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Assume you would like to sell a tract of land and reinvest all of the proceeds into other real estate. The normal rule is that the sale or exchange of appreciated property results in the recognition of gain and the payment of income taxes associated with that gain. Internal Revenue Code §1031 is an exception to this general rule and is based on Congress’ desire not to impose a tax on a gain where a taxpayer continues his or her investment in “like-kind property.” With proper planning, the disposition of property held for investment or used in a trade or business can qualify for Section 1031 treatment.
Although it is usually associated with real estate, Section 1031 is also available for the exchange of certain tangible personal property. Most Section 1031 transactions are “deferred exchanges” due to the practical problems associated with a direct exchange of property for property. In a deferred exchange, a “qualified intermediary” (“QI”) is employed to take possession of cash proceeds at the first closing until the proceeds can be reinvested in replacement property. Within 45 days of the first closing, the taxpayer must identify for the QI, in writing, three (3) potential replacement properties. Within 180 days of the first closing, the QI must acquire one or more of the identified replacement properties. There are no exceptions to these time limitations. To defer recognition of all of the gain, a taxpayer must (a) roll all of the cash into the replacement property and (b) incur debt in purchasing the replacement property which is equal to or more than the debt satisfied at the first closing. If the taxpayer wants to acquire his replacement property prior to the date of the first closing, a “reverse exchange” may be carried out by employing the assistance of an “exchange accommodation titleholder” (“EAT”). Deferring the payment of income taxes by making use of Section 1031 allows a client to reinvest funds that would otherwise be payable to state and federal tax authorities.
The above description is intended to provide Web site browsers with some general information about the subject matter covered but is provided with the understanding that this Web site is not engaged in rendering legal services. I f legal advice pertaining to IRC Section 1031 is required, the services of one of the tax attorneys at Buist Moore Smythe McGee P.A. should be sought.
Limited liability companies (“LLCs”) are legal entities that resemble corporations in some respects and partnerships in other respects, however, they are neither. LLCs are separate and distinct from corporations and partnerships. South Carolina first adopted an LLC statute in the summer of 1994 but replaced it with the Uniform LLC Act (“Act”) on June 1, 1996. LLCs have since become the entity of choice for small to medium size businesses. LLCs are regularly employed in large business transactions. The Act limits the personal liability of the owners (known as “members”) in the same manner that shareholders are protected from the liability of the corporation they own. The Act allows the members to structure their business arrangement through the use of an “operating agreement” in the same manner that partners set forth their deal in a partnership agreement. While the corporate statute imposes many mandatory rules, the LLC Act acts primarily as a default and for the most part only applies where a particular matter is not covered in an operating agreement. A single member LLC is generally treated as a sole proprietorship for tax purposes and reports its business activity on a Schedule C or Schedule E of the Member’s Individual Income Tax Return (Form 1040). A multiple-member LLC is generally treated as a partnership for tax purposes and files a Partnership Return of Income (Form 1065). It is possible, however, for an LLC to “check the box” and elect to be treated either as a “C” corporation or “S” corporation through the use of an Entity Classification Election (Form 8823) and Election by a Small Business Corporation (Form 2553).
The above description is intended to provide Web site browsers with some general information about the subject matter covered but is provided with the understanding that this Web site is not engaged in rendering legal services. If legal advice pertaining to limited liability companies is required, the services of an attorney at Buist Moore Smythe McGee P.A. should be sought. It is particularly important for a client who wishes to organize an LLC taxed as a corporation to seek the advice of a qualified tax attorney or certified public accountant (CPA).
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