Commercial Real Estate Blog by Madison
Tag Archives: IRS

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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Potential Tax Savings Abound with the New IRS Regs for Improvements to Tangible Property

By: Moshe Hildeshaim, Director of Operations, Madison SPECS

The IRS has recently confirmed the newest regulations which govern the treatment of expenses incurred in improving tangible property. The regulations determine how to break down the costs related to repairs or capital improvements. These rules will affect taxpayers who acquire or improve tangible property.

According to the new regulations, structural assets may be broken down in greater detail for future write-off benefits. When the taxpayer is determining if improvements were made, the building structure and each building system can be considered separately.

The building is evaluated and broken out into units of property (UOP) according to nine Enumerated Building Systems. Continue reading

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The Tax Benefits and Spread of Conservation Easements, Part 2

By: Terence P. Guerriere, Esq., Senior Vice President, MCRES

For some, conservation easements may represent an opportunity to emulate Henry David Thoreau, “I went to the woods because I wished to live deliberately, to front only the essential facts of life” (Walden). Conservation goes a long way towards protecting the natural world for future generations, by preserving species and their habitats.

Conservation easements also offer a significant benefit to taxpayers. After last week’s discussion on meeting the IRS requirements in order to qualify for conservation easement, let’s evaluate how a conservation easement impacts the property owner’s bottom line. The benefits may explain why conservation easements are growing. Continue reading

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Qualifying for Conservation Easements, Part 1

By: Terence P. Guerriere, Esq., Senior Vice President, MCRES

In the world of commercial real estate, conserving nature goes beyond protecting environmental resources. When structured correctly, conservation easements can ensure renewable resources for future generations, and provide some monetary advantages for the here and now. Under certain conditions, conservation easements are recognized by the U.S. Internal Revenue Service (IRS). If IRS requirements are met, the landowner may qualify for certain tax incentives.

Just exactly what is a ‘conservation easement’ and what are the IRS requirements for a
parcel of land to qualify for conservation easement? Continue reading

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IRS Guidelines for Determining Capitalization

By: Moshe Hildeshaim

It has indeed been a drawn-out process for the IRS to finalize its capitalization regulations. A key aspect of the final regulations proposed by the IRS is the classification of tangible property expenses, commonly referred to as “Repair Regs”.

The turmoil has come from multiple IRS attempts to resolve the confusion between business expenses versus the capitalized costs of building. Original regulations were proposed by the IRS in 2006, withdrawn in 2008, reissued in 2011, then postponed until 2014. The final regulations were finally published in September, 2013 and will apply to tax years beginning on or after Jan 1, 2014. These new regulations will affect all taxpayers that acquire, produce or improve tangible property. So what are the IRS guidelines for determining capitalization? Continue reading

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The Emperor’s New Reg’s – New IRS Guidelines May Open New Cost Segregation Opportunities for Property Owners

Written by Danny Wechsler

In December of 2011, the IRS published new temporary regulations (T.D. 9654) in relation to capital expenditures under Sec.263(a). I bring this topic up now because the American Institute of Certified Public Accountants (AICPA) recently released a paper discussing these new regulations. Continue reading

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