Congratulations! By now you’ve completed your preliminary budgeting for the New Year.
Practically speaking, you probably aren’t quite there yet, but like many others, you’re close to finalizing your 2010 numbers. Pondering the broader economy, analyzing the smaller markets and sprinkling in a little under-promising with a dash of over-delivering - we’ve all been through it before. And while many of us don’t especially enjoy the budgeting process, we very much appreciate the value returned when we do it well.
Although the current economic climate has made planning difficult, there’s still opportunity if planners revisit some of the basic rules that brought success in the first place. One of those rules involves a pragmatic approach to managing cash flow.
Part of any successful approach includes reducing tax expenditures where possible, especially when combined federal and state rates can top 40%. Like-kind exchanges (LKEs) can help you defer this large amount and put that cash back into strategic play, allowing you to leverage every last dollar of your asset’s value for use in a competitive marketplace. While the general concept surrounding LKEs is simple, its implementation can take a variety of forms.
One such form involves setting aside or “banking” properties with an Exchange Accommodation Titleholder (EAT). This structure allows a taxpayer to designate asset acquisitions as prospective replacement properties for use in upcoming like-kind exchanges (see reverse exchanges). The beauty of the banking structure is that it allows the taxpayer to immediately put the newly acquired assets to productive use while retaining flexibility to wait for the disposal of assets that no longer get the job done.
- First, determine a group of assets that might be sold over the upcoming 180 day period.
- Second, acquire new assets (like-kind to those to be sold) through the template laid out in Revenue Procedure 2000-37, where the taxpayer and qualified intermediary appoint Exchange Accommodation Titleholders (EATs) to take temporary ownership of the new assets. It’s important to note that legal title must be placed in the name of each EAT at time of purchase and all funds used to acquire the new assets must be secured by the taxpayer. Also, be mindful that the 180-day deadlines will be triggered on the purchase dates.
- Third, after placing the assets under EAT ownership the assets are leased to the taxpayer for immediate use.
- Fourth, the eventual sale of the previously designated relinquished properties, followed immediately by the transfer of the new like-kind assets out of the related EATs and into the taxpayer’s legal title.
Because the transactions are structured under Revenue Procedure 2000-37, each exchange must be completed within 180 days. If the designated relinquished properties do not sell by day 180, the replacement property(s) must be transferred back to the taxpayer at the end of the deadline. The potential for tax deferral still exists as the unsold property(s) do remain eligible for like-kind exchange treatment, but any gains associated with the sale will need to roll into another banked property, or as part of another exchange.
We will explore additional strategies in future newsletters, but in the meantime begin integrating LKEs as a consistent part of your cash management strategy. Many of your competitors already are.
Steve Chacon is Accruit’s Director of Exchange Operations. He can be reached at stevec@accruit.com or 866.397.1031 x116.
