Building for the Future FEA 2018 Annual Conference STEPHEN A. WAYNER, ESQ. C.E.S. MANAGING DIRECTOR OF LIBERTY 1031 LLC VARIOUS WAYS TO HOLD REAL ESTATE September 12 14, 2018 Marriott Country Club Plaza Kansas City, Missouri
Ownership Entity Comparisons THE WHY--SAME TAXPAYER REQUIREMENT The same taxpayer that disposed of the relinquished property must acquire the replacement property to satisfy the exchange requirements of I.R.C. Section 1031. There are numerous definitions of what the same taxpayer could be.
THE BASIC TYPES OF OWNERSHIP SOLE PROPRIETORSHIP Ownership One owner Personal Liability of Owners Unlimited Personal Liability for the obligations of the business/investment. Tax Treatment Entity NOT taxed, as the profits and losses are passed through to the sole proprietor. Key Documents for Formation DBA filing (Fictitious Name filing). Management of the Business Sole proprietor manages the business. Capital Contributions Sole Proprietor contributes whatever capital is needed.
THE BASIC TYPES OF OWNERSHIP C CORPORATIONS Ownership Unlimited number of shareholders allowed; no limit on stock Classes; shareholder need not be US. Citizen or Resident; may be owned by another business, rather than individuals. Personal Liability of Owners Generally no personal liability for the obligations of the corporation. There is limited liability up to the amount invested, plus his or her own malpractice. Tax Treatment Corporation taxed on its earnings at the corporate level and shareholders have a further tax on any dividends distributed. DOUBLE TAXATION!!! the
THE BASIC TYPES OF OWNERSHIP C COPORTATIONS -- CONTINUED Key Documents for Formation Articles of Incorporation, Bylaws, organizational Board Resolutions, Stock Certificates, Stock Ledgers. Management of Business Board of Directors has overall management responsibility and officers have day-to-day responsibility. Capital Contributions Shareholders typically purchase stock in the corp.
THE BASIC TYPES OF OWNERSHIP S CORPORATIONS (FORMERLY KNOWN AS SUB-S CORPS) Ownership Up to 100 shareholders allowed, only 1 basic class of stock allowed; must be U.S. citizen or resident and may NOT be owned by another business. Personal Liability of Owners Generally, a shareholder s liability is limited to the amount invested, plus his or her own malpractice or guarantees. Tax Treatment Entity is generally not taxed as the profits and losses are passed through to the shareholders (pass-through taxation) that is presuming the shareholders have elected not to be taxed as a corporation.
THE BASIC TYPES OF OWNERSHIP S COPORATIONS (FORMERLY CALLED SUB-S) CONTINUED Key Documents for Formation Articles of Incorporation, Bylaws, Organizational Board Resolutions, Stock Certificates, Stock Ledger, IRS & State S Corporation Elections. Management of the Business Board of Directors has overall management responsibility and officers have day to day responsibility. Capital Contributions Shareholders typically purchase stock in the Corporation, but only one class of stock in allowed.
THE BASIC TYPES OF OWNERSHIP GENERAL PARTNERSHIP Ownership Unlimited number of General Partners allowed. Personal Liability of Owners Unlimited personal liability of the general Partners for the obligations of the business/investment. Tax Treatment Entity not taxed, as the profits and losses are passed through to the general partners per their partnership agreement.
THE BASIC TYPES OF OWNERSHIP GENERAL PARTNERSHIP CONTINUED Key Documents for Formation General Partnership Agreement; local filings if partnership holds real estate. Management of the Business The general partners have equal Management rights, unless they agree otherwise. Capital Contributions The general partners typically contribute money or Services to the partnership, and receive an interest in profits and Losses.
THE BASIC TYPES OF OWNERSHIP LIMITED PARTNERSHIP Ownership Unlimited number of general and limited partners allowed. Personal Liability of Owners Unlimited personal liability of the general Partners for the obligations of the business/real estate or lawsuits brought against the partnership. Limited partners liability is generally limited to the partner s investment, plus his or her own malpractice. Tax Treatment Entity is not taxed, as the profits and losses are passed through to the general and limited partners.
THE BASIC TYPES OF OWNERSHIP LIMITED PARTNERSHIP Ownership Unlimited number of general and limited partners allowed. Personal Liability of Owners Unlimited personal liability of the General Partners for the obligations of the business/real estate or lawsuits brought against the partnership. Limited partners liability is generally limited to the partner s investment, plus his or her own malpractice. Tax Treatment Entity is not taxed, as the profits and losses are passed through to the general and limited partners.
THE BASIC TYPES OF OWNERSHIP LIMITED PARTNERSHIP CONTINUED Key Documents for Formation Limited Partnership Certificate; Limited Partnership Agreement. Management of the Business The general partner manages the business, subject to any limitations of the Limited Partnership Agreement. Capital Contributions The general and limited partners typically contribute money or services to the limited partnership and receive an interest In the profits and losses.
THE BASIC TYPES OF OWNERSHIP LLC LIMITED LIABILITY COMPANY Ownership Unlimited Number of Members Allowed; Members need not be U.S. Citizens or residents; may be owned by another business rather than individuals. Personal Liability of Owners Generally no personal liability of the members for the obligations of the business/real estate. Tax Treatment Entity not taxed (unless chosen to be taxed as a Corporation), as the profits and losses are passed through to the members. Let me repeat-- The Taxpayer has a choice of how to be taxed, either as a Corporation or individually.
THE BASIC TYPES OF OWNERSHIP LLC LIMITED LIABILITY COMPANY CONTINED Key Documents for Formation Articles of Organization and Operating Agreement. Management of the Business The Operating Agreement sets forth how the business is to be managed a Manager can be designated to manage the business. Capital Contributions The members typically contribute money or services to the LLC and receive an interest in profits and losses.
THE NOT SO BASIC TYPES OF OWNERSHIP JOINT TENANTS WITH RIGHT OF SURVIVORSHIP Two or more persons owning a property with right of survivorship. They do not have to be married. The joint tenants share an equal ownership in the property. Property held under a joint tenancy is fair game for the creditors of one of the joint tenants. Thus, a creditor of one partner can seize the assets from both parties or the creditor can do a partition lawsuit, etc. to either get an ownership right in the real estate or get paid any monies owed to them.
THE NOT SO BASIC TYPES OF OWNERSHIP TENANCY IN COMMON (TIC) Title to property (usually real property, but it can apply to personal property) held by two or more persons, in which each has an "undivided interest" in the property and all have an equal right to use the property, even if the % (percentage) of interests are not equal or the living spaces are different sizes. Unlike joint tenancy there is NO right of survivorship if one of the tenants in common (TIC) dies. * Each interest may be separately sold, mortgaged or willed to another. Thus, unlike a joint tenancy interest which passes automatically to the surviv or, upon the death of a tenant in common, there must be a probate proceeding (court supervised administration) of the estate of the deceased to transfer the interest (ownership) in the tenancy in common..
THE NOT SO BASIC TYPES OF OWNERSHIP TENANCY BY THE ENTIRETY (TBE) The type of concurrent estate in real property held by a Husband and Wife, whereby each owns the undivided whole of the property, coupled with Right of Survivorship, so that upon the death of one, the survivor is entitled to the decedent s share. Neither spouse can by themselves, sever the Tenancy by the Entirety by using it as collateral or selling or mortgaging an interest in the property. Creditors with a judgment against one spouse are restricted from seizing TBE property. There are various versions of TBE s in different areas of the country.
THE NOT SO BASIC TYPES OF OWNERSHIP TENANCY BY THE ENTIRETY (TBE) --Continued The following states have TBE protection on real property: Alaska, Arkansas, Delaware, District of Columbia, Florida, Hawaii, Illinois, Indiana, Kentucky, Maryland, Massachusetts, Michigan, Mississippi, Missouri, New Jersey, New York, North Carolina, Oklahoma, Oregon, Pennsylvania, Rhode Island, Tennessee, Vermont, Virginia, and Wyoming. Upon death of either spouse, the surviving spouse will automatically own the property in its entirety. Thus, that property does not go into probate. So, it is not subject to the claims of the decedent s heirs, or creditors of the beneficiary. The TBE property will convert to the solely owned property of the surviving spouse, and then can be subject to the claims of the surviving spouse s creditors. One final comment should the couple obtain a divorce, the TBE is automatically terminated.
THE NOT SO BASIC TYPES OF OWNERSHIP LAND TRUSTS In the late 19 th century in Chicago, IL, some people figured out that land trusts would be good things for buying property for investors to build skyscrapers on, and city alderman figured this would be a good way to hide their ownership in land, since they were forbidden to vote on city building projects when they owned the land nearby. The land trust in America today is often called an Illinois Land Trust. In Florida, until a couple of years ago, the Florida Statute was titled the Illinois Land Trust statute.
THE NOT SO BASIC TYPES OF OWNERSHIP LAND TRUSTS CONTINUED Advantages of Land Trusts: Individuals use land trusts for privacy (anonymity) and to avoid probate. Businesses set up land trusts when they want to compile large tracts of land without arousing suspicion or alerting people to their plans (which could cause the asking price to rise. Example: Disney World) Judgments or liens (such as IRS liens) against an individual s name are not a lien against their land trust property (in most cases), but might be attachable for other types of liens or judgments. Interests can be transferred quickly without recording a deed.
THE NOT SO BASIC TYPES OF OWNERSHIP LAND TRUST CONTINUED ADVANTAGES Negotiating a purchase or sale can be easier when the trustee can be blamed. In many cases, liability on financing can be limited to the assets of the trust. In many cases, you can make a non-assumable loan assumable by having the lender approve putting the property into a land trust and having the seller as beneficiary of the trust. When the seller wants to sell, it sells their beneficiary interest and the lender never knows there was a transfer. Most lenders, especially FNMA and FREDDIE MAC, have learned this trick and will not necessarily approve the use of the the land trust or transfer of the beneficial interests, without the lender giving its written approval to the transfer.
THE NOT SO BASIC TYPES OF OWNERSHIP LAND TRUSTS CONTINUED NOTE: Six States have specific Statutes allowing Land Trusts, they are: Illinois, Florida, Indiana, Virginia, Hawaii, and North Dakota. Experts on the subject take the position that land trusts are also valid in all of the States except for Louisiana.
THE NOT SO BASIC TYPES OF OWNERSHIP TRUSTS DST S DELAWARE STATUTORY TRUST (DST) DST s are formed as private governing agreements under which real, tangible or intangible property is held, managed, administered, invested and /or operated. Most DST investments are offered as replacement property to accredited investors seeking to defer their capital gains taxes through the usage of a Section 1031 tax deferred exchange. The DST allows the small investor to own a fractional interest in large, institutional quality and professionally managed commercial property along with other investors, not as limited partners, but as individual owners within a Trust. Each owner receives their percentage share of the cash flow income, tax benefits and appreciation, if any, of the entire property. In most cases, DST s provide the investor the potential for annual appreciation and depreciation (tax shelter), without the management headaches.
THE NOT SO BASIC TYPES OF OWNERSHIP DST S CONTINUED THE SEVEN ELIGIBILITY RESTICTIONS FOR SECTION 1031 USAGE: Internal Revenue Service Bulletin: 2004-33 and Internal Revenue Rul. 2004-86 1. Once the offering is closed, there can be no future contributions to the DST by either current or new beneficiaries. 2. The Trustee cannot renegotiate the terms of the existing loans and cannot borrow any new funds from any party, unless a loan default exists as a result of a tenant bankruptcy or insolvency. 3. The Trustee cannot reinvest the proceeds from the sale of its real estate.
THE NOT SO BASIC TYPES OF OWNERSHIP DST S THE 7 ELIGIBILITY RESTRICTIONS CONTINUED 4. The Trustee is limited to making capital expenditures with respect to the property for normal repair and maintenance, minor nonstructural capital improvements, and those required by law. 5. Any reserves or cash held between distribution dates can only be invested in short-term debt obligations. 6. All cash, other than necessary reserves, must be distributed on a current basis. 7. The Trustee cannot enter into new leases, or renegotiate the current leases, unless there is a need due to a tenant bankruptcy or insolvency.
THE NOT SO BASIC TYPES OF OWNERHIP COMMUNITY PROPERTY STATES There are 9 community property states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. Alaska, Puerto Rico and Tennessee have adopted community property systems, but they are optional. REQUIREMENTS: If property is held a community property, each spouse technically owns an undivided one half interest in the property. This type of ownership applies to most property acquired by each spouse during the course of the marriage. It generally does not apply to property acquired prior to the marriage or to property acquired by gift or inheritance during the marriage.
THE NOT SO BASIC TYPES OF OWNERSHIP COMMUNITY PROPERTY REQUIREMENTS CONTINUED After a divorce, community property is divided equally in some states and according to the discretion of the court in other states. It is important to note that there are NO two community property states with the exact same laws. The statutes or judicial decisions in one state may be completely opposite to those of another state on a particular legal issue. Some states have created a newer form of community property, called community property with right of survivorship. This form of holding has some similarities to joint tenancy with right of survivorship. Because community property law affects the property of all married persons in the states in which it is in effect, it can have substantial consequences upon dissolution of marriage from the perspective of the spouse forced to share a valuable asset the he or she thought was separate property. Example: Frank McCourt thought he personally owned the Los Angeles Dodgers as a separate property. In order to avoid a long debilitating trial, he paid ex-wife Jamie McCourt a $130 million dollar settlement, after their post-nuptial agreement was found to be invalid.