2A — September 16 - 29, 2016 — M id A tlantic
Real Estate Journal
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MAREJ A dvertising D irectory Applied Bank..........................................................26A Appraisal Institute - Delaware Chapter...............20A Appraisal Institute - Metro NJ Chapter...............16A Appraisal Institute - Northeast NJ Chapter. .......17A Appraisal Institute - Southern NJ Chapter.....18-19A Arcara Realty Advisors..........................................29A ARD Appraisal........................................................15A Bussel Realty Corp...................................................1B Capital Markets Real Estate Network....................3C Capstan.....................................................................2B Caryl Communications...........................................29A Castle Lanterra Properties......................................6A CIRC Delaware.......................................................28A Cooper-Horowitz...................................................BC-A CREW Lehigh Valley. .......................................14-15C CREW NJ................................................................21B CREW Philadelphia. ..............................................16C Cushman & Wakefield. .........................................IC-C Deerwood Real Estate Capital...............................11A Earth Engineering....................................................2C Environmental Systems.........................................29A Fowler Companies..................................................29A Gebroe-Hammer Associates.....................................7B Harvey, Hanna & Associates.................................25A Heller Industrial Parks..........................................11B Hillcrest Paving & Excavating..............................29A Hinerfeld.......................................................... 29A, 1C Integra Realty Resources.......................................13A Investors Real Estate Agency................................29A Investors Realty, Inc.. ............................................27A Kaplin Stewart. ........................................................4A Kearny Bank...........................................................10B Keystone....................................................................4C Landmark Commercial Realty. ...............................7C Marcus & Millichap..................................................4A Mericle Commercial. ............................................BC-C Meridian Capital Group....................... 1A, 3A, 5A, 7A Morris County EDC................................................20B NAI Summit..................................................... 29A, 2C New Jersey Realty Advisory Group.......................14A NJHMFA.................................................................15B NorthMarq Capital.................................................12B PennCap Properties. ....................................... 29A, 9C Poskanzer Skott Architects....................................13B PREC......................................................................IC-C Principal Commercial Capital. ..............................10A Progress Capital Advisors........................................8A Provident Bank.......................................................22A Redwood Realty Advisors.........................................6B Rittenhouse Appraisals..........................................12A ROCK Commercial...................................................6C RT Environmental Services, Inc..............................3B SADV.......................................................................17C SEBCO Laundry Systems........................................2B Somma Associates....................................................8B Subway....................................................................29A Sudler......................................................................14B The Berger Organization. ........................................9B The Henley Group..................................................21A The Kislak Co.. .........................................................4B The Traffic Group...................................................24A WCRE........................................................................2B Whitesell...................................................................4A
Mid Atlantic R eal E state J ournal Publisher ............................................................................ Linda Christman Publisher ............................................................................... Joe Christman Associate Publisher ................................................................ Steve Kelley Associate Publisher .............................................................Alissa Aronson Associate Publisher ..........................................................Barbara Holyoke Associate Publisher ...................................................................Kim Brunet Senior Editor/Graphic Artist .................................................Karen Vachon Production Assistant/Graphic Artist ...........................................Julie King Office Manager .................................................................... Joanne Gavaza Mid Atlantic R eal E state J ournal — Published Semi-Monthly Periodicals postage paid at Rockland, Massachusetts and additional mailing offices Postmaster send address change to: Mid Atlantic Real Estate Journal, 312 Market St. Rockland, MA 02370 USPS #22-358 | Vol. 28 Issue 17 Subscription rates: $99 - one year, $148 - two years, $4 - single copy REPORT AN ERROR IMMEDIATELY MARE Journal will not be responsible for more than one incorrect insertion Toll-Free: (800) 584-1062 | MA: (781) 871-5298 | Fax: (781) 871-5299 www.marejournal.com The views expressed by contributing columnists are not necessarily representative of the Mid Atlantic Real Estate Journal
Mid Atlantic Real Estate Journal
Laurence Fundler
The Story of Lucky: Section 1031 Exchanges Can Be Used In The Context of the Sale of Tangible Personal Property T he provisions of Sec- tion 1031 of the In- ternal Revenue Code are available and commonly employed to defer capital gains tax liability when a taxpayer purchases "like- kind" real property to re- place property sold. Al- though this scenario is quite familiar in real estate trans- actions, it is worth noting that the same opportunities and rules of Section 1031 that apply to the sale of real estate also can apply to the sale of tangible personal property such as coins, art- work or other collectibles. The following "feel good" story illustrates the value of this proven but somewhat lesser known tax planning strategy, and is based on our recent experience with a client who we'll refer to as "Lucky" for reasons that are self-evident. Approximately fifty years ago, Lucky spent $70 on the purchase of a counterfeit replica of a rare and expen- sive gold coin. The coin sat in a box for many years, vir- tually forgotten and never seeing the light of day. Then, not too long ago, Lucky dis- covered that his so-called counterfeit coin was actually not a replica but was, in fact, an authentic rare and expen- sive coin. The coin was also in great condition. After learning of the coin's authenticity and value, Lucky decided to sell it and use the proceeds to diversify his coin holdings by pur- chasing multiple coin sets. Lucky's accountant astutely advised him that a 28% cap- ital gains tax rate applies to the sale of collectibles - including coins, artwork, stamps, etc. - which would take a significant bite out of
the proceeds. Lucky wanted to know his options to either eliminate or minimize the 28% capital gains tax on the sale of the coin. The good news is that Lucky was "in luck" again when we advised him that Section 1031 can be applied in the context of collectible tangible property, such as the sale of his rare coin, if the proceeds are used to purchase replacement "like- kind" coins. The following simplified overview provides more de- tail on the viability and versatility of a Section 1031 exchange in connection with the sale of certain tangible property. A Section 1031 exchange allows a person to sell one or more appreciated assets (real property or tangible personal property) and defer the payment of capital gain taxes by acquiring one or more replacement properties of "like-kind." Section 1031 allows for the repositioning, diversification or consolida- tion of investments while de- ferring the payment of capital gains taxes to a later time. There are specific require- ments and deadlines that must be followed in order for a sale transaction to qualify for Section 1031 treatment. Importantly, the relinquished property and the like-kind replacement property must have either been held for investment or used in a trade or business. In addition, in order to defer all of the gain, the taxpayer cannot actually or construc- tively receive the sales pro-
ceeds. There are various ways in which a Section 1031 exchange can be structured in order to qualify for defer- ral treatment. Because of the many rules and restrictions involved, it is critical that one consult with a tax advi- sor prior to engaging in a Section 1031 exchange. Turning back to Lucky, the proceeds on the sale of his "counterfeit-turned- authentic" gold coin were significant, and were placed directly in the hands of a qualified intermediary and then used to purchase re- placement "like-kind" coins in a transaction that quali- fies under Section 1031. Lucky was successful in deferring approximately $154,000 of capital gain taxes until he sells the re- placement coins - unless of course he engages in a sec- ond Section 1031 exchange at that time and further defers the taxes. If Lucky holds onto the coins until he dies, his estate will receive a stepped-up basis for the coins, and all of the deferred gain will forever escape capital gains taxes. If you own valuable tan- gible property or collect- ibles, the capital gains tax on sale can be significant. If you want to diversify or consolidate your holdings, consider a Section 1031 ex- change to defer the capital gains tax until a later time, or perhaps forever. Laurence Fundler is a member of Greenbaum Rowe Smith & Davis' Tax, Trusts & Estates Department. n
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