2012 Year-End Review from CCIM

Throughout the past year, CCIM Institute had three top priorities: increase liquidity, prevent burdensome regulations, and create awareness of how federal tax policies impact commercial real estate. Read more.

Federal Tax Policy with Fiscal Cliff Updates

Federal tax code has not substantially changed for over two decades. 2013 brings a new set of rules and guidelines for all U.S. tax payers. Keep in mind that filing for 2013, is not due until April 2014. Individuals, families and businesses across the board (not only higher-income individuals or households) will be to some degree, impacted by federal tax rate changes negotiated through the fiscal cliff deal. Capital Gains/Carried Interest The capital gains/carried interest rate will increase to 20 percent for individuals with and adjusted gross income more than $400,000 and married couples with AGI more than $450,000. Individuals/couples below the $400,000/$450,000 AGI level will still pay 15 percent. 3.8 Percent Healthcare Tax Passed under the Affordable Care Act in 2010, the 3.8 percent healthcare tax will affect some real estate transactions. Individuals with AGI more than $200,000 and married couples with AGI more than $250,000 may be subject to the 3.8 percent healthcare tax. Payroll Tax In February last year, the payroll tax cut was extended until Dec. 31, 2012. Payroll tax includes Social Security payments that were cut to 4.2 percent instead of 6.2 percent. Without language included in the fiscal cliff deal, the payroll tax reverted back to the pre-recession level, 6.2 percent. It is estimated that the average worker will pay about $1,000 more in taxes annually, or about $42 per pay check. Alternative Minimum Tax Under the fiscal cliff deal, the AMT received a permanent fix and will adjust for inflation. The AMT will be less burdensome on lower-income levels with more exemptions for credits or tax deductions whereas higher-income levels will receive less exemption opportunities.  Exemptions and Deductions Individuals with AGI more than $250,000 and couples with AGI more than $300,000 should expect a phase out of the personal exemption of $3,800 and itemized deduction write-offs. Direction on the "Pease" provision was included in the fiscal deal ("Pease" is named after Congressman Don Pease (OH) who created an itemized deduction phase out in 1990). The itemized deduction phase out was avoided with the recession and Bush-era tax cuts. As clarified by the fiscal deal, the "Pease" provision will now eliminate up to 80 percent of deductibles for $300,000 AGI couples or $250,000 AGI individuals: including charitable donations and mortgage interest. Estate and Gift Tax Estate or gift taxes will be taxed at or above the $5 million (per person) level but the tax rate will increase from 35 percent to 40 percent in 2013. Depreciation ("bonus") Businesses may deduct up to 50 percent of expenses (property and equipment), not including real estate for the 2013 tax year. Leasehold Improvements There is a 15-year straight-line cost recovery for qualified leasehold improvements on commercial properties that extends through 2013 and is retroactive for 2012. Income Tax Rates The greatest change will be for individuals with AGI over $400,000 and married couples with AGI over $450,000; a new tax rate of 39.6 percent applies to this income level. For incomes below, the Bush-era tax rates became permanent. On January 3, 2013 the Internal Revenue Service released a guide on new federal tax rates, Updated Withholding Guidance for 2013. Read more. The fiscal cliff negotiations did not produce changes to federal tax policies on depreciation recapture or passive loss.

Final Fiscal Cliff Stages

CCIM Institute's summary of the fiscal cliff negotiation stages and final details preventing the U.S. economy from going over the cliff can be reviewed online. Read more.

Regulation

FASB Lease Accounting Proposed Rules The Financial Accounting Standards Board’s lease accounting proposal has the potential to reduce the U.S. GDP by $27.5 billion annually and cause a loss of approximately 190,000 U.S. jobs. It is expected that FASB will release more information by April 2013. Read more. Basel III/Dodd-Frank Act The Dodd-Frank Act requires federal agencies to protect consumers. Basel III is a proposed rule under Dodd-Frank. Basel III is overly complex and has the potential to hurt local economies. Read more.

Healthcare/Affordable Care Act

Individual Healthcare Mandate By 2014, the individual mandate upheld by the U.S. Supreme court will go into effect. Read more. CCIMs (and all U.S. citizens) will either continue having coverage through their employer, purchase insurance coverage through a health insurance exchange, or pay a tax penalty. Health Insurance Exchanges will be set up through their state or the federal government. States had to determine by 2012 whether they will create their own exchange or use the exchange the federal government creates.

Small Business

SBA’s 504 Refinancing Loan Program The Small Business Administration’s 504 Loan Program provided another refinancing opportunity for small business expansion plans, the program expired in 2012 but Congress is considering extending the program. Read more.

State Tax Policy

Internet Sales Tax Online retailers put brick and mortar storefronts out of business because there is an unfair advantage when tax season rolls around. Read more.

The Cost of Capital- Update from NAR

BACKGROUND


As you may recall, on June 12, 2012, the Federal Reserve, OCC and FDIC proposed regulations implementing the Basel III capital accords. Basel III is an international agreement that updates capital and liquidity requirements for banks and other financial institutions. This 750 page regulation will impact the ability of non-financial businesses to raise capital and increase their costs of borrowing.
In a series of three separate but related proposals, the regulators proposed substantial revisions to the U.S. regulatory capital regimen for banking organizations that, if adopted, will have a significant impact on the entire U.S. banking industry. The U.S. rules are based on the core requirements of the 2011 international Basel III Accord and in significant part on the “standardized approach” for the weighting and calculation of risk-based capital requirements under the 2004-2006 Basel II Accord. Importantly, the proposals will extend large parts of a regulatory capital regime that was originally intended only for large, internationally active banks to all U.S. banks and their holding companies, other than the smallest bank holding companies (generally, those with under $500 million in consolidated assets).
Commercial Real Estate

Most commercial loans will continue to be risk-weighted at 100 percent. The one significant change is for “high volatility” commercial real estate loans (“HVCRE loans”), a subset of ADC loans. HVCRE loans will be risk-weighted at 150 percent. A lender may be able to return an ADC loan to the 100 percent risk weight through underwriting and the imposition of certain terms, as follows:

• The LTV ratio is less than or equal to the “applicable maximum supervisory LTV ratio.”

• The borrower has contributed at least 15 percent of the appraised “as completed” value of the property. The contribution may take the form of cash or unencumbered readily marketable assets, or the borrower may have paid development expenses out of pocket.

• The borrower has paid to the bank the capital charge that the bank will have to incur on the loan and has done so before the bank advances any funds.

• The contributed capital, which may eventually include capital generated internally by the project, must remain in place until the project is completed, the facility converts to permanent financing, or is sold or paid in full.

• Permanent financing by the bank must conform to the bank’s underwriting criteria for long-term commercial mortgage loans. An ADC loan to finance one- to four-family residential properties, however, may continue to be risk-weighted at 100 percent.

Residential Construction and Multifamily Loans

The current risk-based capital rules assign a risk weight of 50 percent to certain one-to-four family residential presold construction loans and to multifamily loans. A 100 percent risk weight applies to a presold construction loan if the purchase contract is cancelled. These risk weights are fixed by statute and cannot be changed. The proposed Standardized Approach, however, adds several new conditions to both kinds of loans in order to qualify for these risk weights.

Presold construction loans must meet several prerequisites designed to ensure that the property will, in fact, be sold on completion. Two notable new requirements are, first, that the builder incur at least the first 10 percent of the direct costs of construction (land, labor, and construction) before the builder may begin to draw down on the loan; and, second, that the loan amount may not exceed 80 percent of the sales price of the presold residence.

Loans secured by mortgages on multifamily properties will remain eligible for the 50 percent risk weight if several conditions are met. For example, a newly originated multifamily loan cannot be risk-weighted at 50 percent and must be weighted at 100 percent. If, after at least one year, the borrower has made all principal and interest payments on time, the loan will be eligible for the 50 percent risk weight, if other conditions are satisfied.

These conditions include the following: (i) the LTV ratio does not exceed 80 percent on a fixed rate loan or 75 percent on a loan where the rate may adjust; (ii) amortization of principal and interest must occur over a period of not more than 30 years, and the original maturity for repayment of principal is not less than seven years; and (iii) annual net operating income of the property must exceed annual debt service by 20 percent for a fixed-rate loan or 15 percent for a loan where the rate may vary.

Basel III Working Group

We have formed a staff level working group with various real estate groups in Washington. This group is meeting regularly to share information and develop a collective strategy on these proposed rules.

Good News on Flood Insurance

On June 29, 2012, both the Senate and House passed the Biggert-Waters Flood Insurance Reform Act of 2012 as a part of H.R. 4348, the Surface Transportation Conference Report.  The President will sign the measure in a few days.  This is the culmination of a successful multi-year REALTOR campaign and a final push at NAR’s Midyear Legislative Rally and Meetings in May 2012.  Congress had been extending the National Flood Insurance Program a few months at a time since 2008.  Twice this led to shut downs, including one that stalled thousands of real estate sales in June 2010 alone.  Passage of this 5-year reauthorization will bring certainty to real estate transactions in more than 21,000 communities nationwide where flood insurance is required for a mortgage.  The bill ensures the program will continue long-term for more than 5.6 million business- and homeowners who rely on it, achieves one of NAR’s top priorities for the year, and means taxpayers will spend less on federal assistance for flood disasters over the long run. 

A Look At The Year Ahead From Kevin Maggacimo-President of Sperry Van Ness

As we look forward to a new year, I am pleased to share my thoughts on the very memorable 12 months past, and to offer my outlook for the commercial real estate market in 2012. Before I do, I would be remiss if I did not thank the Sperry Van Ness clients, Advisors, staff, and fellow brokers for their contributions in driving us forward in spite of the unpredictable times. I know that I speak for all SVN Advisors and staff when I wish you a prosperous New Year.

A Year of Fits and Starts for Commercial Real Estate

During a year of extraordinary economic and political uncertainties, commercial real estate held its position as a crucial safe haven for investors in 2011. Investment into the sector reached a peak in the second quarter, supported by CMBS conduit originators and more active life company and bank lenders. Even as economic and employment trends fell short, leasing activity for well-positioned assets strengthened. During this period, investment into segments of the market that had lagged during 2010, including commercial properties in secondary and tertiary markets and value-add opportunities, showed signs of firming, as well.

In spite of the rising momentum, commercial real estate investors revealed they were not entirely immune to the obstacles facing the wider recovery in business confidence. As I suggested in my New Year’s message one year ago, this has been a period of fits and starts. Over the summer, renewed disruptions of capital and credit that were largely unrelated to the property sector threw the conduit into disarray and slowed the pace of transaction activity more broadly. For many borrowers, lending sources pulled back once again, with the result that a larger share of pending sales has struggled to reach closing.

While sales volume in the third and fourth quarters will not match the spring’s flurry of trades, the shifts in the market must be understood in the context of a turbulent economic and political environment. Where investors have retrenched, it is often under the force of external pressures. It nonetheless remains clear from the current diversity of investors and lenders that commercial real estate is high on the investment hierarchy. In fact, many of the last twelve months’ most notable and most visible deals only came to fruition as the year drew to a close. The fundraising activities of the major REITs support this assessment, as well. US REITs raised $37.5 billion in equity in 2011, a new record that easily surpasses the previous high of $32.7 billion set in 1997. They raised another $13.8 billion in unsecured debt.

A Persistent Imbalance

In the final tally, investment sales in 2011 will easily surpass the $120 billion benchmark set in 2010 and will roughly triple the record lows set in 2009. As a wider range of buyers and sellers have reengaged, pricing in the most actively traded markets has exhibited the sharpest improvements. In the extreme, some highly coveted trophy properties have prompted aggressive bidding by domestic and cross-border buyers and have ultimately sold at higher prices than during the market peak in 2006 and 2007.

While the most visible investments affirm institutional investors’ confidence in the sector, they offer only one perspective on the market. As I pointed out at this time last year, the headline statistics do not fully convey the unevenness of the recovery or the diversity of its investors. The market for assets that do not dominate their respective cities’ skylines is necessarily recovering along its own trajectory. In the current market, that has meant a balance of tailwinds and headwinds that has weighed in favor of the latter.

Core investors whose scope may be limited to a subset of metropolitan areas have argued that rising prices and falling cap rates will inevitably spill over into other segments of the market. In one respect, this is correct. Yields on mid-cap investments are higher than for any trophy property. But that assessment also overlooks the uniqueness of the market for small- and mid-cap commercial properties and the very different makeup of the investor and lender base. Understanding these differences is crucial to assessments of what the next year will hold for commercial real estate.

The Economy, Jobs, and the Political Deadlock

As in previous cycles, the recovery in small- and mid-cap property investment is proving more sensitive to underlying drivers of cash flow than the market for the largest properties. This inevitably means that a strong economic recovery will be one of the requisites for more robust investment. While companies have seen their profits rebound, surpassing their previous peaks from 2007, an environment of extraordinary economic and political uncertainty has constrained decision-making and investment in new tools and people.

In the first days of 2012, the employment outlook looks brighter. For commercial real estate – and for millions of families across the country that have struggled with unemployment – this is the critical missing link to a more balanced recovery. Although the data on job creation in 2011 only shows a modest improvement over the prior year, leading indicators of firm hiring have turned more positive. Job openings have been trending up consistently over the last year. More recently, first-time applications for unemployment insurance have fallen back to their lowest levels since early 2009. Further, employment gains in temporary help services have picked-up over the past 5 months, which lends well to permanent job creation. Even though single-family housing shows no definitive signs of an inflexion, other metrics indicate that marginally stronger growth in 2012 will support a healthier pace of private sector job creation.

Regrettably, an environment of political dysfunction qualifies the outlook, both at home and in Europe. In fact, the latter presents one of the most credible threats to global growth. In the United States, the uncertainties presented by unusually intrusive policymaking may resolve over the next year, given the need for all parties to clarify their political positions and objectives as Election Day approaches. Needless to say, a business environment where the rules of the game are more predictable is more conducive to growth and job creation.

Investment Sales and Financing

As much as it depends on a stronger economic trajectory, the outlook for small- and mid-cap investment also relies on buyers’ access to financing. In financing their investments, large REITs may offer shares or issue unsecured bonds; trophy investments have also been supported by favorable lending terms from life companies and large international banks. These scenarios are not reflective of the market for smaller assets where the sources of risk and its mitigating factors can be very different. Given the historically dominant role of regional banks and CMBS lenders in facilitating this segment of the market, these lenders figure prominently in the assessment of what the next year will hold.

Although the CMBS market has struggled to reassert itself since last summer’s interruption, plans for new issuance in the first quarter of 2012 indicate a gradual increase in conduit origination activity. Surprising as it may seem, stability in global bond markets is an important condition for well-functioning CMBS markets, since the spreads on the latter’s bond yields are influenced by corporate bond market trends, as well. In the first half of 2011, more than half the CMBS loans securitized had origination balances of less the $10 million. It remains the case that a more active CMBS market is required for the small and mid-cap segments to flourish, in particular, as a large number of seasoned CMBS loans mature over the coming year.

Outside of the apartment sector, where generally improving fundamentals and the contributions of Fannie Mae and Freddie Mac are facilitating both sales and new development, commercial property investors are dependent on bank financing given an absence of other debt sources. For the last several years, that has presented a problem. Banks have been preoccupied with the management of their distress portfolios and have hesitated to extend new credit, even in the best of cases. The most recent data show those priorities changing. Banks’ default rates on their commercial and apartment loans have fallen consistently over the last year. Coinciding with the stronger performance of the legacy balance sheets, many banks are accelerating the liquidation of bad loans and real estate-owned. A growing minority are lending again, increasing their exposure in segments of the market where an absence of competition and low interest rates are affording opportunities to extend credit. Improvements in bank lending and CMBS issuance will have a disproportionately positive impact on the mid-cap market. Access to historically low-cost credit in 2012 and the likelihood of higher interest rates in 2013 signal an unmatched window of opportunity for acquisitions over the next 12 months.

Conclusions

The economic and jobs outlook is improving. With so many of the underpinnings of a stronger recovery in place, we can afford a degree of optimism. Politics and the possibility of external shocks, primarily from Europe, still qualify that optimism.

While prices in the largest markets have recaptured a significant share of their lost value, other assets have lagged the headline measures. Combined with historically low borrowing costs, there is tremendous upside potential for borrowers with access to financing who can identify well-positioned assets.

While the process has been frustratingly slow, more banks are moving distress off their balance sheets. This process has the potential to accelerate in 2012, given banks’ stronger positions generally, an evolving regulatory environment, and the potential for distress from maturing CMBS. That will create some pressures on the market, but it should also deepen the pool of distressed assets and notes for sale.

Attention will necessarily turn to the small and mid-cap market as the economy improves and financing options broaden. Given our experience in this arena, we are anticipating a high volume of advisory work to identify and market investment opportunities before consensus firms. Timing will be the crucial differentiator in this market – the intersection of low-cost financing and first-mover advantage demands that we act deliberately.

Watch Paul Tatman's Interview on One on One With Alex Ruggieri

“Paul Tatman is and has been a mover and shaker in the business world, throughout the Midwest, radiating from his base in east central Illinois. Many have been the times when others believed an effort by Paul Tatman to be hopeless or useless, but he has managed to make it successful with apparent ease. Paul is a consummate entrepreneur - conceiving, creating, developing, and birthing business ventures, solo, as well as in concert with others. I can't count the number of successful start-ups he has kicked off, many times turning them over to, or selling them to others to administer, and most of these are still successfully in operation. He has started and operated a variety of business plans starting with his very successful multi-location collision repair business, a construction company focusing on commercial properties, a towing and recovery operation, several real estate ventures, and other endeavors. Paul Tatman is painfully honest, works tirelessly, has an extremely logical, creative, and analytical mind, and is comfortable in settings with persons of all stations in life. His most outstanding character trait, by far, is his faultless integrity. He is also a wisely generous man, with many individuals and entities owing him a debt of gratitude for his financial and personal help.” To view my interview with Mr. Paul Tatman in its entirety CLICK HERE

SPERRY VAN NESS TO OFFER RENEWABLE ENERGY AND ENERGY EFFICIENCY SERVICES

· SVN Forges Strategic Alliance with GreenPoint Partners to Deliver Sustainability Solutions For Commercial Real Estate Owners and Users

IRVINE, CA – OCTOBER 14, 2010. Sperry Van Ness International has joined the GreenPoint Network, an alliance of real estate firms dedicated to helping clients achieve profitable sustainability. SVN Advisors in over 150 offices nationwide will receive training and resources to help clients identify energy initiatives that reduce operating expenses, increase building values, and capture financial incentives. GreenPoint’s engineers will perform energy audits and implement energy efficiency projects and solar installations.

“In the U.S., commercial buildings account for nearly 40 percent of total energy consumption and over two-thirds of electricity consumption,” said Sperry Van Ness CEO Kevin Maggiacomo. “And over the next decade, energy costs will likely be the fastest-growing component of building operating expenses. If a building consumes more energy than its peers, it will attract fewer tenants and trade at lower valuations. Through our partnership with GreenPoint, SVN Advisors can make an impact that not only increases a client’s bottom line, but is also good for the planet.”

Said GreenPoint CEO Dustin Gellman, “Energy efficiency and renewable energy are a real estate play. Green building retrofits impact cash flows, and real estate professionals can help property owners better understand the financial impact of energy initiatives on asset performance. We are delighted to work with Sperry Van Ness, an organization with a legacy of progressive thinking and innovation in the real estate industry.”

Sperry Van Ness Advisors will begin offering sustainability services beginning October 2010. The suite of services includes energy audits, competitive procurement, project management, incentives acquisition, and LEED certification. For more information, visit: www.SVNgreen.com

About Sperry Van Ness International

Founded in 1987, Sperry Van Ness is has approximately 900 advisors in more than 150 locations throughout the U.S. Sperry Van Ness delivers results for clients through a proven business model that provides advanced marketing and technology tools. Based in Irvine, Calif., the firm provides brokerage, consultation, asset management, property management, leasing, accelerated marketing, and auction services. Sperry Van Ness transactions total more than $11 billion annually in office, multifamily, retail, industrial, self-storage, hospitality and land transactions. For more information, please visit www.svn.com

The Story of Ragle Dental Labs in Jerry's Own Words

I went to work in a dental laboratory June of 1973. I had worked at a grocery store all through high school and decided I needed a change. My father talked me into taking the position at the lab. Only being 18 at the time he felt if I didn’t like it I still had plenty of time to make a career change. Well it fit and after 6 years with a local firm and a pregnant wife I decided to venture out on my own. On June 1 1979 I opened Ragle Dental Laboratory on Hill Street in Champaign renting a back room from Fillman Advertising. By year end Ginny and I had our first employee and first child. I was there almost two years then bought a denture lab from a group of dentists, it was located on Stoughton Street in Champaign. I combined the two businesses moving my operation from Hill Street into the Stoughton location purchasing the building. That business had a couple employees as well. We steadily grew over the next couple of years then running out of space I leased, with an option to purchase, a newer building located at 104 East Stoughton (one of the pictures I sent you previously). We stayed there until I purchased the property at 301 S First Street in 1989 which is our current location. We renovated the old 1941 building and moved in September of 1990. I went from 1600 sq. ft to 6000 sq. ft. only to find in 1991 the economy was not good and neither were interest rates. It was a tough year. We survived and steadily grew our customer base by word of mouth. In 2000 I purchased a lab in Mattoon, it had 10 employees bringing our staff total to 30. I closed the Mattoon lab after a couple years and retained all but one employee who didn’t care to make the drive to Champaign. Over the next few years a few others did the same but two did stay until their retirement in 2007. One still remains our Director of Training and is actually back training three new employees. We opened up the milling center this past April adding 4 employees and a new side to the business (scanner photos attached) but as the economy worsened our overall staff declined. Fortunately not through layoffs but people moving or going back to school and not replaced. We currently have a staff of 24 which they are shown in the Christmas card photo sent previously (4 are not in the photo). The next generation are in full swing, Natalie and Nick. Both complement each other in the business with Natalie handling the administrative side and Nick the technical aspect. Natalie is expecting her second child and our second grandchild any day now. To watch Jerry's interview on Channel three's One on One Click Here

Can USDA Help You Get Your Deal Done?

The answer may be a resounding YES if you are looking to do a transaction in a rural community. I recently interviewed Dave Chestnut and Matt Harris from the local USDA/Rural Development office in Champaign, Il. Wow! All I can say is that they blew my socks off when it came to the shear number of programs that they have in the USDA playbook to help you get a deal done. Oh and another important point THEY HAVE MONEY! and THEY HAVE A MANDATE TO LEND! That's right in addition to their normal adequately funded budget they have been given an additional $45,000,000.00 to help spur economic development, facilitate the purchase or sale of a business, help a farmer or agribusiness expand or even just help you sell that gas station on the corner! No kidding they have what one might might be tempted to call a "best kept secret" type of thing going if it weren't for the fact that they are doing everything they can to get the word out. Besides all of this they are easy to work with. You start by talking to your banker. That's right your personal neighborhood banker can help you navigate the paperwork and process. The program works best that way simply because there is some paperwork involved which is about the only downside to working with USDA. So if you can handle that (which your banker will help you do) and your deal is not in a community with a population over 50,000 people then USDA may just be the answer to getting your deal done! The entire interview with Dave Chestnut and Matt Harris can be heard on the radio show Central Illinois Business in January. The program airs Saturday mornings at 11:00a on 1400A.M.

Income Tax Strategies for Real Property

By William L. Exeter
President and Chief Executive Officer
Exeter 1031 Exchange Services, LLC
www.exeter1031.com
william.exeter@exeterco.com

The sale of real property, whether it’s commercial or investment real estate or your primary residence or a vacation home, generally means that you will realize ordinary income, depreciation recapture and/or capital gain taxes.

Tax deferral and exclusion strategies can easily and effectively help you reposition your real estate portfolio in order to accomplish any number of investment objectives while deferring or excluding income taxes.

It is important for you to be familiar with the various tax deferral and tax exclusion strategies that are available to you. And, you should always consult with your legal, tax and financial advisors to ensure you select the most appropriate income tax strategy under your circumstances.

This article is the first in a series of articles on Income Tax Strategies for Real Property, and will introduce you to the various strategies available to you when selling real property. We will delve into greater detail on these strategies throughout this series.

Here is a brief summary of some of the Income Tax Strategies for Real Property:

1031 Exchange (Investment Property)
Section 1031 of the Internal Revenue Code allows you to exchange real or personal property that was held for rental or investment purposes, or that was used in your trade or business (relinquished property), for like-kind real or personal property that will be held for rental or investment purposes, or that will be used in your trade or business (replacement property), so that you can defer your capital gain and depreciation recapture income tax liabilities.

1033 Exchange (Involuntary Conversion)
Section 1033 of the Internal Revenue Code provides that real or personal property subject to an involuntary conversion, either from an Eminent Domain proceeding (condemnation by the government) or destruction by a natural disaster, such as an earthquake, hurricane or fire, can be exchanged on a tax-deferred basis for like-kind real or personal property that is similar or related in service or use.

1034 Exchange (Repealed in 1997)
Section 1034 of the Internal Revenue Code was repealed and replaced by Section 121 (see following) in 1997. The 1034 exchange allowed you to sell your primary residence and defer or roll over your capital gain by acquiring another primary residence of equal or greater value.

121 Exclusion (Primary Residence)
The Taxpayer Relief Act of 1997 repealed and replaced the tax deferral rollover provisions of Section 1034 with the tax-free exclusion provision under Section 121 of the Internal Revenue Code. Generally, you can sell your primary residence and exclude from gross income up to $250,000 in capital gains ($250,000 per taxpayer, $500,000 for a married couple). You must have owned and lived in the property as your primary residence for at least 24 of the last 60 months.

453 Installment Sale Treatment (Seller Carry Back Note)
Section 453 of the Internal Revenue Code allows you to sell real property and help your buyer finance the purchase of your property by carrying back an installment note (seller carry-back financing) while deferring the recognition and payment of your capital gain income tax liability until you receive principal payments. Depreciation recapture income tax liabilities can not be deferred under Section 453 and are due and payable in the year in which you sold your relinquished property. You can also accomplish this through a Deferred Sales Trust™.

721 Exchange (upREIT or 1031/721)
Section 721 of the Internal Revenue Code allows you to exchange investment real estate for an interest in a Real Estate Investment Trust (REIT). This is also referred to as an upREIT, or 1031/721 exchange.

The majority of investors will end up using the 1031 exchange to defer the payment of their capital gain and depreciation recapture taxes upon the sale of relinquished property and the subsequent acquisition of replacement property, so our series on Income Tax Strategies for Real Property will spend quite a bit of time discussing the 1031 exchange.