Commercial Real Estate Blog by Madison
Author Archives: Lee David Medinets, Esq.

FIRPTA Withholding Rates have been Increased to 15%

By Lee David Medinets, Esq., Chief Counsel, MCRES and Senior Counsel, Madison Exchange, LLC a/k/a Madison 1031 and their affiliates

Until a few days ago, The Foreign Investment in Real Property Tax Act of 1980 (“FIRPTA”), IRC Sec. 1445, provided generally that the transferee (i.e., the purchaser) of U.S. real property or a qualified substitute must withhold from closing proceeds 10% of the gross purchase price paid for the U.S. real property. That amount must then be forwarded to the IRS as a withholding tax on the transferor (i.e., the seller) whenever the transferor is a foreign person (as that term is defined in the act). Real estate attorneys, escrow agents and qualified intermediaries routinely act as qualified substitutes in these transactions. If the transferor or a qualified substitute fails to forward FIRPTA withholding in a timely fashion, that party can be liable for the funds it should have withheld plus penalties and interest. The liability of qualified substitutes however, is generally limited to the compensation it received on the transaction.

The Consolidated Appropriations Act, 2016, Public Law 114-113 is a massive omnibus financial and tax bill (6.75 Meg. in Word format) that recently became law. Division Q of that law is titled the “Protecting Americans from Tax Hikes Act of 2015” (the “PATH Act”). Section 324 increases the FIRPTA withholding rate from 10 percent of the gross sales price to 15 percent of the gross sales price. Continue reading

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Parking Arrangements in Construction Exchanges and for Other Purposes

By: Lee David Medinets, Esq., Chief Counsel, MCRES, Madison Exchange a/k/a Madison 1031, and affiliates

In the last few posts, we looked at how parking arrangements are handled in reverse exchanges. Construction exchanges are in some ways very similar to reverse exchanges. Both involve a parking arrangement. In a construction exchange, however, the purpose of the parking arrangement is different.

IRC § 1031 allows for the cost of construction on replacement property to be counted as part of the purchase price of that property, but only to the extent that the improvements have been made to the property before the taxpayer acquires it. Once the taxpayer owns the replacement property it is too late. Moreover, payment for bricks and mortar sitting at the construction site does not count for exchange purposes until those bricks and mortar have been attached to the ground. The cost of services performed for construction counts, but not the cost of services that have not yet been performed. In a construction exchange, the parking arrangement allows these improvements to be made while the property is in the hands of a friendly party. Continue reading

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Parking Arrangements in Reverse Exchanges – Part 3

By Lee David Medinets, Esq., Chief Counsel, MCRES, Madison Exchange a/k/a Madison 1031, and affiliates

In my last post, we looked at how a safe harbor reverse exchange works under Rev. Proc. 2000-37. Either the relinquished property or the replacement property is “parked” with an “exchange accommodation titleholder” or “EAT”. We also discussed the restrictions on a safe harbor reverse exchange that must be included in a “qualified exchange accommodation agreement” (a “QEAA”) in order to have the benefit of the safe harbor. In this post we will examine the difference between parking a replacement property versus parking a relinquished property.

There are usually some significant advantages to parking the replacement property instead of the relinquished property. Here are five advantages. Continue reading

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Parking Arrangements in Reverse Exchanges – Part 2

Lee David Medinets, Esq., Chief Counsel, MCRES, Madison Exchange a/k/a Madison 1031, and affiliates

In the last post, we began to examine the problem of what to do when a taxpayer needs to buy an IRC Section 1031 like-kind exchange replacement property before the relinquished property in that exchange can be sold. This is called a “reverse exchange” because it proceeds in the opposite direction from the common forward exchange where the relinquished property is sold first. The reverse exchange process creates a special problem in that the taxpayer cannot simultaneously own both the relinquished property and the replacement property. In a reverse exchange, either the relinquished property or the replacement property must be “parked” with some relatively friendly third-party until the relinquished property is sold.

We also examined why traditional non-safe harbor reverse exchanges are expensive, risky and rare. On the other hand, traditional non-safe harbor exchanges have the substantial advantage that there is no theoretical limit to how long a potential replacement property could be parked. In order to inject some certainty into the reverse exchange process and in order to encourage reasonable time limits on that process, the IRS has offered an alternative by creating a safe harbor in Revenue Procedure 2000-37. Continue reading

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Parking Arrangements in Reverse Exchanges – Part 1

By Lee David Medinets, Esq., Chief Counsel, MCRES and Senior Counsel, Madison Exchange, LLC a/k/a Madison 1031 and their affiliates

IRC §1031 like-kind exchanges are popular, reliable, IRS-approved transactions that allow taxpayers to defer paying taxes on profits when property (usually real estate) that is held for productive use in trade or business or for investment is exchanged for like-kind property (e.g., real estate exchanged for real estate) that will also be held for productive use in trade or business or for investment.

In a typical IRC §1031 exchange, the taxpayer sells relinquished property through a qualified intermediary (a “QI”) and later acquires replacement property through the same QI. If the process is handled in accordance with Treasury Regulations, it is considered as if the taxpayer exchanged the relinquished property for the replacement property. This process is commonly referred to as a “forward” exchange because it proceeds in the normal direction – sell first, buy second. However, sometimes a taxpayer needs to buy the replacement property before the relinquished property can be sold. This is called a “reverse exchange” because it proceeds in the opposite direction from a forward exchange.

A reverse exchange poses a special problem. The taxpayer cannot simultaneously own both the relinquished property and the replacement property. That would make it impossible to exchange one property for the other. Therefore, in a reverse exchange, either the relinquished property or the replacement property must be “parked” with some relatively friendly third-party until the relinquished property is sold. Continue reading

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New Private Letter Ruling Suggests a Method for Handling Certain Construction Exchanges

By Lee David Medinets, Esq., CES®, Chief Counsel, Madison Exchange, LLC

A “Construction Exchange” is a special type of tax-deferred IRC § 1031 like-kind exchange that allows a taxpayer to defer recognizing income by sheltering proceeds from the sale of relinquished property into improvements made to replacement property, not just in the cost of buying the replacement property (as in an ordinary “forward exchange”). In order for a construction exchange to work, the taxpayer cannot own the property at the time the im-provements are made. In a typical safe-harbor construction exchange [Rev. Proc. 2000-37], the replacement property is purchased from a third-party seller on behalf of the tax-payer by an exchange accommodation titleholder (“EAT”). The EAT is essentially acting as the taxpayer’s agent under a contract that allows the taxpayer to use and improve the re-placement property during the taxpayer’s 180-day exchange period. By the end of the ex-change period, the EAT transfers legal ownership of the replacement property to the tax-payer, which completes the exchange.

One common problem is that a safe-harbor construction exchange will not work if the tax-payer owned the replacement property within 180 days of the start of the exchange. [Rev. Proc. 2004-51.] What if the replacement property is owned by a related party, such as a multi-member LLC that the taxpayer controls? There has been some concern that such an exchange might fail to qualify as a safe-harbor construction exchange because ownership of the replacement property by the related party would be viewed by the IRS as the equivalent of ownership by the taxpayer himself/herself. IRS Private Letter Ruling 201408019, issued February 21, 2014, addressed this precise issue. Continue reading

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IRC §1031 Like-Kind Exchanges and the Mexican Land Trust

By Lee David Medinets, Esq., MCRES General Counsel

Non-Mexicans are not permitted to own land in certain “restricted zones” within Mexico (i.e., within 100 miles of that country’s international borders or within 50 miles of the ocean). Nevertheless, foreigners may own a beneficial interest in land within restricted zones through a fideicomiso or Mexican Land Trust (“MLT”). In order to acquire land through an MLT, the foreign national must first obtain permission from the Mexican Ministry of Foreign Affairs. If permission is granted, then legal title to the land can be held by a Mexican bank as trustee of the MLT, and the foreign national can have all of the benefits and burdens of real estate ownership as a beneficiary of the MLT.

In the recent Rev. Rul. 2013-14 (released June 7, 2013), the IRS determined whether an MLT can be swapped in an IRC § 1031 like-kind exchange. Continue reading

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A Tale of Two Residences

Written by Lee David Medinets, Esq.
General Counsel, MCRES and Senior Counsel for Madison 1031

IRC § 1031 provides an opportunity to defer taxes when like-kind properties are exchanged. In order to qualify, one essential requirement is that both the relinquished property and the replacement property must be “held for productive use in a trade or business or for investment.” Therefore, a common problem in like-kind exchanges is to determine whether a particular residential property is held for investment or for personal use. Two recent U.S. Tax Court cases give a little help in making that distinction. Continue reading

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A Real Estate Investment Strategy for Replacement Properties was NOT Entitled to Patent Protection

There are numerous strategies in the marketplace for creating “headache free” real estate investments to be used as replacement property in like kind §1031 exchanges. Fort Properties, Inc. challenged the validity of this patent, claiming that AML’s strategy is unpatentable. The U.S. Circuit Court of Appeals for the Federal District agreed. Continue reading

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New York and New Jersey Construction Lien Laws

New Jersey’s notice of settlement law (formerly N.J.S. 46:16A-1 et seq.) has been repealed, revamped and reenacted as N.J.S. 46:26A-11, effective May 1, 2012. The most important changes from the old law are that a notice of settlement is now effective for 60 days, rather than 45 days, and a notice of settlement may now be extended for an additional 60 days. New York, in contrast, has no law that protects buyers or lenders from claims arising between the record date at the time of a pre-closing rundown and the date that closing documents are recorded. Continue reading

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