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A practical guide to deferring taxes when replacing business property.

Executive Summary

Following the 2007-2008 financial crisis, there is an increasing trend in Like Kind Property Exchanges (LKPEs). In 2013, partnerships and C corporations engaged in over $53 billion and $57 billion of LKPEs, respectively.

The magnitude of these transactions suggests that LKPEs may represent a powerful tax planning tool. The purpose of this article is to raise financial managers' awareness of significant savings through LKPEs when replacing business assets.

The impact of relevant factors on realizable tax savings are assessed through multiple net present value (NPV) analyses for both flow-through entities and C corporations.

Perhaps most importantly, the Excel template used in these analyses is available upon request. This article concludes with a discussion of methods to minimize potential risks associated with an LKPE.


The decision to replace a long-term business asset should factor in the impact of potential tax liabilities on cash flows due to gains from the disposal of the original asset. With the traditional sale approach, the company takes ownership of the proceeds at the sale of the original asset and then reinvests in the replacement asset.

A realized gain occurs if the sale price of the original asset exceeds its basis (i.e., historical cost minus accumulated tax depreciation). The recognition of realized gains leads to higher taxable income and higher tax liabilities. Therefore, the sale approach has a negative impact on expected end-of-year cash flows.

To mitigate the potential adverse cash flow effect, financial managers can structure the replacement as an LKPE, thereby delaying tax payments. Exhibit 1 shows that LKPEs increased substantially for both partnerships and C corporations following a dramatic decrease after the 2007-2008 financial crisis. In 2013, partnerships and C corporations engaged in over $53 billion and $57 billion of LKPEs, respectively. (1)

Replacing property via an LKPE helps a business avoid current year taxes by deferring the gains, and therefore changes its cash flow analysis of when to replace an asset.

An LKPE also offers a means of diversifying the company's asset portfolio.

Despite the potential benefits, LKPEs can produce undesired results. For example, if the asset disposal generates a realized loss, the involved party will forgo immediate tax savings.


This article provides a primer on tax law requirements of LKPEs and presents example analyses to compare net present values (NPVs) of an LKPE and a sale. The presented analyses can serve as a guide to the optimal transaction type for replacing a business asset by a flow-through entity or a C corporation. (2)

The corresponding Excel template is available upon request so that financial managers can approximate the potential tax savings of an LKPE per their unique set of factors. We also discuss practical considerations on structuring asset replacement transactions to defer taxes while minimizing potential risks.

Like Kind Property (LKP)

Deferral of a gain in an LKPE occurs only if all of the governing Code [section]1031 requirements are satisfied. (3,4) Code [section]1031(a)(1) prescribes that:

--there must be an exchange of the original asset with the replacement property.

--the involved assets must be held for business or investment purpose, and

--the replacement property must be considered as an LKP of the original asset.

As such, the identification of qualified replacement assets is critical before engaging in an LKPE.

There are two types of business assets under LKPE rules: real vs. personal property. Real property is immovable, while personal property is moveable. (5)

The recent increase in real estate property values should provide companies with an incentive to consider using an LKPE when disposing of real property. For example, the Green Street Commercial Property Index increased from 61.2 in May 2009 to 123.4 in March 2016, and the Moody's/RCA US Indices for Apartment showed the increase from 114 in the 4th quarter of 2009 to 250 in 4th quarter of 2015. (6)

In addition, LKPE rules for real property are exceptionally flexible, given that they cover any exchange of real properties used in trade/business or held for investment.

That is, trading any combination of the following immovable assets would qualify for the LKPE treatment: land, office building, warehouse, factory building, residential rental property, etc. Perpetual real estate interests such as oil, gas, water, or gravel are also categorized as real property.

It is self-explanatory that an exchange of a warehouse for another warehouse qualifies as an LKPE of real property. Also it may not be surprising that an LKPE involves a trade of real property used for business purposes (e.g., a warehouse) for a dissimilar real property used for business purposes (e.g., an office building).

An unexpected application of LKPE rules might be that real property held for business purposes (e.g., a warehouse) can be exchanged for real property held for investment purposes (e.g., residential rental property). Such broad classifications of real LKPs allow a company to diversify its asset portfolio via the exchange transaction.

The flexibility within real property LKPEs, along with the increasing values of real property, likely contributes to the growing magnitude of LKPEs noted above in Exhibit 1.

LKPE rules governing personal property are more restrictive. Personal property can only be exchanged for personal property if both properties are categorized in a like class as defined under Treasury Regulation 1.1031(a)-2(b). The like class restriction contributes to the less common occurrence of replacing personal property via an LKPE.

Another reason for the limited usage of LKPEs to trade personal property is that it is less likely to realize a gain on personal property relative to real property. Current depreciation laws also reduce (or even eliminate) the tax advantages of LKPEs for replacing personal property.

Specifically, small businesses can immediately deduct up to $500,000 of new or used tangible personal property purchases under Code [section]179, and all companies are eligible for Bonus Depreciation rules under Section 168(k) that provide an immediate 50% deduction for new personal property purchases. (7) As such, the remainder of this article focuses on examining LKPEs of real property.

Tax Considerations of LKPEs

The primary motivation to engage in an LKPE is to defer tax payments. Unfortunately, LKPEs are sometimes mistaken as a "tax-free" method of asset replacement. An LKPE transfers the basis of the original property to the replacement property, thereby deferring the gain from the exchange.

The impact on future income is determined by the eventual sale price of the replacement property and the amount of accumulated depreciation claimed at its sale.

The Impact of Eventual Sale Price on Deferral

We use an example of trading non-depreciable assets (e.g., land) via an LKPE to illustrate the impact of the eventual sale price. In the example, an original asset, LKP A, with a basis of $500,000 and a Fair Market Value (FMV) of $600,000 is exchanged for a replacement property, LKP B, resulting in a deferred gain of $100,000. Exhibit 2 shows recognized gains at the sale based on various sale prices of LKP B.

Scenario 1 in Exhibit 2 shows that the recognized gain increases as the replacement LKP appreciates.

In Scenario 2, the FMV of LKP B remains unchanged at its eventual sale, leading to a 100% deferral in the gain that would have been recognized if LKP A were sold.

A slight decrease in the FMV, in Scenario 3, results in a smaller recognized gain on the sale of LKP B than the gain that would have been recognized if LKP A were sold.

In Scenario 4, the gain at the time of the Like Kind Property Exchange changes to a recognized loss at the sale of LKP B as the FMV declines substantially.

Exhibit 2 highlights the importance of carefully selecting the property to be acquired in an LKPE. Though deferring the realized gain is appealing, choosing a devaluing asset can erode more value than the tax savings from an LKPE.

Selling a capital asset for more (less) than its basis generates realized capital gains (losses). A common misconception is that realized gains as a result of selling business assets held for longer than a year are recognized as Long Term Capital Gains (LTCGs) for tax purposes.

On the contrary, the tax law specifically excludes long-term business assets from being classified as capital assets and refers to them as Code [section]1231 assets. In a transaction of a non-depreciable Code [section]1231 asset, if the selling price is higher than the basis, the difference is classified as Code [section]1231 gains; if the selling price is less than the basis, Code [section]1231 losses occur.

Code [section]1231 gains are netted against Code [section]1231 losses. A positive net amount creates net Code [section]1231 gains that are treated as LTCGs. The gains are subject to a maximum 20% tax rate for flow-through entities or 35% tax rate for C corporations.

Conversely, net Code [section]1231 losses are fully deductible against ordinary income and therefore generate tax savings of up to 39.6 cents per dollar for flow-through entities or 35 cents per dollar for C corporations. (8)

The Impact of Accumulated Depreciation on Deferral

Tax policy provides various incentives for expanding business through asset acquisitions. For example, firms are able to claim depreciation on most business assets and enjoy preferential rates on gains at the eventual sale of some of these assets.

In this section, we provide a brief discussion of these tax incentives to facilitate a pragmatic analysis of an LKPE of a depreciable real property.

Depreciation claimed on a business asset generates ordinary income deductions. It also reduces the asset's basis that is used to calculate gain (loss) at the sale of the asset. Accordingly, there are two potential sources of a gain when a depreciable real property is sold.

For flow-through entities, the portion of the gain due to appreciation (i.e., the difference between selling price and historical cost) is treated as a Code [section]1231 gain.

Meanwhile, the portion of the gain due to accumulated depreciation on real property is classified as Unrecaptured Section 1250 gain and is subject to a maximum preferential tax rate of 25%. This preferential treatment for Unrecaptured Code [section]1250 gains complicates the comparison of tax savings from a sale transaction and an LKPE.

C corporations do not benefit from Unrecaptured Code [section]1250 preferential tax rate, and they are subject to Code [section]291 instead. Specifically, the recognized gain on depreciable real property is categorized as ordinary income equal to 20% times the lesser of recognized gain or accumulated depreciation while the remaining recognized gain is treated as Code [section]1231 gains.

What if a depreciable real property sells for less than its basis? Analogous to a nondepreciable property, the difference is classified as a Code [section]1231 loss for both flow-through entities and C corporations.

A replacement property obtained via a sale transaction has a higher basis than the asset obtained via an LKPE. The higher basis allows for higher future depreciation deductions, which can generate tax savings of up to 39.6 cents per dollar for flow-through entities.

The additional basis can be especially valuable in an acquisition of real property, given that preferential tax rates apply to gains as the result of depreciating such assets.

In contrast, the LKPE rules generally transfer the basis of the original property to the replacement property. When acquiring a depreciable real property, the business engaging in an LKPE forfeits the potential higher basis and hence has future implicit costs due to the lost net tax savings.

NPV Analyses of Tax Consequences

It is important to incorporate the net present value (NPV) method in estimating the tax consequences when comparing asset disposals via an LKPE and a sale. Our analysis is based on a complete process, from disposing of the original asset to disposing of the replacement asset to account for all tax perspectives.

Specifically, the tax impacts are estimated in three scenarios:

--the disposal of the original asset (Property A),

--the depreciation of the replacement asset (Property B), and

--the disposal of Property B.

The tax consequence estimate varies with the following factors:

1. Business-level factors

* Entity tax classification (flow-through entity or C corporation)

* Marginal tax rate of the business

* Discount rate applicable to the business

2. Asset-level factors

* Asset classification (depreciable or nondepreciable real property)

* Depreciation recovery period of an asset

* Length of time an asset is held before its disposal

* Acquisition cost of Property A

* Value of Property A at its disposal

* Value of Property B at its disposal

Given that there are almost indefinite combinations of the abovementioned factors, we present an analysis for real property replacement based on one set of these factors in Exhibit 3. The complete set of variable descriptions is available upon request.

The tax analysis starts with a determination of a company's entity tax classification (i.e., flow-through entity or C corporation). Our example in Exhibit 3 is based on a flow-through entity.

We use top marginal tax rates that are applicable to the tax classification. The marginal tax rates for flow-through entities can be difficult to determine, given that they vary among owners.

It is appropriate to use a weighted-average approach for a reasonable estimate. In addition, we incorporate a 5% discount rate when estimating the NPVs of tax consequences.

The asset-level factors are tied to the type of real property that is being considered. The analysis in Exhibit 3 focuses on the replacement of a non-residential real property (e.g., manufacturing facility and office building). Such real properties are more likely held by various companies than residential rental properties (e.g., apartment complexes).

The analysis can be applied to the disposal of a residential rental property by changing the depreciation recovery period from 39 to 27.5 years.

Both forms of real property are depreciated for tax purposes using the straight-line depreciation method. (9) In our example, the maximum holding period is the depreciable recovery period.

An examination of a non-residential real property requires the values of both the depreciable real property (e.g., factory building) and the non-depreciable property where it is located (i.e., land).

We assume that 100% of the fund from disposing of Property A is re-invested in Property B to mitigate disqualified tax benefits of an LKPE. The FMV of Property B remains unchanged from the time of its acquisition to disposal.

Exhibit 3 shows that the net present value (NPV) differential between a Like Kind Property Exchange (LKPE) and a sale transaction amounts to $202,437 for disposing of Property A in the examined scenario. The result suggests that an LKPE has higher aggregate tax benefits than the sale approach.

Specifically, an LKPE generates an immediate tax saving of $407,692 at the disposal of the original asset, while it costs the business a transaction fee of $1,350 along with a tax loss of $203,905 due to the forfeited basis.

The results of our analysis are contingent on the examined factors and there is a risk of reaching a different conclusion with alternative input values for the factors. To illustrate, we perform the analysis with a lower discount rate of 2%, a shorter holding period of 5 years for Property A, and a lower sales price of $2,000,000 for Property B's building.

The results show that the aggregate tax benefits of the sale approach is $4,572 higher than that of an LKPE. Our original example accounts for factors included a relatively low discount rate of 5% and the likelihood for a business to apply an even lower discount rate (e.g., 2%) is limited.

Given the holding period of the original asset is known when considering an LKPE, there is no uncertainty in estimating the factor. In contrast, it is more difficult to estimate the subsequent sales price of the replacement asset, representing a challenge for an analysis of tax consequences.

One factor that has a substantial impact on tax consequences of the transaction types to replace a business asset is the entity tax classification of a business (i.e., flow-through entity or C corporation).

Exhibit 4 presents aggregate tax benefits of an LKPE relative to the sale approach by entity tax classifications for the original analysis as well as the modified analysis. The primary conclusion from Exhibit 4 is that C corporations benefit to a larger extent from engaging in LKPEs.

The finding is not unexpected. Since C corporations do not benefit from preferential tax rates, the additional basis generated through a sale transaction yields no tax benefits at the sale of the replacement asset.

The tax consequence analysis is also contingent on other factors (e.g., realized gain at the disposal of Property A). As such, it is necessary for financial managers to apply their applicable factors when determining if the forfeited basis disadvantages an LKPE. To assist in this process, the Excel worksheet applicable to the analysis in Exhibit 3 is available upon request.

Methods of Minimizing Risks in Like Kind Property Exchanges

Achieving tax benefits from an LKPE requires careful planning. In this section we discuss some common issues that can negate a company's efforts to defer income through an LKPE. Corresponding methods of minimizing these risks and guidance on other precautions when contemplating an LKPE are also provided.

The Received Property

The choice of an LKPE is driven by the desire to defer taxes. The receipt of a non-LKP in the transaction diminishes this preferred outcome. Tax practitioners refer to a non-LKP as "boot."

For example, when the sale price of the original property is higher than the purchase price of the replacement property, the acceptance of excess cash due to the difference in property values is qualified as the receipt of boot.

However, the receipt of boot can be hidden. Net debt relief (i.e., the amount that debt relief exceeds the combination of new debt taken on and cash given in an LKPE) on a relinquished asset is also classified as boot.

With the receipt of boot, the gain is recognized, rather than being deferred, to the lesser of the realized gain on the overall transaction or the value of the received boot.

What if an apartment complex received in an LKPE of real properties contains personal property such as washers, dryers and vending machines? Per boot rules, the personal property is boot and therefore can trigger a recognized gain.

A successful search for a qualified replacement property necessitates careful considerations beyond whether the received property is qualified as boot. For instance, what is its impact on annual productivity and earnings?

An exchange involving real property calls for research to fully understand economic and environmental factors such as the property's location, potential need for expensive structural repairs, and the tenant turnover rate for a residential rental property.

Time Constraints

An LKPE is subject to two time restrictions. First, the replacement LKP is required to be identified within 45 days of the original asset being transferred out. Per Treasury Regulation 1.1031 (k)-1(c)(2), this identification must be presented in a signed written document and delivered to the person obligated to transfer the replacement property.

Secondly the receipt of the replacement LKP has to be within 180 days of the original asset being transferred out. (10) The 180-day exchange period starts at the beginning of the 45-day identification period. These restrictions leave limited time for analyzing potential replacement properties and may lead to selecting a non-optimal replacement asset.

The 45-day identification period contains certain flexibility features that help mitigate the risk of suboptimal choices. A company can cancel identification of a replacement property and switch to an alternative replacement at any point before the end of the identification period.

Furthermore, multiple replacement properties can be identified within the 45-day window. This allows for more due diligence on the final acquisition before the end of the 180-day exchange period.

Despite the abovementioned flexibility, the total number and value of replacement properties that can be identified are subject to restrictions. If no more than three replacement properties are identified, there is no limit on the cumulative Fair Market Value of identified properties.

In contrast, when more than three replacement properties are identified, the cumulative FMV of identified properties by the end of the identification period cannot be more than twice the FMV of the original property.

As an illustration, if a company wants to identify four replacement properties of equal values, none of the properties can be worth more than 50% of the original property.

The violation of the first two scenarios indicates a need for an alternative that allows for an unlimited number of replacement properties to be identified with no limit on the cumulative FMV.

In this case, 95% of the total FMV of all identified properties must be acquired. This scenario prescribes the identification of more than three properties with a cumulative FMV greater than 200% of the original property's FMV.

That is, a company has to more than double its investment in order to defer the gain on the original property. From a practical standpoint, most companies likely benefit from only the first two scenarios.

Reverse Exchanges

Even with the flexibility features described above, a company is still at risk of failing to identify/acquire an optimal replacement property within the time requirements. One method to alleviate the risk is to achieve a safe harbor by following Revenue Procedure 2000-37 and enter into a reverse exchange. (11)

The safe harbor under Revenue Procedure 2000-37 requires a third party, an exchange accommodation titleholder (EAT), to acquire (or "park") the replacement property before the disposal of the original property.

To help finance the acquisition of the replacement property, the EAT can borrow from the company, or the company can guarantee the EAT's loans.

Alternatively, the company can rent the replacement property from the EAT during the time it holds title to the property prior to the transfer. For these safe-harbor reverse exchanges, it is not necessary to demonstrate arm's length characteristics (e.g., market rates) for interest rates on the loans or rental payments.

The acquired replacement property must be transferred to the company within 180 days of the EAT holding title to it. If the replacement property is what the company is looking for, satisfying the requirement is not going to be an issue.

What if the company wants to make improvements on the property before the final transfer, or construct the ideal replacement property? The construction of these improvements or the entire asset likely takes longer than 180 days.

In these cases, Revenue Procedure 2000-37 no longer applies. To receive deferral treatment, the reverse exchange needs to be designed per tax case law. Such non-safe-harbor reverse exchanges require the EAT to bear legitimate rights and risks associated with the ownership in the replacement property. This may necessitate the EAT to carry liability insurance on the asset before transferring it to the company.

Different than a reverse exchange under Revenue Procedure 2000-37, a non-safe-harbor reverse exchange requires arm's length arrangements between the company and the EAT. That is, interest rates and/or rental payments must be based on market rates.

Qualified Intermediary (QI)

In a typical Like Kind Property Exchange, the company transfers its original property to a Qualified Intermediary, who acquires an LKP for the business. The QI can either trade the transferred-in asset for an LKP or use the proceeds from selling the transferred-in asset to purchase an LKP.

QIs play a critical role in executing LKPEs, and therefore businesses should give serious consideration to the selection of a QI. Per the IRS Fact Sheet (FS-2008-18), an individual cannot serve as a QI for a company if he/she has been an employee or has had a working relationship with the business during the past two years.

That is, a QI cannot be the company's accountant, attorney, employee, real estate agent, or investment banker within the time limit. Financial managers can refer to the QI directory at for a list of QIs who are members of the Federation of Exchange Accommodators, or ask their tax professionals for a recommendation.

While QIs are important in successfully executing LKPEs, costs associated with utilizing Qls are crucial aspects of such transactions. The fee charged by a QI to conduct an LKPE ranges from $700 to $2,000.

More significant are unexpected costs due to an unfortunate choice of a QI with financial struggles. The QI's liquidity issue may delay the receipt of replacement property until after the 180-day deadline and the desired deferred gain becomes a taxable gain.

In an even worse scenario, a company may not receive any replacement property if the QI files for bankruptcy before completing the LKPE. The risk is rooted in no federal requirement for QIs to be licensed or audited by any regulatory body.

Moreover, there has generally been no requirement of QIs being insured, maintaining an acceptable capitalization level, or being bonded. To take an extreme example, Edward Okun, the owner of 1031 Tax Group LLC, committed a $126 million fraud scheme of using 1031 sale proceeds for personal purposes (FBI 2009).

A growing number of states have enacted or are considering legislation regarding Qualified Intermediaries. A company interested in the LKPE should determine whether it resides in a state that regulates QIs, and what levels of protection are imposed by the state with such regulations.

Further questions should be raised in research on potential QIs:

--Does the QI have fidelity bond insurance to protect against fraudulent activities (e.g., embezzlement and theft)?

--Does the QI carry Errors & Omissions insurance to protect against a failed LKPE due to human errors?

--What are coverage amounts of these insurance policies?

--Is the insurance company reputable?

--Is the QI bonded? Are all of bonding payments up to date?

--Is the QI large enough to survive unexpected economic downturns?

It is also important to insist that exchange funds be held in a separate, segregated qualified escrow account or qualified trust. Utilizing these accounts restricts a company to receive any remaining funds from acquiring the replacement LKP until the end of the exchange period. A violation of the rule leads to a reclassification of the desired tax deferral LKPE as a taxable sale transaction.


This article is intended to make financial managers aware of tax deferrals through Like Kind Property Exchanges. An overview of tax law requirements of LKPEs is presented, along with multiple Net Present Value analyses of tax benefits of an LKPE relative to a sale transaction by entity tax classifications.

To help financial managers estimate the potential tax savings of an LKPE based on their own inputs, the Excel template used to conduct our analyses is available upon request. We also discuss potential risks associated with LKPEs and some methods to minimize these risks.

Nonetheless, several tax issues related to LKPEs are beyond the scope of this article. For example, Schnee (2014) provides guidance on related-party exchanges. We recommend that financial managers work closely with tax professionals before entering in an LKPE to avoid unintended consequences.


FBI. 2009. U.S. Business Owner Sentenced to 100 Years for His Role in Scheme to Defraud Clients of Funds Allegedly Held in Trust, August 04, 2009,

Internal Revenue [section] [section]168(k).

Internal Revenue Code [section]179.

Internal Revenue Code [section]291.

Internal Revenue Code [section]1031.

Internal Revenue Code [section]1031(a)(1).

Internal Revenue Code [section]1231.

Internal Revenue Code [section]1250.

IRS Fact Sheet (FS-2008-18).

Ling, David C. and Milena Petrova. 2015. "The Economic Impact of Repealing or Limiting Section 1031 Like-Kind Exchanges in Real Estate."

Revenue Procedure 2000-37.

Schnee, Edward J. 2014. "Like-Kind Exchange Rules: Continued Evolution." Tax Adviser 45 (7): 494-503.

Treasury Regulation [section]1.1031(a)-2(b).

Treasury Regulation [section]1.1031(k)-1(c)(2).


(1) The year 2013 file contains the most recent data for exchange transactions that are available at The data is obtained from the Form 8824 (Data for Like-Kind Property Exchanges. 1995-2013).

(2) Flow-through entities are also referred to as pass-through, entities or conduits. Typical examples of flow-through entities include partnerships, S-corporations, and LLCs. All business income flows through annually to owners, and it is subject to the owners' top marginal tax rates.

(3) In face of the potential tax savings that LKPEs can provide, there could be policy concern whether the government can afford to be allowing the tax saving technique. Ling and Petrova (2015) examine several potential economic impacts of repealing Code [section]1031.

(4) All section references are to the Internal Revenue Code of 1986, as amended.

(5) Note that personal property is not the same as personal-use property. Personal-use property indicates a non-business asset while personal property refers to a moveable business asset.

(6) The March 2016 Green Street Commercial Property Price Index is the most recent data available at The 4rth quarter of 2015 Moody's/RCA US Indices: Apartment (i.e., multifamily rental properties with at least 10 units) is the most recent data available at:

(7) The $500,000 deduction from Code [section]179 is subject to a dollar-for-dollar phaseout once tangible personal property purchases exceed $2,000,000. As such, it will provide zero benefit to any firm with tangible personal purchases exceeding $2,500,000.

(8) The full deductibility of net Code [section]1231 losses suggests that such losses are not subject to the restrictions applied to net capital losses.

(9) The presented analyses do not account for the mid-month convention when depreciating real property, since it will only have a minimal impact on long-term depreciation calculations.

(10) The exchange period could be shorter than 180 days if the due date of the tax return, including extensions, for the tax year of relinquishing LKP occurs before the 180th day. Given that extensions allow for an additional six months to file a return, there is no practical reason to have an exchange period shorter than 180 days.

(11) Safe harbor is a tax terminology that describes achieving desired tax results despite not meeting all of the normally required criteria.

Dr. Steven Hanke, Indiana University-Purdue University Fort Wayne
Exhibit 2:
Sale Prices and Recognized Gains at the Sale of a Non-Depreciable LKP

                    Scenario 1  Scenario 2  Scenario 3  Scenario 4

Eventual Sale        650,000     600,000     550,000     350,000
Price of LKP B
Basis of LKP B (*)  (500,000)   (500,000)   (500,000)   (500,000)
Recognized Gain on   150,000     100,000      50,000    (150,000)
Sale of LKP B

(*) LKP B acquires its basis from LKP A.

Exhibit 3:
NPV Calculations for Real Property Transactions

Information: A = Existing Property; B = Replacement Property

 #  Property A: Acquisition Price ($)
 1  Building                                           2,000,000
 2  Land                                                 500,000
 3  Total                                              2,500,000
    Property A: Fair Market Value at its Disposal ($)
 4  Building                                           2,400,000
 5  Land                                                 600,000
 6  Total                                              3,000,000
    Property B: Fair Market Value at the Disposal
    of A ($)
 7  Building                                           2,400,000
 8  Land                                                 600,000
 9  Total                                              3,000,000
    Property B: Subsequent Sale Price ($)
10  Building                                           2,400,000
11  Land                                                 600,000
12  Total                                              3,000,000
13  Depreciation Recovery Period of Property A (Year)         39
14  Holding Period of Property A (Year)                       24
15  Depreciation Recovery Period of Property B (Year)         39
16  Holding Period of Property B (Year)                       39
    Tax Rates
17  Ordinary Income                                            0.396
18  Unrecaptured Gain                                          0.250
19  Long-Term Capital Gain                                     0.200
20  Discount Rate                                              0.050
21  LKPE Transaction Fee ($)                               1,350

Entity Tax Classification

                                * Flow-Through Entity  * C corporation

                                            LKPE       Cash Transaction
#   Scenario 1: Disposal of the Original
    Asset (Property A)
22  Accumulated Depreciation for A          1,230,769         1,230,769
23  Carryover Basis from A                  1,269,231         n/a
24  Depreciable Basis for B [LKE]             769,231         2,400,000
    or for A [CT]
25  Unrecaptured Gain (URG) for A           n/a               1,230,769
26  Tax on URG (TURG) for A                 n/a                 307,692
27  Present Value (PV) of                   n/a                (307,692)
    [T.sub.URG] (PVTURG) for A
28  Long-Term Capital Gain (LTCG) for A     n/a                 500,000
29  Tax on LTCG ([T.sub.LTCG]) for A        n/a                 100,000
30  PV of TLTCG ([PVT.sub.LTCG]) for A      n/a                (100,000)
31  PV of Recognized Gain ([PVT.sub.URG] +  n/a                (407,692)
    [PVT.sub.LTCG]) for A
    Scenario 2: Depreciation of the
    Replacement Asset (Property B)
32  Annual Depreciation for B                  51,282            61,538
33  Annual Tax Savings from                    20,308            24,369
    Depreciation for B
34  PV of Tax Savings from                    210,787           414,692
    Depreciation for B
    Scenario 3: Disposal of Property B
35  Accumulated Depreciation for B          2,000,000         2,400,000
    at its Disposal
36  Unrecaptured Gain (URG) for B           2,000,000         2,400,000
37  Tax on URG ([T.sub.URG]) for B            500,000           600,000
38  PV of TURG ([PVT.sub.URG]) for B          (74,574)          (89,489)
39  Long-Term Capital Gain (LTCG) for B       500,000                 0
40  Tax on LTCG (TLTCG) for B                 100,000                 0
41  PV of [T.sub.LTCG] (PVTLTCG) for B        (14,915)                0
42  PV of Recognized Gain ([PVT.sub.URG]      (89,489)          (89,489)
    + [PVT.sub.LTCG]) for B
43  Transaction NPV at the Disposal of A      119,948           (82,489)
44  Difference ([NPV.sub.LKE]                          202,437
    - [NPV.sub.CT])

Exhibit 4:
NPV Differentials by Entity Tax Classifications

                           Entity Tax Classifications
                        Flow-through Entity  C corporation

Original Analysis (*)   $202,437             $418,980
Modified Analysis (**)   ($4,572)            $107,503

(*) All factors in the original analysis are shown in Exhibit 3.
(**) The modified analysis includes the same factors as in the original
analysis except for: a lower discount Rate (2%), a shorter holding
period for Property A (5 years), and a lower sale price for Property
B's building ($2,000,000).
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Author:Hanke, Steven
Publication:Review of Business
Date:Dec 22, 2016
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