Beutler Exchange Group

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Fall 2016 Catch-up

You haven't heard from us in a few months. All good

news. We have been scrambling to keep up with the

high level of exchange activity - forward exchanges as

well as reverse and improvement. More good news -

there have not been many new developments in the

exchange world. What follows is a summary of what we

have seen so far in 2016.

Recent Developments

2017 Proposed Federal Budget

The White House's proposed budget, as in previous years, contains 1031

related provisions for 2017:

1. Limiting the gain deferral from like-kind real and personal property

exchanges to $1.0m per year per taxpayer.

2. Making artwork and collectibles ineligible for 1031 treatment.

3. Raising the capital gain rate to 28%.

The Federation of Exchange Accommodators, of which Beutler Exchange

Group is a member, continues to monitor and lobby at the federal and state


Principal Use of an Aircraft

While few of the exchanges documented by Beutler Exchange Group are of

capital assets (aircraft, equipment, cows) IRS Chief Counsel Advisory

201605017 is of interest for a couple of reasons.

1. The Taxpayer's aircraft was used for both business and personal

purposes. The first question was whether a single asset could be

characterized as two separate assets so that the Taxpayer could take

advantage of §1031 for the business use portion. (In the past second

home owners were inclined to do the same.) The CCA answer is "no."

The aircraft cannot be treated as two separate assets. A determination

will have to be made as to its "principal use " (It is possible to have a

will have to be made as to its principal use. (It is possible to have a

mixed-asset property. For example, a farm property comprised of the

primary residence, rental housing and farm land. The Taxpayer can

utilize the primary residence exclusion for the home and §1031 for the

rental use and farm land.)

2. In determining the "principal use" the CCA described a two-year look

back period. This mirrors other 1031 safe harbor time frames, for

example, related party exchanges and personal use of vacation


The question of "seasoning" is asked in our office on a daily basis. How

long do we have to hold our replacement property before gifting to our child:

How soon can we exchange after terminating a partnership? The CCA

supports a conservative approach of 24 months of seasons.

California - Swap and Drop after Seven Months

On the other hand...

The taxpayers acquired a property as tenants-in-common in an exchange

("swap"). Seven months later they contributed ("dropped") their interests to a

single purpose limited liability company as required by their lender.

The Franchise Tax Board decision to disallow the exchange, because of the

quick change of ownership, was overturned by the California Board of

Equalization (BOE). (Appeals of Rago Development Corporation, et al.,

2015-SBE-01, June 23, 2015) The BOE held there was independent

significance in holding as tenants-in-common and the formation of the

limited liability company was merely a change in the form of ownership

which did not disqualify the exchange. The Oregon Tax Court held similarly

in Dept. of Rev. v. Marks, 20 OTR 35 (2009).

We would still recommend seasoning before changing the form of

ownership. 24 months?

FIRPTA Withholding Increased

The Foreign Investment Real Property Tax Act (FIRPTA) requires

withholding at the time of sale if the Seller is a foreign person, as defined in

the act. §1031 will not defer the payment of this tax so, to the degree a sale

is subject to FIRPTA withholding, the benefit of an exchange is undermined.

Sale proceeds that would otherwise have been used to purchase

replacement property must be sent to the IRS.

Effective February 16, 2016 the withholding rate was increased from 10% of

the gross sale price to 15%.


Welcoming our New Staff Attorney - Kelci Paiva

Kelci earned her JD at Florida Coastal School of Law

Kelci earned her JD at Florida Coastal School of Law

and her LLM in Environmental and Natural Resource

Law at Lewis & Clark Law School. She most recently

worked in property management.

We are very happy she joined our team!

Kelci Paiva