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1031 Exchange: Tax Deferral in Commercial Real Estate Transactions

1031 Exchange: Tax Deferral in Commercial Real Estate Transactions

John Daskam

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For commercial real estate owners, selling assets which have been fully depreciated, fully stabilized, or held long term, can be an attractive option given certain market conditions, or over-saturation of the given asset type within an investor’s portfolio.

Regardless of the reason, a 1031 exchange may be a good option to consider for the sale proceeds which may allow the investor to defer tax on the gain. A prospective seller may wish to continue to invest the proceeds from the sale, and may do so, while deferring the tax consequences, through a like-kind exchange, taking advantage of Section 1031 of the Internal Revenue Code.

By exchanging the proceeds from the sale, an investor may swap the investment property for another, and defer the capital gains tax that otherwise would have to be paid as a result of the sale.

There are a number of rules governing a transaction where 1031 exchange proceeds are being used to purchase a property or where the buyer is using such proceeds to fund a future acquisition. These rules relate to, among other things, the time during which an investor must identify the replacement property, how the sale proceeds must be held (i.e. through a qualified intermediary), the buyer’s corporate form before and after the sale occurs, and the types of property that qualify for an exchange.

The 1031 exchange can provide significant value to real estate investors and should be considered in any commercial real estate transaction. For questions about how to take advantage of this mechanism, reach out to the real estate team at M&D.

ABOUT THE AUTHOR

PARTNER

John Daskam joined Milgrom & Daskam as a Partner in January 2019. He focuses his law practice on real estate and corporate law. His real estate practice includes acquisitions and dispositions, landlord-tenant matters, leasing, financing, development, and contract preparation and negotiation.

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Copyright Law

Should You Seek Foreign Intellectual Property Protection?

If you plan to conduct business abroad or have an online business that reaches customers abroad, you should consider seeking international intellectual property protection. Intellectual property protection is often limited to the country where you conduct business and/or where you file for protection with the respective foreign intellectual property office. For example, a U.S. trademark registration will not protect you against trademark disputes that arise in other countries. As another example, a U.S. patent prevents others from making, using, selling, offering for sale, and importing your patented invention in the U.S., but does not prevent others from doing the same in other countries.

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Uncategorized

DON’T GET NFTEASED

DON’T GET NFTEASED

Jared Stipelman

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It’s 2022, and everyone from Snoop Dogg to the cashier at your local supermarket is creating or sponsoring their own NFT project, including many of our Firm’s clients. NFTs (non-fungible tokens) might be a revolutionary way for artists and collectors to control their work, but they are currently a Wild West. Before you get rich quick on this “21st Century Gold Rush”,[1] consider some of the lessons we have learned through our practice.

YOUR NFT IS SUBJECT TO COPYRIGHT – U.S. copyright laws protects any “creative” works that is “fixed” in a tangible form by its “author”. It also allows the author to control the creation of new works that are “derivative” of their original work, whether because such new work shows the original work in a different medium, or because it uses the essence of the original work as the base for its new additions. Thus, for example, I could not make and sell a Spongebob Squarepants Halloween costume that was based off the TV cartoon (same idea different medium) without likely infringing on the copyright for Spongebob Squarepants. I could not take the Spongebob Squarepants cartoon and then commercialize my own Anemonephil Triangleshirt cartoon. AND I cannot take someone else’s artwork and make it into an NFT without their permission without committing copyright infringement. Each individual copyright infringed upon (and we find that NFT projects often contain hundreds of potentially derivative works) could in theory subject the infringer to $30,000-$150,000 in “statutory damages” under US copyright law.

OUR ADVICE: Before you issue your project, make sure you own your art. If you have purchased it from someone else, make sure that they owned the art they are selling you, make sure they officially sell you the rights to use the art, and make sure that the seller is not going to disappear anonymously into the night right after making the sale.

MIND YOUR OFFERINGS – Chances are that if you are starting an NFT project, you are intrigued by the promise of profit margins that dwarf those of traditional investments. Alas, the reason that NFT projects can promise pots of gold at the end of rainbow, while stocks cannot, is that many NFT projects are unregulated securities. A “security” is basically any tradeable financial instrument that holds or represents any kind of value, like a stock, or a purchase option, and where that value can change depending on trading or market activity. Many NFT projects, which truthfully might fall a bit short of the Mona Lisa in their merits as art, focus their promotional materials and marketing much more on the financial side benefits of ownership and trading (such as percentages of future sales, first access to new NFT projects, issuance of rarer NFTs, and so forth). These financial incentives increase the value of the project, which in turn makes the projects’ owners or creators a profit when the project is sold. This process is similar to how stock markets work—stocks are bought and sold to create value for those in their market, and the stocks increase in value by offering benefits to owners (such as service perks, or yearly distributions) and through heavy trading volume. The difference is that publicly traded stocks must follow many rules meant to safeguard the average consumer, and NFTs do not. The US Securities and Exchange Commission has recently stated that it will begin evaluating whether certain NFTs are actually subject to (and generally not following) securities laws. Given that the SEC has been staffing up with specialists in this field, we can predict a wave of SEC investigations and new rules in the NFT space.

OUR ADVICE: Before you issue your project, speak with a securities specialist to ensure that your project structure is either (i) not a security, or (ii) complies with securities laws.

YOU ARE LESS ANONYMOUS THAN YOU THINK – We have seen numerous clients shrug off these concerns on the grounds that the client is anonymous and thus basically immune to investigation. Unless you have married your NFT project with spy-level operational security, this is simply not true. Certain exchanges or wallets hold some of your information to comply with international banking rules. Email addresses are not necessarily anonymous, IP addresses are often traceable, and anonymous transaction histories can be linked to real-life purchases. Your Discord conversations can unwittingly reveal personal details, your smart contracts likely contain traceable information, and each of your business partners is a potential canary.

OUR ADVICE:  If you believe your project might raise legal issues, don’t assume you can hide from them.

 MILGROM AND DASKAM IS A FULL-SERVICE CORPORATE LAW FIRM THAT SPECIALIZES IN ISSUES RELATING TO EMERGING TECHNOLOGIES. PLEASE CONTACT ME OR THE FIRM WITH ANY QUESTIONS YOU MIGHT HAVE ABOUT YOUR NFT PROJECT (AND PLEASE, DO IT BEFORE YOU START 😊)


[1] The NFT Gold Rush: How Cryptoartists Kick-Started a Boom – The New York Times (nytimes.com)

ABOUT THE AUTHOR

OF COUNSEL

Jared is a New York corporate attorney specializing in regulatory compliance. While active in several fields, Jared focuses his practice on employee benefits, trademark prosecution, and business acquisitions, particularly in the fields of e-commerce and health and beauty. He also provides pro bono counsel to charities devoted to animal welfare and responsible land use and has published writings on matters ranging from anti-counterfeiting operations to the trademark doctrine of foreign equivalents.

Jared graduated cum laude from Hamilton College in 2008, and cum laude from The George Washington University Law School in 2014, where he was the recipient of the 2013 Finnegan Prize. Jared is also an inventor who owns or is in the process of securing several US patents on certain medical and storage technologies.

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Employment Law

Workplace Accommodations for Nursing Mothers

Many women choose to breastfeed their newborns, as the benefits of nursing are well-established. However, returning to work can present challenges to nursing mothers. Currently, twenty-eight states have laws related to supporting nursing women at work, and Colorado is among them.

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Real Estate Law

FinCEN and Real Estate: Additional Disclosure Requirements May Be On the Horizon for Real Estate Transactions

As part of the anti-money laundering regime under the Bank Secrecy Act of 1970 (the “BSA”), in late 2021, the Financial Crimes Enforcement Network (“FinCEN”) division of the Department of the Treasury issued an advanced notice of proposed rulemaking (“ANPRM”) seeking to address potential money laundering through real estate transactions. The comment period for the ANPRM closed on February 21, 2022. This ANPRM comes closely after the notice of proposed rulemaking related to the implementation of the Corporate Transparency Act (the “CTA”), which you can read more about here. Both the CTA and the proposed regulations under the ANPRM would require significant levels of disclosure regarding the beneficial ownership of companies and real estate in non-financed real estate transactions. These measures aim to reduce money laundering, and assets held by undisclosed foreign investors. It is estimated that between 2015 and 2020, at least $2.3 billion was laundered through U.S. real estate, though the actual figure is likely much higher Accordingly, both FinCEN and Congress are trying to limit the number of real estate transactions used to launder money.

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