Buffett Says Buy Single Family Rentals

Billionaire and Berkshire Hathaway CEO Warren Buffett gave out some free investment advice on TV Monday. Buffett said on CNBC that Americans should buy distressed houses, which are really cheap right now, and rent them out (after fixing them up a bit, of course). Buffett said he'd snatch up "millions" of single family homes if it were practical, but said he isn't very handy.

America's investment grandpa also was optimistic about the economy: He said it's bouncing back in almost all sectors, except home construction, but he predicts it will bounce back there, too.

CELL EASEMENTS ARE JUST EASEMENTS: “TAX DEFERRAL BENEFITS AVAILABLE TO SELLERS UNDER IRC SECTION 1031”

With the continuing expansion of cellular coverage across the United States, owners of land suitable for placement of cellular towers are being approached by cellular communications companies that desire to acquire easements, licenses or leasehold interests as a means of expanding their cellular coverage. Depending on the amount of suitable sites in the area and amount of cellular traffic, a cellular transaction can present a windfall for the property owner, but the way in which the transaction is structured can produce very different tax results for the owner.

An easement, sometimes characterized as a “communications easement”, constitutes a transfer of an interest in the real property under state law. As such, the conveyance of an easement for consideration results in a sale taxable at (currently) lower capital gain rates. The creation of a lease or the grant of a license, on the other hand, results in a contract right to receive rent or license fees over time. Rents and license fees are generally included in the owner’s income when received and are taxed as ordinary income, at rates that are generally higher. Looking at the transactions from a non-tax perspective, the grant of an easement is usually not terminable by the owner since the grantee acquires a deeded interest in the real property itself. The grant of a license or fee, on the other hand, will be terminable upon the expiration of the lease or license term. Given the greater limitations on the owner’s future use of a property subject to a perpetual easement, the grant of an easement generally commands a much greater premium than the grant of a terminable license or term lease.

If the communication easement is perpetual (e.g., runs with the land), then there is yet another structuring opportunity that sets the easement apart from the grant of a license or leasehold. In many instances, the IRS has characterized a perpetual easement as property that is “like kind” to a fee interest in real property for purposes of tax deferral under Internal Revenue Code § 1031. Accordingly, if the transaction is structured as sale of a communication easement, the property owner would likely be able to engage a qualified intermediary to facilitate a 1031 exchange of the perpetual easement for other real property to be held by the owner for investment or for use in a trade or business. There is no similar opportunity to defer the tax arising out of a license fee or rent in the case of a lease apart from the limited deferral afforded by the owner’s receipt of license or lease payments over time.

In PLR 9621012, the IRS determined that a perpetual scenic conservation easement on ranch land was like-kind with timberland, farmland, and ranch land. This ruling is based on the State’s civil code, which characterized a conservation easement as an interest in real property.

In PLR 9232030, the IRS ruled that an agricultural easement was like-kind to a fee simple interest in real estate.

In PLR 200201007, the IRS ruled that a taxpayer’s exchange of a perpetual conservation easement on a ranch for other ranch property qualified for Section 1031 tax deferral.

In PLR 200651018, the IRS determined that a perpetual stewardship easement was like-kind to a fee interest in other real property.

In PLR 9851039, the IRS came to the conclusion that the exchange of an agricultural conservation easement for a fee interest in other farm property was like-kind.

In Rev. Rul. 72-549, easement and right-of-way that the taxpayer granted and the real estate properties that the taxpayer acquired [fee interests] qualify as like-kind property under §1031 of the Code.

In Rev. Rul. 59-121, C.B. 1959-1, 212, conveyance of easement for land. Thus, the consideration received for the easement constituted proceeds from the sale of an interest in real property.

In Rev. Rul. 68-331, C.B. 1968-1, 352, conveyance of an interest in a producing oil lease for a fee interest in an improved ranch held to be an exchange of property of a like-kind under §1031(a) of the Code since both the leasehold interest and the fee interest are continuing interests in real property.

In Rev. Rul. 55-749, C.B. 1955-2, 295, land exchanged for perpetual water rights considered real property rights under applicable state law. This Revenue Ruling holds that the fee interest in the land and a water right in perpetuity are sufficiently similar to constitute property of like-kind for purposes of §1031(a) of the Code.

For more information on the computation of capital gain taxes see: Capital Gain Tax Calculation. To learn more about a 1031 exchange, see: Asset Preservation - 1031 Exchange

AIRCRAFT OWNERS CAN DEFER CAPITAL GAIN TAXES in a 1031 EXCHANGE

Many aircraft owners, whether dealing with a requirement to upgrade from a current aircraft to meet new business needs, delayed delivery times, or steep depreciation schedules resulting in increased capital gain, can benefit from the tax deferral benefits of a Section 1031 exchange. Business owners and investors are well aware of this valuable tax strategy and frequently use §1031 exchanges of real property to improve their investment position or expand business operations with full tax deferral. These same tax benefits also present a tremendous opportunity in the arena of aircraft dispositions. In the absence of a §1031 exchange, depreciation taken on aircraft is subject to depreciation recapture at the time of sale and any potential appreciation of the aircraft further compounds the tax consequences for the aircraft owner. Once a tax advisor calculates the amount of value remaining after taxes to reinvest into a new aircraft, it may not seem like a smart move to sell after all.

PERFORM A 1031 EXCHANGE RATHER THAN SELLING

The answer to this dilemma lies in exchanging an aircraft, instead of selling. Many aircraft owners are unaware that a method exists for deferring what can be significant capital gain taxes and depreciation recapture due on the sale of an aircraft. A §1031 exchange is nearly as simple as a typical aircraft sale. Once a purchaser for an aircraft is located, you or your broker should contact a Qualified Intermediary who will structure an exchange within the IRC requirements. It is not necessary to purchase a replacement aircraft from the same party you are selling to, nor is it necessary to close the sale and the purchase at the same time. The tax code has built in timeframes and structures to allow you flexibility in your exchange.

ASSET PRESERVATION PROVIDES A TAX SOLUTION

Aircraft owners look to Asset Preservation, Inc. (API) for answers to their capital gain tax dilemmas. Aircraft owners have learned that API has helped structure hundreds of aircraft sales as §1031 exchanges, thereby deferring capital gain taxes that would otherwise be due! API has been facilitating aircraft exchanges for over twenty years as a Qualified Intermediary as defined by §1031 of the Internal Revenue Code. As a Qualified Intermediary, Asset Preservation, Inc. has designed a system for facilitating aircraft exchanges which allows owners to sell aircraft, search for replacement aircraft, and complete tax deferred exchanges within the time limits specified. API's sole purpose is to guide aircraft owners through their exchange transactions with minimal interruption to their everyday business activities. API’s professionals monitor each exchange carefully through communication with sellers and brokers to address issues as they arise. Our experienced staff and aircraft specialists allow us to accommodate all types of exchange transactions. API has CPAs and legal counsel on staff who are available to assist in interpreting exchange rules. However, API does not replace independent tax or legal counsel; we work together to reach the best possible exchange solution for each unique situation. Give API a call to learn how we can help you keep your sale proceeds available for reinvestment in a new or upgraded aircraft. Our exchange counselors are always available to answer questions and provide guidance in determining if a §1031 tax deferred exchange might be an excellent alternative for you.

Vineyard Exchanges

“Wine is sunlight, held together by water.” —Galileo

“I cook with wine and sometimes I even add it to the food.” —W.C. Fields

People have enjoyed vineyards and wine for thousands of years. With demand increasing, prospective vintners are buying up vacant land and planting grapes. When sold, many of these vineyards are suitable properties for a tax deferred 1031 exchange. The sale of a vineyard or winery may include several different types of property that qualify for tax deferral in a 1031 exchange, including:

1. The land associated with the vineyard itself;

2. The facilities and outbuildings that are a part of the wine making operations, including the caretaker’s house, wine tasting facility or other property used in the wine operations;

3. Water rights (if treated as a real property interest under local law); and

4. Equipment and other personal property used in the production of wine.

VINEYARDS AND DEPRECIATION

Many of the components of a vineyard may be depreciated over 10 years using straight line depreciation. Although this provides a nice tax advantage for the property owner during the depreciation period, the deprecation creates a considerably higher tax liability at the time of sale. When the property is sold, depreciation is recaptured and taxed at a Federal rate of 25% — a rate much higher than the current Federal capital gain tax rate of 15%. When a vineyard owner adds this depreciation recapture tax to the applicable Federal tax on the remaining gain, as well as state and local income taxes, they may end up with considerably less after-tax dollars than they expected. By contrast, through a 1031 exchange, the property owner can dispose of the vineyard and defer some or all of the capital gain and depreciation recapture taxes.

If the owners also have a residence on the wine property, the residence may qualify for exclusion of capital gain taxes under IRC Section 121. This residence portion of the property sale is normally excluded from the portion of the sales price allocated to the exchange, since IRC Section 1031 only applies to property held for investment or used in a business. For more information on the tax exclusion under IRC Section 121, click on Primary Residence Rules.

PERSONAL PROPERTY

Section 1031 also permits personal property held for investment or used in a business to be exchanged for other similar personal property, provided that the replacement property is in either the same General Asset Class or the same Product Class as the relinquished property. A vineyard sale may include significant amounts of irrigation equipment and tractors, as well as the machinery used to extract juice from the grapes and to bottle the wine. Note that the IRS has established 13 General Asset Classes, while the more detailed Product Classes are specified in the North American Industry Classification System (NAICS).

Wine collectors may also exchange their collections, provided the wine is held primarily for investment. So if a wine connoisseur wants to exchange a collection of Mouton-Rothschild for a collection of Latour, they might also obtain the tax deferral benefits of a 1031 exchange.

In Vino Veritas!

Question regarding Holding for Investment

I got a question yesterday regarding "held for investment."  Here it is:  "What if I do a 1031, and two weeks after I buy the replacement property I sell it?"  Answer: only property that is held for use in a business or held for investment qualifies under Section 1031 of the federal tax code.  Some people think this means that if the exchanger holds the property for a certain period of time, the 1031 works, and if the holding period is too short, the 1031 doesn't qualify.

In truth, there is no minimum time period that dictates qualification.  ” To qualify, an exchanger must have the intent to hold for investment. Intent is a subjective thing, so the IRS will look to objective factors that evidence the purpose for which property is held. Time is only one factor that may be considered in assessing the exchanger’s intent. Many other factors (in fact, “all facts and circumstances”) surrounding the taxpayer’s ownership and transfer of property may be considered in determining the taxpayer’s intent. Ideally, an exchanger could point to multiple factors to establish that the property is held for investment, such as a long period of ownership, a use consistent with an investment intent and a tax reporting history that demonstrates the investment use of the property.