BUSINESS LOAN OPTIONS FOR FINANCIAL RELIEF RESULTING FROM COVID-19/CORONAVIRUS

The Coronavirus pandemic has caused many businesses to experience severe income loss, many already unable to cover their bottom-line business expenses. As a result, our firm has begun actively working with clients applying for economic disaster loans. Please reach out to us immediately for help in preparing your application as deadlines are quickly approaching.  Due to the urgency and time sensitivity of these applications, we are making these are highest priority.

Below is a list of the business loans that may be available to you (on a case by case basis): 

FLORIDA SMALL BUSINESS EMERGENCY BRIDGE LOAN

  • Purpose: Designed to “bridge the gap” between the disaster occurrence and when the business secures long term recovery resources
  • Amount: Up to $50,000.00 per small business (up to $100,000.00 in some occasions)
  • Term: Requires repayment within 12 months
  • Interest: 0% for the first 12 months after which interest is charged at 12%
  • Eligibility:
    • Florida must be the designated disaster area
    • Must maintain a place of business in Florida and established prior to March 9, 2020
    • Demonstration of economic injury as a result of Coronavirus
    • Individual or individual who owns at least 51% equity of entity
    • At least 2-100 employees**
  • Use: Proceeds MUST be used for maintaining or restating business (use of proceeds to pay off debts already incurred on case by case basis)
  • Supporting Documentation Required:
    • Government ID          
    • Federal Business tax returns for the last 2 completed years
    • Employer tax documentation.
    • Personal tax returns for the last 2 completed years with attached Schedule C
    • Additional information that the applicant believes would assist the Loan Review Committee in making its decision (such as a loan summary).
  • Application Deadline: May 8, 2020 – Website: https://floridadisaster.biz/

FLORIDA DEPARTMENT OF ECONOMIC OPPORTUNITY-THE REBUILD FLORIDA BUSINESS LOAN FUND

  • Amount: Up to $500,000.00 in state and federal funds ($40,000,000.00 available)
  • Term: Case by case basis
  • Interest: Market interest rates
  • Eligibility:
    • Existing and new businesses that were impacted directly or indirectly by a disaster to rebuild and expand
    • Industries identified by the state as key strategic markets for future growth and will focus on creating and enhancing the diversification and resiliency of Florida’s economy
  • Use: Inventory purchases, construction or renovation, working capital needs, capital start-up loans, machinery and equipment purchases, equipment financing

SBA FEDERAL ECONOMIC INJURY DISASTER LOAN (EIDL)

  • Amount: Up to $2,000,000.00 in assistance available (determined on a case by case basis but may not exceed what the applicant could have paid had the disaster not occurred)
  • Term: long term prepayment up to 30 years
  • Interest: 3.75% for small businesses; 2.75% for non-profits
  • Eligibility:
    • Must have less than 500 employees
    • Physical presence in the disaster area
    • Substantial economic injury
    • Applicant’s credit history
    • Financial position of the business (must be able to repay loan)
    • Business’s potential to accumulate funds necessary to operate
    • Estimated loss incurred or that will be incurred
    • Businesses with credit available elsewhere are not eligible (This may be removed by approved CARE Act)
    • Must have collateral for loans over $25,000
    • Ineligible: Agricultural, religious, charitable, gambling, unclear about cannabis industry
  • Use: Proceeds MUST be used to pay fixed debts, payroll, accounts payable, and other bills that are unable to be paid as a result of Coronavirus impact
    • Cannot be Used To: Refinance debt incurred prior to disaster; Service current SBA loans, Pay directly or indirectly any obligation of tax or non-tax penalty due to a violation; Pay dividends or disbursements to owners except for reasonable remuneration directly related to performance of services for the applicant business
  • Step: (1) Apply via SBA website; (2) Review, verification and processing; (3) Loan closing and disbursement
  • Supporting Documents Required:
    • Online SBA Application – Form 5 – To be completed online (Registration required)
    • IRS Form 4506T- Tax Transcript authorization for tax verification
    • Copy of most recently filed tax return
    • Personal financial statements for all owners of 20% or greater ownership interest – SBA Form 413
    • Schedule of liabilities – SBA Form 220
    • Current year to date profit and loss statement
  • Disbursement: Initial disbursement within 5 days after approval (approval usually takes 3-4 weeks but could be more given the extent of the pandemic)
  • Application: Within 9 months of state of disaster declaration

SMALL BUSINESS ASSOCIATION 7(A) (Loans given not specifically as a result of Coronavirus)

  • Amount: Maximum of $5,000,000.00
  • Term: Maximum of 25 years
  • Maximum Guarantee: 85% for loans up to $150,00.000 and 75% for loans greater than $150,000.00
  • Interest: Negotiable
  • Eligibility: Case by case basis.

CARES ACT (initial proposal-not yet approved)

  • EIDL CHANGES:
    • Extension of EIDL Loan availability to $10 Billion.  
    • Waiver: Creates waiver of personal guarantee for loans of less than $200,000.00
    • Emergency Grant: Creates emergency grants of $10,000.00 to be distributed by SBA within 3 days while an application is pending. No repayment even if denied EIDL loan.
    • Eligibility:
      • Nonprofits with fewer than 500 employees
        • Business must be in operation on March 1, 2020 and had employees for which it paid salaries and payroll taxes
    • Basis is only on credit score
    • Use: Proceeds MUST be used for working capital, payroll support, salaries, mortgage payments, rent, utilities, and certain other existing debt obligations
  • SMALL BUSINESS INTERRUPTION LOAN PROGRAM
    • Purpose: to cover the period of time from March 1, 2020 to December 31, 2020. Designed to ensure employees are paid even as their employer’s business is currently closed
    • Amount: Government to make available $350,000,000,000.00 in guarantees to obtain loans to cover expenses during Coronavirus Pandemic. Maximum to business is an amount equal to 4 times the borrower’s total monthly expenses (monthly average over last 12 months) capped at 10 million
      • Expenses include payroll, mortgage, rent, payments on other debt obligations
    • Interest: No more than 4%
    • Waiver of Fees: SBA to waive all applicable fees.
    • Deferment: Lenders required to defer payments for not less than 6 months
    • Loan Forgiveness: Equal to the costs incurred or payments made by borrower during an 8-week period after the origination date of the loan including:
      • Payroll costs
      • Interest payments on any mortgage (existing prior to Feb 15, 2020)
      • Rent payments (after Feb 15, 2020)
      • Utility service payments (service began before Feb 15, 2020)
      • Forgiveness reduced by reduction in employees or reduction in employee pay greater than 25%
      • Borrower will not be penalized for reduced payroll if borrower rehires workers previously laid off (unclear as to time limits)
    • Eligibility:
      • No more than 500 employees (applies per physical location unless gross receipts exceeds $500,000,000.00) Standard cannot be more than 500 employees in the aggregate of all affiliates.
      • Cannot be receiving other assistance related to the Coronavirus Pandemic, any pending application will eliminate availability of SBIL
      • Not limited by geography or to states that have been declared as disaster areas
    • Use: Paid sick leave, group health care benefits, employee salaries, mortgage payments, rents, utilities, payment of other debt obligations.
    • Application: Accepted through SBA qualified lenders
  • EXPANSION OF SBA EXPRESS LOAN PROGRAM
    • Approval or denial within 36 hours
    • Can be a term loan or line of credit
    • Amount: Maximum of $350,000.00 to be increased to $1,000,000.00 then reduced to $500,000.00 after December 31, 2020
  • EXPANSION OF MICROLOAN PROGRAM
    • Loans up to $50,000.00 made through nonprofit lending organizations directed to underserved market applicants
    • Average loan size of $14,000.00
  • SBA LOAN DEFERMENT FOR EXISTING LOANS
    • Secondary Market Loans: Up to 6 months
    • Loans Not Sold on Secondary Market: Lender can use the Colsons Customer Service Online Request for deferral of less than or equal to 12 months, including lender notification of unilateral 3-month deferral
    • SBA 504 Loans: The amount deferred should not exceed 6 cumulative monthly payments or 20% of original loan amount whichever is less         
    • Borrower financial info will be reviewed prior to deferral to ensure cash flow problems are not long term
    • If loan is more than 60 calendar days past due and problems appear long term deferral will not be granted
    • Interest will continue to accrue during deferment period with payments optional
  • FEDERAL RESERVE-MAIN STREET BUSINESS LOANS
    • Details not yet available but will be a direct lending program from the federal reserve to businesses

FL DEPT OF ECONOMIC OPPORTUNITY-SHORT TIME COMPENSATION PROGRAM

  • Term: 12 calendar months
  • Eligibility:
    • The employer must describe a plan for giving notice, if feasible, to an employee whose workweek is to be reduced, together with an estimate of the number of layoffs that would have occurred absent the ability to participate in STC.
    • Participating employees must be full-time (at least 32 hours per week prior to Short Time Compensation reduction), permanent employees (not seasonal) and the employees must have a set number of hours (excluding overtime) that they work each week in order to participate. Employees paid piece rate, on commission, or who are hired to do certain jobs regardless of the time required are not eligible for participation.
    • Short Time Compensation benefits are payable when normal hours of work are reduced from 10-40 percent. If normal work hours exceed 40, the percentage will be based on 40 hours.
    • Each week that Short Time Compensation benefits are claimed, at least 10 percent of the employees from the total staff or within a particular unit must be working reduced hours. (Two employees is the minimum for a staff or unit of less than 20 employees.)
  • Use: to retain employees during a temporary slowdown, avoid the expense of recruiting, hiring, and retraining new works when business resumes, a transition to layoff
  • Application: Requires log in.

FACEBOOK SMALL BUSINESS GRANTS PROGRAM

  • Amount: $100,000,000.00 in cash grants and AD credits determined on a case by base basis
  • Eligibility: Details to come
  • Use: Proceeds may be used to assist with rent, keep workforce, connect with more customers, and cover operational costs.
  • Application not out yet, can sign up on https://www.facebook.com/business/boost/grants?ref=eml to obtain updates

STATE BANK OF INDIA

  • Emergency Credit for existing Borrowers affected by the Coronavirus outbreak
  • Amount: up to ₹ 200 crore or 10% of existing fund based on working capital limits
  • Term: 12 months
  • Interest: 7.25%
  • Eligibility:
    • Current standard account
    • Account not classified as SMA 1 or 2 as of March 16, 2020
  • Deadline: June 30, 2020

Please note many of the loan options above are provided on a case by case basis and are not set in stone, as they are changing depending on what is available, and the laws being enacted. It is important you understand your options and the loan terms being offered during this period.

We are immediately available to assist you through the application process, contact Gulati Law at 407-900-5054 to get started immediately. We recommend getting your applications in as soon as possible as processing can take weeks. 

Handling Your Hotel Loans Amid the Coronavirus Pandemic

With the sudden arrival of the Coronavirus Pandemic, the hospitality industry has been hit hard. Between the fear, anxiety and social isolation of consumers and the government ordered lockdowns and no travel orders, occupancy of many hotels is down to an alarming level. It is anticipated, by the American Hotel & Lodging Association that more than half of U.S. Hotels may close before the end of 2020.

How will Lender’s respond to the crisis?

Unfortunately, we cannot predict how the Banks are going to be responding to the sudden and severe financial distress of their Hotelier Borrowers. Unless your loan agreement, note, and mortgage specifically includes a force majeure clause or a similar clause including a viral pandemic (see Gulati Law Blog Coronavirus and How it Affects your Contracts) providing some type of cure, then the Lender has the right to default you and pursue all legal remedies including acceleration of the debt and foreclosure of the property.

What Can I do to Get Ahead of the Crisis?

It is important not to wait until you receive a notice of default to take action. Reaching out to your Lender in anticipation of default is vital to reaching a resolution. Gulati Law has trained attorneys who are able to reach out to your lender to discuss forbearance, deferment of payments, or other solutions that work for both you and your lender.

Is Refinancing an Option?

Even before the start of the pandemic, mortgage loan interest rates had been at an all time low. It is the hope of the industry that these will stay low or continue to fall leaving an opportunity for hotel owners to refinance their existing loans. It is of the utmost important to have a qualified attorney review any refinance documents prior to execution. Gulati law has been successful in negotiating refinances with the best terms for our clients and can close all loans in house.

In addition to the option of refinancing, there may be other options as Congress convened over the weekend to discuss legislation intended to provide stimulus for the American economy, called the CARES Act. Stay tuned for more updates on this proposed Act.

 Information Needed Prior to Reaching out to the Lender

  1. Actual Borrower Name, any Guarantor Names, Property Address and ID Number;
  2. History of good payments;
  3. Positive stories about the quality of your hotel and customer service;
  4. Occupancy issues and other current financial strains; and
  5. Possible financial payments you CAN make (if any) until the economy recovers.

Contact Gulati Law, P.L. for Assistance

We cannot reiterate enough that you should contact a qualified attorney to correspond with your lender on your behalf. Contact our office today to discuss retaining our services immediately (initial letters to your Lender may be complimentary on a case by case basis).

Remember to stay positive! We believe that once this crisis passes, we will be stronger than before!

Sources: Congress.gov, AHLA, AAHOA, Hospitality Mgmt

Coronavirus and How it Affects your Contracts!

As the number of Coronavirus (COVID-19) cases in the United States and Internationally continues to rise, many business owners are feeling the effects of quarantines, social distancing, travel bans, and more. In the short amount of time since the virus has emerged, businesses, especially in the hospitality and service industries, have experienced significant and devastating disruption.

What is a Force Majeure Clause?

A Force Majeure clause is a provision in a contract that allows for a party to suspend or terminate the performance of its obligations when certain circumstances beyond their control arise, making performance inadvisable, commercially impracticable, illegal, or impossible.

Examples of Force Majeure events include war, riots, fire, flood, hurricane, typhoon, earthquake, lightning, explosion, strikes, lockouts, slowdowns, prolonged shortage of energy supplies, and acts of state or governmental action prohibiting or impeding any party from performing its respective obligations.

Force majeure clauses must be clearly stated in the Contract and are interpreted strictly.

Is Coronavirus a Force Majeure Event?

The severe disruption to businesses around the world, resulting from the effects of Coronavirus (both physical and emotional), are clearly affecting business owner’s ability to function in the declining economy.  In approaching business operations and all the contracts that accompany the same, you may be wondering “can I get a break” and the Force Majeure clause may be the way to get just that. While unfortunately Coronavirus is not likely to be specifically stated in your clause, as it is a world event unanticipated in our lifetime, it can most certainly be argued that, depending on the business sector, the response to the Coronavirus (such as mandatory lockdowns, social distancing, and business closures) are in fact acts of government which are impeding a party from performing its respective obligations. It may not fully excuse non-performance or cancel existing contracts, but in some cases may defer or alter the terms.

What Does this Mean for Me?

For these reasons it is vital that business owners carefully review the language of their agreements, and not simply choose not to perform and expect to escape without consequences.  In entering this uncharted territory of business operations in a consumer panicked society, it is important the business leaders in the industry stay calm and solution oriented by doing the following:

Detailed Review – Review every contract you have that requires some form of fulfillment of goods or services, or some sort of financial action or commitment over the next 6 months.

Be Proactive – Reach out to your business contacts regarding the impact of the Coronavirus. It is likely that they too have felt the effects and discussing how to mitigation potential damages is valuable to all parties.

Modify your Clause – Whilst the world hopes that we never see another pandemic as tragic as Coronavirus, this should be a wakeup call for all contract participants to ensure that the Force Majeure clause is included in every contract and shall include the extreme scenarios.

Retain Legal Assistance – If you, your business, your real estate, or your pending construction is at risk, contact Gulati Law to discuss your options. As a firm with vast experience dealing with contract delays, performance challenges, payment concerns and force majeure clauses we have the skills to assist you through this difficult time and preserve your current relationships. Most importantly stay safe!

C-CORP vs. S-CORP

C-CORP vs. S-CORP

How to decide which structure and tax election is best for you?

Should you incorporate as a C-Corporation or an S-Corporation? To answer that question, you need a clear vision of your business goals. Operationally these entities are similar, yet they have significant differences when it comes to taxation and growth potential.

C-Corporations

C-Corporations, or “C-Corps,” are known as “default” corporations. These entities are the default designations given to corporations when businesses first file their “Articles of Incorporation,” a series of documents unique to each state.

Advantages. Some advantages include the ability to raise capital, the ability to be publicly traded, and the ability to issue multiple types of stock. C-Corps can raise a significant amount of capital because they have fewer restrictions when it comes to shareholders. These entities may have an unlimited number of shareholders and can seek financial backing globally. For these reasons, C-Corps are generally favored by larger corporations.

Disadvantages. However, there is a significant drawback when it comes to C-Corps, and that is “double taxation.” The “double taxation” of a C-Corp refers to the taxation upon the dividends paid out to shareholders individually and on the profit of the corporation itself. This drawback is typically one of the deciding factors in choosing which type of taxation is best for your entity.

S-Corporations

S-Corporations, or “S-Corps,” are different from C-Corporations in that you must explicitly elect to become an S-Corp. To be taxed as an S-Corp you must file Internal Revenue Service Form 2553, also known as “Election by a Small Business Corporation.”

Advantages.  The biggest advantage is lack of double taxation. Unlike C-Corps, an S-Corp’s profits are not taxed, only the income dispersed to the shareholders is taxed. This is the trade-off for S-Corps, in exchange for reduced size they can keep more of their profits, which is why this model is generally favored by small businesses. However, it should be noted that some states do actually “double tax” S-Corp. Those states include the District of Columbia, New Hampshire, Tennessee, and Texas.

Disadvantages. The disadvantages include the limit of a maximum of 100 shareholders, it may only issue one kind of stock, and it cannot be owned by a C-Corp or another S-Corp.

Limited Liability Company Election

Don’t be misled by the “corp” reference, an LLC can also to be taxed as either a C-Corp or S-Corp with the same advantages and disadvantages.

The question of whether to become an S-Corp or a C-Corp can be easily determined with the right guidance. Speaking with a knowledgeable Business Law firm such as Gulati Law, along with your accountant is the best way to determine which structure is best for the needs of your corporation and to set your business up for lasting success.

Hotel Investor’s Number One Question in Today’s Market!

We have had a strong decade of growth in the Hospitality Industry, however, the number one question we get from Hotel Investors in Florida is- are we approaching the next great recession?

“Both Hotel ADR* and RevPAR* Growth Trends are starting to slow down, which could indicate a stabilization in the hotel economy. This notion aligns with a survey conducted by Marcus & Millichap Research Services, where it was concluded that hotel investors expect stabilized hotel property values soon.

Moving forward, hotel investors must be cautious and astute in preparing their investments and maintaining adequate reserves in the event of a recession.

Contact us today with your Florida Real Estate Hospitality questions. Attorney Gulati of Gulati Law is Certified in Hotel Industry Analytics (CHIA designation) and deals with Hotel transactions within the Firm.

*ADR: Commonly referred to as Average Daily Rate is a statistical unit that is often used in the lodging industry.

*RevPAR: Commonly referred to as Revenue per available room which is a performance metric used in the hotel industry.

Sources: Marcus & Millichap Research Services, BEA, BLS, U.S. Census Bureau, Federal Reserve, STR, Inc

Gulati Law is Awarded 2019 Law Firm 500 Honoree

Gulati Law, P.L., named a 2019 Law Firm 500 Honoree for Fastest Growing Law Firms in the U.S.

Over the past 3-years, our team at Gulati Law, P.L., have been dedicated to providing excellence in customer service resulting in many happy clients. In doing so, our commitment and focus has taken us on a fabulous journey of growth – both personally and for our business.

We are pleased to announce that our law firm has been named a 2019 Law Firm 500 Honoree awarded to the Fastest Growing Law Firms in the US. Although this recognition is calculated on growth, it could not be possible without the continued operational excellence and commitment to client service exhibited by our team each and every day.

Thank you so much to our loyal clients, colleagues, family, and partners who have supported us as we have grown.

The Law Firm 500 Award is an honor for our firm to receive and a tribute to our team. Of course, we could not have achieved this truly remarkable accomplishment without our devoted team. Each in their own way has contributed to making this possible.

As we continue to grow, we encourage you to follow our progress and stay in touch!

 

About Gulati Law

Gulati Law has focused on serving their clients with more of a personal boutique style of representation. Gulati Law’s has a sophisticated mix of clients who venture in, among other things, informational technology, restaurants, media, financial services, manufacturing, retail, hospitality and lodging, and many other diverse businesses. Gulati Law’s team handles real estate closings, including commercial deals, 1031 Exchanges, and re-finances. They also assist clients with their contract preparation, small business formation’s, asset protection and set up.

For more information about our firm contact us at (407) 900-5054 or Office@GulatiLaw.com

 

Service Animals and the ADA!

Under the Americans with Disabilities Act (“ADA”), a “service animal” is only a dog that is individually trained, works or performs tasks for individuals with physical, sensory, psychiatric, intellectual or other mental disabilities. The task(s) performed by the dog must be directly related to the person’s disability.

It is important for the hospitality industry to understand what qualifies are a service animal under the ADA. The ADA does not recognize comfort animals, therapy animals, or companion animals. An animal whose sole function is to provide therapy is not a “service animal” under ADA.

How to verify?

In situations where it is not obvious that the dog is a service animal, staff may ask only two specific questions: (1) is the dog a service animal required because of a disability? and (2) what work or task has the dog been trained to perform? Staff are not allowed to request any documentation for the dog, require that the dog demonstrate its task, or inquire about the nature of the person’s disability.

The ADA requires that service animals be under the control of the handler at all times. In most instances, the handler will be the individual with a disability or a third party who accompanies the individual with a disability. The service animal must be harnessed, leashed, or tethered while in public places unless these devices interfere with the service animal’s work or the person’s disability prevents use of these devices. In that case, the person must use voice, signal, or other effective means to maintain control of the animal.

For example, a person who uses a wheelchair may use a long, retractable leash to allow her service animal to pick up or retrieve items. She may not allow the dog to wander away from her and must maintain control of the dog, even if it is retrieving an item at a distance from her. Or, a returning veteran who has PTSD and has great difficulty entering unfamiliar spaces may have a dog that is trained to enter a space, check to see that no threats are there, and come back and signal that it is safe to enter. The dog must be off leash to do its job, but may be leashed at other times. Under control also means that a service animal should not be allowed to bark repeatedly in a lecture hall, theater, library, or other quiet place. However, if a dog barks just once, or barks because someone has provoked it, this would not mean that the dog is out of control.

There are specific rules under the ADA that are tailored specifically to hoteliers and public service accommodations. Please contact us, your business law attorneys for more information. Staying informed helps limit ingenuine service animals and support and welcome your guests and comply with ADA.

Source: ADA

1031 Like Kind Exchange Tips

1031 Like Kind Exchange Tips -Identifiying Properties 

With Real Estate being so hot, we have seen such an increase in 1031 Like Kind Exchange’s in the past few years.

Here are a few tips to consider when thinking about doing the exchange:

The Basic 1031 Identification Rule Is:

The Exchanger has only 45 days from the day of closing on its relinquished property to identify possible replacement property.

WARNING: Section 1031 and the IRS regulations thereunder have strict requirements for the identification of replacement property.

Identification of all replacement property must be made in writing, must be signed by the Exchanger, and must be delivered to the Qualified Intermediary on or before midnight of the 45th day.

The Exchanger may identify any type of investment or business real property in the USA, including a single-family rental, apartment building, hotel, office building, warehouse, vacant land, shopping center, etc.

The Exchanger/Taxpayer may not identify replacement property or amend its identification after the 45th day has expired.

Identifying Multiple Properties:

The Exchanger may identify more than one property, as follows:

(1) The Exchanger may identify as many as three (3) properties, regardless of their total value (known as the “3-Property Rule”) See Example # 1 below; OR

(2) The Exchanger may identify any number of properties provided their aggregate fair market value on the 45th day does not exceed 200% of the aggregate fair market value of all of the Exchanger’s relinquished property on the date of its transfer (known as the “200% Rule”) See Example #2 below; OR

(3) The Exchanger may receive, by the end of the Exchange Period, Replacement Property which the Fair Market Value of, is at least 95% of the aggregate Fair Market Value of all of the Replacement properties identified (known as the” 95% Rule”) See Example #3 below.

“The Exchanger is not required to acquire all the property it has have identified. Therefore, many gurus in our industry recommend that the Exchanger identify alternative properties should the closing on the Exchanger’s preferred property fail for any reason. Any property acquired prior to the 45-day Exchanger’s identification expiring, counts as an identified property.”

EXAMPLE #1 – 1—3 PROPERTY RULE:
Mr. and Mrs. Trembling (Exchangers) sell their investment property that they have owned for 17 years for the sum of $695,000.00. They, within 45 days of the relinquished transaction, e-mail to their Qualified Intermediary a list of three (3) properties for the following amounts: Property # 1: $1,200,000.00; Property #2: $500,000.00; Property # 3; $400,000.00.

As long as the Exchangers purchase property of equal or more value than their relinquished property ($695,000.00) any tax they may have owed will be deferred. There is NO dollar amount limitation on the properties they have identified. The only limitation they have using this rule is that they can only identify 3 properties.

EXAMPLE #2 – 200% RULE:
Mr. and Mrs. Anderson (Exchangers) sell their investment property that they have owned for 3.5 years for the sum of $500,000.00. Within the 45-day time limit, they e-mail to their Qualified Intermediary, the following list of possible Replacement Properties: #1: $150,000.00; #2: $300,000.00; #3: $250,000.00; #4: $100,000.00; and #5: $199,000.00.

The Exchangers are allowed to identify any number of properties, but they cannot total together more than 200% of what they sold.

The 5 properties they identified combined total: $999,000.00, which is under the $1,000,000.00) they would be allowed to identify and therefore their Identification is valid. They do not have to purchase all of these properties, but if they want to defer all of their gains, they must obtain at least $500,000.00 of replacement property.

EXAMPLE #3 – 95% RULE:
Mr. Thomas Franklin (Exchnager) sells his investment property for the tidy sum of $800,000. He identifies the following properties as possible replacement properties: #1: $600,000; #2:$ 300,000; #3: 900,000; #4: 700,000 and #5: $200,000.

The total valuation of all the properties together is: $2,700,000.

He cannot use the 200% rule because he has identified more than 200% of his relinquished property’s selling price ($800,000 x 200% = $1,600,000). But he can still use the 95% rule. He must purchase 95% of the valuation price of the properties he identified. That would be: $2,565,000 ($2,700,000 x 95% = $2,565,000). If he purchases less than the 95%, his 1031 exchange will be disqualified.

After reviewing the above 3 Rules for Identification, most Exchangers select the 3 Property rule, because it is a lot easier. It has no dollar amount restrictions, but the exchanger is limited to only 3 properties for identification purposes.

Source: Stephen Wayner of Liberty 1031.

DISCLAIMER: We always recommend that the taxpayer consults with their tax and/or legal counsel on all matters dealing with the Internal Revenue Serice.

SECTION 1031 (TAX DEFERRED EXCHANGES)

SECTION 1031 (TAX DEFERRED EXCHANGES) VS. SECTION 1033 (INVOLUNTARY CONVERSIONS) ON INVESTMENT REAL ESTATE

More and more people are having their property taken by a governmental agency through eminent domain proceedings.  So, let’s briefly discuss some of the information that will help during this process.

Question: What options are available to me as the Taxpayer, when my investment real estate is involuntarily converted (taken from me)?

Answer:  The Taxpayer has two major options.  They can either use Section 1031 and transact a Tax Deferred Exchange or use Section 1033 for tax deferral purposes.

Question:  What are the basic rules for a Section 1031 exchange?

Answer:     There are 6 basic Rules on a Section 1031 Exchange:

 (1)  Both the property sold  and the replacement property (the new property) must be held for use in a trade or business or have been held for investment purposes. IMPORTANT NOTE: the replacement property can be any type of investment real estate.  So, you could sell a condominium unit and replace it with a piece of raw land, as long as they were both investment properties or used in a trade or business.

(2)  The 45 day identification time requirement.  The Taxpayer has up to 45 days from the day of closing to identify what the Taxpayer may want to purchase.

(3)  The 180 day purchase of replacement time requirement.  The Taxpayer has up to 180 days from the closing to close and purchase the replacement property.

(4)  Taxpayer cannot touch the funds from the sale of the relinquished property.  As a result, the funds from the closing are given to an independent third party to handle the exchange portion of the transaction.  That independent third party is called a Qualified Intermediary.  Liberty 1031, LLC is a Qualified Intermediary.  Liberty 1031, LLC is also responsible for preparing all of the 1031 documentation.

(5)  The Same Taxpayer Rule.  The Taxpayer of the relinquished property must be the purchaser of the replacement property.  There are some possible variations to this rule.  Be sure to discuss this item with your Qualified Intermediary and your Legal and/or Financial Advisor.

(6)  Replacement Property.  In order to defer paying any taxes (Long Term Capital Gains, Depreciation Recapture Tax, and Possible State Taxes), the Taxpayer must purchase investment replacement property of equal value or more than the property that was relinquished (sold) and must reinvest all of the cash proceeds into the new replacement property.

Question:  What are the basic rules for a Section  1033 transaction?

Answer:     There are 4  basic Rules on a Section 1033 taking:

(1)  There is no requirement to hire a Qualified Intermediary.

(2)  The property is involuntarily converted when one of the following events occurs: the property is destroyed by fire, earthquake, hurricane or some other destructive event;  or the property is seized, without governmental compensation, which makes this type of conversion somewhat irrelevant;  or a governmental agency exercises it power of eminent domain or there appears to be an imminent threat of a requisition or condemnation (the property owner must be aware of the threat and must reasonably believe that a condemnation is likely to happen).

(3)  There is a Partial Conversion—occurs when  a portion of the property is involuntarily converted.  Important Note: If the taking of the real estate portion taken renders the operation of the business or use of the property economically impractical, then the Taxpayer could sell the whole property and defer taxes on the entire property when obtaining a replacement property.

(4)  Timelines for Property Held for Productive use in a Business or Trade or for Investment Property.  The Taxpayer has up to 3 years from the date the converted property was disposed of or the date of a threat or imminence of requisition or condemnation.

 Question:  So which Section should a Taxpayer use?

Answer:  A number of knowledgeable CPA’s have advised their clients to use BOTH sections.  By using both Section 1031 and Section 1033, the Taxpayer would first use Section 1031, where the funds would be distributed to the Qualified Intermediary.  The Taxpayer will then have 45 days from the closing of its relinquished property, to identify their possible replacement property(ies).  Taxpayer also would have 180 days from the closing of the relinquished property to purchase a replacement property. The advantage of doing a Section 1031 tax deferred exchange for the Taxpayer is that the replacement property can be any type of investment real estate, for example:  a commercial piece of real estate for investment raw land.  Should the Taxpayer fail to complete its 1031 exchange, then the escrowed funds would be distributed back to the Taxpayer.  The Taxpayer could then continue with a Section 1033 Tax deferral to find and close on another property.  BUT, under Section 1033, the replacement property must be very similar to or related in service or use, to the property that was taken, in order to have no gain recognized and  not taxed.

One final comment:  It is ALWAYS advisable that the Taxpayer speak with their Legal and Financial counsel whenever dealing with an involuntary conversion.

Source: Liberty 1031

Post-Hurricane Scams Targeting Real Estate Owners!

ATTENTION all Real Estate Owners!

BEWARE OF SCAMMERS
There have been talks of some individuals attempting to take advantage of real estate owners post-hurricane recovery situations. Insurance, debris removal, and tree removal scammers are actively working in storm affected areas.

Do not sign anything regarding an “assignment of benefits” from a potential contractor.

If you have any questions regarding reviewing paperwork to be signed, please reach out to your Real Estate or Business Law Attorney.

 

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