Issue link: http://winesandvines.uberflip.com/i/400294
110 p r a c t i c a l w i n e r y & v i n e ya r d n O v e M B e r 2 0 1 4 T a X P L a n n i n g —V i n e Y a R D s a L e property would include any property attached to the land such as vines, trel- lises, irrigation systems, fences, wells, etc. Exchange Group 2 would include equipment such as tractors and other farming equipment. Exchange Group 3 would include intangibles such as the amortizable vineyard appellation. This example is merely illustrative; in a real transaction, there may be multiple ex- change groups for equipment and intangibles. In our example above, a taxpayer sells Vineyard A and purchases Vineyard B through a §1031 exchange. In addition to the proceeds from the sale of Vine- yard A (which are held through an in- termediary), the taxpayer contributes another $6,750 to purchase Vineyard B. To determine whether any gain must be recognized, each exchange group must be analyzed. Due to the fact that the taxpayer is exchanging property that is up in value and also exchanging into property that has equal to or more de- preciable property, no gain would be recognized on this exchange. In order to calculate the new tax basis in Vineyard B, the taxpayer would need to add the amount paid in cash for Vine- yard B to its carryover basis as shown in Figure 2. Timing requirements In a standard §1031 transaction, the tax- payer sells Vineyard A and then buys/ exchanges it for Vineyard B. The tax- payer has no more than 180 days to com- plete the §1031 exchange transaction and physically acquire the new property as follows: Day 1: Sell Vineyard A and transfer the proceeds to a qualified intermediary (described below). Within 45 days, the replacement prop- erty must be identified. Within 180 days (or, if earlier, the due date of the tax return), Vineyard B must be transferred to the taxpayer. As most §1031 exchanges do not occur directly between two parties, a third intermediary party is needed. If you sell your property first before acquiring the exchange property, a qualified interme- diary would enter into an exchange agreement with the taxpayer and be as- signed into the purchase and sale agree- ments. The intermediary would hold the cash proceeds from the sale and purchase the exchange property when that property gets identified; qualifying the exchange for §1031 treatment. It is also possible for a taxpayer to buy Vineyard B before selling Vineyard A. If a taxpayer buys the exchange Vineyard B before selling Vineyard A, Vineyard B can be "parked" with a qualified inter- mediary until Vineyard A is ready to sell, executing the exchange simultane- ously. While the same 180-day time limit applies, the taxpayer must deposit Vine- yard B with the qualified intermediary and enter into a "qualified exchange ac- commodation agreement." Conclusion §1031 exchanges can be extremely ad- vantageous for taxpayers. Through the deferral of taxes, a taxpayer's purchasing powers are significantly increased. How- ever, if the §1031 rules established in the Internal Revenue Code and other au- thoritative sources are not followed care- fully, the Internal Revenue Service will take the position to disallow the deferral of the gain and treat the transaction as a taxable event, which could result in an unforeseen cash crisis. Therefore, it is prudent to seek both tax and legal advice immediately upon beginning such a transaction to ensure all requirements are met so that the gain upon the ex- change may be fully deferred. PWV David Pardes is a tax director at Price- waterhouseCoopers (San Francisco, Calif.) with responsibility for tax services to nu- merous vineyards and wineries, includ- ing their owners. Pardes has been a guest speaker at UC Davis Extension, the Vine- yard Economic Forum and various CalCPA tax industry conferences. Pardes obtained his MBA from Boston University and a master's degree in taxation from Golden Gate University. Figure 1 Vineyard A Vineyard B Original Accumulated Adjusted Fair Original Accumulated Adjusted Fair Basis Deprecia on Basis Market Value Basis Deprecia on Basis Market Value Exchange Group 1: Real Property $10,000 $5,000 $5,000 $15,000 $12,000 $6,000 $6,000 $20,000 Exchange Group 2: Equipment $2,000 $1,500 $500 $3,000 $4,000 $2,000 $2,000 $3,000 Exchange Group 3: Intangibles $3,500 $500 $3,000 $3,250 $4,200 $800 $3,400 $7,000 Figure 2 Exchange Allocated Excess New Basis Carryover Basis Basis in Vineyard B Exchange Group 1: Real Property $10,000 $5,000 $10,000 Exchange Group 2: Equipment $500 0 $500 Exchange 3: Intangibles $3,000 $1,750 $4,750 Great Chiller Systems for Great Wineries ProChiller.com 800-845-7781 Auburn, WA Mocksville, NC PACKAGED GLYCOL CHILLER SYSTEMS Visit us at the North Coast Wine Expo 2014. Synchronizing Wine with Wood