Inland Private Capital Corporation. Section 1033: Tax Deferred Exchange on Involuntary Conversions of Real Estate

Transcription

1 Inland Private Capital Corporation Section 1033: Tax Deferred Exchange on Involuntary Conversions of Real Estate 1

2 Disclaimers For Institutional Use Only. Dissemination to prospective investors is prohibited. Private placement investments are suitable for accredited investors only. This material is neither an offer to sell, nor the solicitation of an offer to buy any security in any program sponsored by Inland Private Capital Corporation (IPCC), which can be made only by the Private Placement Memorandum (PPM), and sold only by broker dealers and registered investment advisors authorized to do so. This is a brief and general description of certain 1033 guidelines. Prospective investors should consult with their own tax advisors. The Inland name and logo are registered trademarks being used under license. This material has been distributed by Inland Securities Corporation, member FINRA/SIPC, placement agent for IPCC. Publication Date: 04/24/2017 2

3 Risk Factors No public market currently exists, and one may never exist, for the interests of any IPCC-sponsored program. The purchase of interests in any IPCC-sponsored program is suitable only for persons who have no need for liquidity in their investment and who can afford to lose their entire investment. IPCC-sponsored programs offer and sell interests pursuant to exemptions from the registration provisions of federal and state law and, accordingly, those interests are subject to restrictions on transfer. There is no guarantee that the investment objectives of any particular IPCC-sponsored program will be achieved. The actual amount and timing of distributions paid by IPCC-sponsored programs is not guaranteed and may vary. There is no guarantee that investors will receive distributions or a return of their capital. Investments in real estate are subject to varying degrees of risk, including, among other things, local conditions such as an oversupply of space or reduced demand for properties, an inability to collect rent, vacancies, inflation and other increases in operating costs, adverse changes in laws and regulations applicable to owners of real estate and changing market demographics. IPCC-sponsored programs depend on tenants for their revenue, and may suffer adverse consequences as a result of any financial difficulties, bankruptcy or insolvency of their tenants. IPCC-sponsored programs may own single-tenant properties, which may be difficult to re-lease upon tenant defaults or early lease terminations. Continued disruptions in the financial markets and challenging economic conditions could adversely affect the ability of an IPCC-sponsored program to secure debt financing on attractive terms and its ability to service that indebtedness. The prior performance of other programs sponsored by IPCC should not be used to predict the results of future programs. The acquisition of interests in an IPCC-sponsored program may not qualify under Section 1031 or Section 1033 of the Internal Revenue Code of 1986, as amended (the Code ) for tax-deferred exchange treatment. Certain of the programs previously sponsored by IPCC have experienced adverse developments in the past. 3

4 Section 1033 Covers Involuntary Conversions Involuntary Conversion Under Internal Revenue Code Section 1033, involuntary conversion is defined as destruction or loss of property through casualty, condemnation pursuant to government powers of eminent domain, or a sale under threat of condemnation Investor Owns a Property Experiences Involuntary Conversion due to Destruction or Condemnation Investor Receives Compensation from Such Event 4

5 Examples of Involuntary Conversions An involuntary conversion typically exists when a property is: condemned under the government s power to take private property and convert it to public use (power of eminent domain) partly or completely destroyed, such as by hurricane or fire property is sold under threat or imminence of condemnation 5

6 Section 1033 Tax Deferral Benefits Section 1033 allows the taxpayer to defer capital gain taxes on the involuntary conversion General guidelines: Replacement property depends on the type of conversion Amount received must be reinvested in a property that is equal to or greater in value than the property condemned or destroyed Replacement properties must be acquired within a defined time period of 2-3 years depending on the type of conversion 6

7 Replacement Property Guidelines Replacement properties are identified based on the type of conversion that occurred, either a condemnation or destruction of property Property was held for investment or business use and condemned/sold due to threat of condemnation use like-kind test for replacement property Other involuntary conversions - replacement property must be similar or related in service or use to the converted property 7

8 Timeline Type of Involuntary Conversion Replacement Period Destruction/Property Held for Sale 2 years after the tax year of conversion Condemnation & Property was Held for Investment or for Use in Trade or Business 3 years after the tax year of conversion 8

9 Hypothetical 1033 Tax Deferral Example $1 million property ($1 million equity/$0 mortgage) Government exercises power of eminent domain Reinvestment in similar use like-kind $1 million property ($500,000 equity/ ($500,000 mortgage) Owner, under Section 1033, keeps remaining $500,000 without tax burden 9

10 Electing to Apply Section 1033 Things to keep in mind when electing to apply a Section 1033 during tax time: Gain on return due to involuntary conversion is not reported Investor is allowed to take constructive receipt of the proceeds due to the conversion (no Qualified Intermediary required) Investor discloses a detailed statement for the year in which the involuntary conversion occurred Investor reports details of replacement property for the year in which the replacement property is acquired 10

11 1031 Exchange Process Exchanger (investor) determines they want to sell a property, the relinquished property, identifies a buyer, and engages a Qualified Intermediary prior to the close of the sale. Proceeds from sale are transferred to Qualified Intermediary and exchanger identifies a replacement property. Qualified Intermediary transfers funds to seller of replacement property and exchanger closes on new property. 11

12 Section 1033 Versus Section 1031 Notable differences between Section 1033 and 1031 General Guidelines Engage a Qualified Intermediary (QI) 45 days to identify a replacement property 180 days to purchase a replacement property No No No Yes Yes Yes 12

13 IPCC Facilitates 1031 & 1033 Exchanges Inland Private Capital Corporation, the industry leader in securitized 1031 exchanges*, provides accredited investors an opportunity to invest in institutional-quality properties IPCC Identifies Properties Investors Defer Capital Gains Tax Offers Properties to Investors Investors May Receive Monthly Distributions IPCC Manages Assets & Makes Decisions *Source: Mountain Dell Consulting 13