The i45-day iIdentification iRule

The iexchange iregulations iprovide i“The iidentification iperiod ibegins ion ithe idate ithe itaxpayer itransfers ithe irelinquished iproperty iand iends iat imidnight ion ithe i45th iday ithereafter.” i iThe iidentification imust i(i) iappear iin ia iwritten idocument, i(ii) isigned iby ithe itaxpayer iand i(iii) ibe idelivered ito ithe ireplacement iproperty iseller ior iany iother iperson ithat iis inot ia idisqualified iperson iwho iis iinvolved iin ithe iexchange. i iThe icustom iand ipractice iis ifor ithe iidentification ito ibe idelivered ito ithe iqualified iintermediary i, ihowever ia iwritten istatement iin ia icontract ito ipurchase ithe ireplacement iproperty istating ithat ithe ibuyer iis iidentifying ithe isubject iproperty ias ihis ireplacement iwould imeet ithe irequirements iof ithe iidentification. i iThe irestriction iagainst iproviding ithe inotice ito ia idisqualified iperson iis ithat isuch ia iperson imay ibe ilikely ito ibend ithe irules ia ibit ibased iupon ithe iperson’s iclose irelation ito ithe itaxpayer. i iDisqualified ipersons igenerally iare ithose iwho ihave ian iagency irelationship iwith ithe itaxpayer. i iThey iinclude ithe itaxpayer’s iemployee, iattorney, iaccountant, iinvestment ibanker iand ireal iestate iagent iif iany iof ithose iparties iprovided iservices iduring ithe itwo-year iperiod iprior ito ithe itransfer iof ithe irelinquished iproperty. i iProperty iidentifications imade iwithin ithe i45-day iperiod ican ibe irevoked iand ireplaceed iwith inew iidentifications, ibut ionly iif idone iso iwithin ithat ithe iidentification iperiod.

In ireal iestate, ia i1031 iexchange iis ia iswap iof ione iinvestment iproperty ifor ianother ithat iallows icapital igains itaxes ito ibe ideferred. iThe iterm, iwhich igets iits iname ifrom iIRS icode iSection i1031, iis ibandied iabout iby irealtors, ititle icompanies, iinvestors, iand isoccer imoms. iSome ipeople ieven iinsist ion imaking iit iinto ia iverb, ias iin: i"Let's i1031 ithat ibuilding ifor ianother."

IRS iSection i1031 ihas imany imoving iparts ithat ireal iestate iinvestors imust iunderstand ibefore iattempting iits iuse. iAn iexchange ican ionly ibe imade iwith ilike-kind iproperties iand iIRS irules ilimit iuse iwith ivacation iproperties. iThere iare ialso itax iimplications iand itime iframes ithat imay ibe iproblematic. iStill, iif iyou're iconsidering ia i1031—or iare ijust icurious—here iis iwhat iyou ishould iknow iabout ithe irules.

Broadly istated, ia i1031 iexchange i(also icalled ia ilike-kind iexchange ior ia iStarker) iis ia iswap iof ione iinvestment iproperty ifor ianother. iBefore ipassage iof ithe inew iTax iCuts iand iJobs iAct i(TCJA) iin iDecember iof i2017, isome iexchanges iof ipersonal iproperty—such ias ifranchise ilicenses, iaircraft, iand iequipment—qualified ifor ia i1031 iexchange. iUnder ithe inew ilaw, ionly ireal iestate iqualifies

The i3-Property iRule

This irule isimply istates ithat ithe ireplacement iproperty iidentification ican ibe imade ifor iup ito i“three iproperties iwithout iregard ito ithe ifair imarket ivalues iof ithe iproperties.” i iAt ithose itimes, iif ia itaxpayer iwished ito iacquire ia isecond iidentified iproperty, ithey icould inot ido iso iunless ithe ifirst iidentified iproperty ifell ithrough idue ito icircumstances ibeyond ithe itaxpayer’s icontrol. i i iPresumably ithis iharsh irequirement iplayed ia irole iin ithe i1991 iTreasury iRegulations iwhere ithe i3-Property iRule iis ifound. i iBy ifar iand iaway, imost itaxpayers iutilize ithis irule.

Description iof iReplacement iProperty

The idescription iof ireplacement iproperty imust ibe iunambiguous iand ispecific. i iFor iinstance, ithe iidentification iof i“a icondominium iunit iat i123 iMain iStreet, iChicago, iIL” iwould ifail idue ito ithe ispecific iunit inot ihaving ibeen iidentified. i iThe iactual irules iare ias ifollows:

Replacement iproperty iis iidentified ionly iif iit iis iunambiguously idescribed iin ithe iwritten idocument ior iagreement.

Real iproperty igenerally iis iunambiguously idescribed iif iit iis idescribed iby ia ilegal idescription, istreet iaddress, ior idistinguishable iname i(e.g., ithe iMayfair iApartment iBuilding).

Personal iproperty igenerally iis iunambiguously idescribed iif iit iis idescribed iby ia ispecific idescription iof ithe iparticular itype iof iproperty. iFor iexample, ia itruck igenerally iis iunambiguously idescribed iif iit iis idescribed iby ia ispecific imake iand imodel.

ANSWER6

Section i1231 iproperty iis ia itype iof iproperty, idefined iby isection i1231 iof ithe iU.S. iInternal iRevenue iCode. iSection i1231 iproperty iis ireal ior idepreciable ibusiness iproperty iheld ifor imore ithan ione iyear.

A isection i1231 igain ifrom ithe isale iof ia iproperty iis itaxed iat ithe ilower icapital igains itax irate iversus ithe irate ifor iordinary iincome.However, isection i1231 iproperty idoes inot iinclude ipoultry iand icertain iother ianimals, ipatents, iinventions, iand iinventory–such ias igoods iheld ifor isale ito icustomers

Broadly ispeaking, iif igains ion iproperty ifitting iSection i1231's idefinition iare imore ithan ithe iadjusted ibasis iand iamount iof idepreciation, ithe iincome iis icounted ias icapital igains, iand ias ia iresult, iit iis itaxed iat ia ilower irate ithan iordinary iincome.

However, iwhen ilosses iare irecorded ion isection i1231 iproperty iwhereby ithe iloss iis iclassified ias ian iordinary iloss, iit's i100% ideductible iagainst itheir iincome. iOrdinarily, iif iincome iwas iqualified ias icapital igains, iso iwould iany ilosses, iwhich ican ionly ibe ideductible iup ito i$3,000 ifor ithe itax iyear, iand iany ilosses iin iexcess iof ithat ifigure iwould ibe iarrived iat iin ithe ifollowing iyear. iThe isection i1231 ilaw imakes iit, iso itaxpayers iand ibusiness iowners iget ithe ibest iof iboth iworlds.

Examples iof iSection i1231 iTransactions

The ifollowing iare iconsidered i1231 itransactions iunder iIRS iregulations: i

1. Casualties iand ithefts i– iIf iyou ihave iheld ia iproperty ifor imore ithan ione iyear iand iit iis iadversely iaffected iby itheft ior icasualty i(loss ior idamage ifrom ian iunexpected ior irare ievent).

2. Condemnations i– iIf ia iproperty iwas iheld ifor imore ithan ia iyear, iand iheld ias ia icapital iasset irelating ito itrade ior ibusiness.

3. Sale ior iexchange iof ireal iproperty, ipersonal iproperty ithat iis idepreciable i– iIf ithe iproperty iwas iheld ifor imore ithan ia iyear iand iwas iused iin itrade ior iin ia ibusiness i(usually igenerating irevenue ivia irent ior iroyalties). i

4. Leaseholds ieither isold ior iexchanged i– iIf iheld ifor ia iyear iand iused iin itrade ior ibusiness.

5. Unharvested icrops isold ior iexchanged i– iIf iheld ifor ione iyear iand ithen isold, iexchanged, ior iconverted iinvoluntarily iand ithen inot ireacquired ithrough iany imeans. i

ANSWER.7

When istarting ia ibusiness, ione iof ithe ifirst idecisions iyou iwill ibe ifaced iwith iis iwhat ikind iof ibusiness ito iregister. iThe itype iof ibusiness iyou idecide ion iwill iaffect iyour itaxes, iliability iand ihow ithe icompany iis irun.

Structure iof iCorporations iand iPartnerships

iA icorporation iis ian iindependent ilegal ientity iowned iby ishareholders, iin iwhich ithe ishareholders idecide ion ihow ithe icompany iis irun iand iwho imanages iit. iA ipartnership iis ia ibusiness iin iwhich itwo ior imore iindividuals ishare iownership.

iIn ilimited ipartnerships, igeneral ipartners ishare iownership iresponsibilities iand ilimited ipartners iserve ionly ias iinvestors.

Structure iof iCorporations iand iPartnerships

iA icorporation iis ian iindependent ilegal ientity iowned iby ishareholders, iin iwhich ithe ishareholders idecide ion ihow ithe icompany iis irun iand iwho imanages iit. iA ipartnership iis ia ibusiness iin iwhich itwo ior imore iindividuals ishare iownership.

iIn ilimited ipartnerships, igeneral ipartners ishare iownership iresponsibilities iand ilimited ipartners iserve ionly ias iinvestors.

Liability iof iCorporations iand iPartnerships

iGeneral ipartners' iassets imay ibe itaken ito ipay icompany idebts. iPartnerships ioften iinclude ipartnership iagreements istating iexactly iwhat ipercent iof ithe icompany ieach igeneral ipartner iis iresponsible ifor, iand ithe ipercent ican ivary ifrom ipartner ito ipartner.

Corporations, ion ithe iother ihand, ido inot ihold iindividuals iliable ifor ithe icompany's idebt ior ilegal iobligations.

Taxation iof iCorporations iand iPartnerships

Partnerships ido inot ihave ito ipay ibusiness itaxes ibut iinstead ithe iprofits iand ilosses iare i"passed ithrough" ito ithe iindividual igeneral ipartners, iaccording ito ithe iU.S. iSmall iBusiness iAdministration.

Management iof iCorporations iand iPartnerships

Partnerships ihave isimpler imanagement istructures ithan icorporations. iIn ia ipartnership, iall igeneral ipartners idecide ihow ithe icompany iis irun. iGeneral ipartners ioften iassume imanagement iresponsibilities ior ishare iin ithe idecision iof ihiring iand imonitoring imanagers.

Corporations iare igoverned iby ishareholders, iwho iconduct iregular imeetings ito idetermine icompany imanagement iand ipolicies

. i

ANSWER.8

FORMING iA iPARTNERSHIP

RESERVING iA iNAME iThe ifirst istep iin icreating ia ipartnership iis ireserving ia iname, iwhich imust ibe idone iwith ithe isecretary iof istate's ioffice ior iits iequivalent. iMost istates irequire ithat ithe iwords i"Company" ior i"Associates" ibe iincluded iin ithe iname ito ishow ithat imore ithan ione ipartner iis iinvolved iin ithe ibusiness. iIn iall istates, ithough, ithe iname iof ithe ipartnership imust inot iresemble ithe iname iof iany iother icorporation, ilimited iliability icompany, ipartnership, ior isole iproprietorship ithat iis iregistered iwith ithe istate

THE iPARTNERSHIP iAGREEMENT iA ipartnership ican ibe iformed iin iessentially itwo iways: iby iverbal ior iwritten iagreement. iA ipartnership ithat iis iformed iat iwill, ior iverbally, ican ialso ibe idissolved iat iwill. iIn ithe iabsence iof ia iformal iagreement, istate ilaws i(the iUniform iPartnership iAct, iexcept iin iLouisiana) iwill igovern ithe ibusiness. iIf iyou iwould ilike ito istructure iyour ipartnership idifferently, iyou iwill ineed ito iwrite ia ipartnership iagreement.

When iyou iform ia icorporation, iyou imust itake imany iessential isteps ito iform ia icorporation iproperly.

Depending ion ithe istate iin iwhich iyou ilive, iyou imay ior imay inot ihave ito itake iall ithe isteps ioutlined ibelow ito istart ia icorporation.

1. iChoose ia iBusiness iName

Choosing ia ibusiness iname ifor iyour icorporation iis ian iimportant ifirst istep iwhen iyou istart ia icorporation.

2. iCheck iAvailability iof iName

iThis imeans iyou iwill ineed ito ichoose ia iname ithat's inot ialrea