Letter of good standing and 1031 Exchange

Member since 2018 · 16 posts · 7 votes

Hopefully someone can shed some light from experience.

I'm in Rhode Island and going to do a 1031 exchange and my accountant needs to obtain a letter of good standing from my state. The accountant claims that I need to identify the actual property ( not properties) I plan on exchanging in order to obtain the letter of good standing. My RE atty spoke to the division of taxation and they said this is false, but my accountant has a way of making people look dumb and is usually correct and said he had an investor recently lose a deal and have to pay cap gains because of this. Anyone?

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Wayne Brooks

Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes

Yeah, the Letter Of Good Standing is simply evidence that your entity is still legally able to transact business in that state. The identifying of an exchange property has nothing to do with that.

And, you Can identify multiple properties, following the 1031 guidelines.

@Dave Foster knows a thing or two about this.

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Anthony ThompsonPro Member
Buy and Hold Investor · Cranston, RI · Member since 2013 · 1k+ posts · 1k+ votes
7y
@Anthony Petrarca usually the letter of good standing is needed for a sale with an entity in general, regardless of whether it's a 1031 exchange.

I've never had to identify the actual property on the letter of good standing request, but I have had to identify that it was for a property sale in general, specifically in Section I - General Requests for Good Standing where you choose the purpose of the sale.
I usually choose "Sale of less than 50% of Rhode Island assets" for a property sale but if that's the only asset held by that entity, or any of the members/owners are out of state residents, it gets more complicated and for any of this you should definitely follow your accountant or advice.
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Anthony Petrarca
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Member since 2018 · 16 posts · 7 votes
7y
Yeah, the accounting claims I have to identify the exact property and close on that one or pay the tax man.
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Anthony ThompsonPro Member
Buy and Hold Investor · Cranston, RI · Member since 2013 · 1k+ posts · 1k+ votes
7y
@Anthony Petrarca if he means you have to identify it when requesting the letter of good standing, ask him to tell you where there is a place requesting it, or for you to put it, on the Request for Letter of Good Standing form.

I've filled out that form multiple times, and just read through every page again now, and I just don't see a spot for it myself.

If he means that you have to identify it as part of the 1031 exchange, with an "identification letter" that must be submitted to him within 45 days of the relinquished (sold) property, then that's normal for a 1031 exchange and where I suspect the confusion about identifying properties is coming in.
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Anthony Petrarca
OP
Member since 2018 · 16 posts · 7 votes
7y
Than you, Anthony, I looked at that document earlier also. He keeps saying in order to get the Letter, they need a property identified, which makes no sense.
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Wayne Brooks
Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
7y
Yeah, the Letter Of Good Standing is simply evidence that your entity is still legally able to transact business in that state. The identifying of an exchange property has nothing to do with that.

And, you Can identify multiple properties, following the 1031 guidelines.

@Dave Foster knows a thing or two about this.
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Anthony ThompsonPro Member
Buy and Hold Investor · Cranston, RI · Member since 2013 · 1k+ posts · 1k+ votes
7y
@Anthony Petrarca what you could do in this situation, and I did myself for a while when I first started filling out that form, was to fill it out to the best of my ability and then go down to the Division of Taxation with the form and check (the amount of which is at the top of page 1).

I'd wait in the main line, then when called I'd go to the window, which is sort of like a screening person behind some glass, and give her the form. She'd look it over and then say all set, and give me a receipt for the form and payment.

I'm sure that the first few times I did it I probably said something like, "I haven't really done this before, so please make sure I didn't miss anything", and I think one time she did tell me to put the phone # on the "Contact Name at Business" line next to my name, even though there's a spot for phone number of page 5 too.

So one thing you could do would be the same thing, except you could say, "someone told me that I was supposed to put the address of the property I'm selling on the form, but I didn't see a spot for it - do you know anything about that?"

If you do this, the address for the Division of Taxation is 1 Captol Hill, Providence, but for purposes of parking there's a side street I like so I usually map 132 State St Providence and then put a few quarters in. You can kind of see which building it is on the Google maps link, and you'll need to sign in at the main security desk before you can go on to the Division of Taxation.

(I'm just speaking hypothetically of course, i.e., what I'd do in your situation; since I'm not an attorney or accountant I obviously can't give you legal or tax advice for your personal situation.)
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Mark Creason
Real Estate Lender and Broker · Dallas, TX · Member since 2013 · 966 posts · 500 votes
7y
@Anthony Petrarca
Have you closed on the property you intent to sell? You will need a Qualified Intermediary to facilitate that. Upon closing, you will have 45 days to ID properties. You can use 1 of 3 rules if you get to day 45. 3 properties rule, the 200% rule, and the 95% rule.
Mark
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Anthony ThompsonPro Member
Buy and Hold Investor · Cranston, RI · Member since 2013 · 1k+ posts · 1k+ votes
7y
@Anthony Petrarca it's also not clear whether you're planning to use your accountant as your 1031 exchange intermediary. That's probably not the case, but in the unlikely event it is, you should research this as my understanding is that you can't use your usual accountant or attorney as your 1031 intermediary/agent.
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Anthony Petrarca
OP
Member since 2018 · 16 posts · 7 votes
7y
@Anthony Thompson, that is a good idea, thank you. Have you done any 1031's lately?
Yes I already have a qualified intermediary in place and understand the rules of the exchange very well, until he hit me with this. We close at the end of October on the property I'm selling.
Just got off the phone with my accountant, he is digging his heels in on this and saying everyone fights him on this and he has become an expert on this, because he went through this in December. He said it's a state rule and not federal. I even told him there is no spot to identify the property to be bought on the form and he maintains the same attitude.
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Anthony ThompsonPro Member
Buy and Hold Investor · Cranston, RI · Member since 2013 · 1k+ posts · 1k+ votes
7y
@Anthony Petrarca yes, I did one earlier this year (successfully exchanging 50% of some land into 100% of a 3F), and also failed one earlier this year (the replacement property was in a divorce situation and we thought we had both parties on board but I guess one of their lawyers said the price was too low, but this only happened once our identification period had passed).

I think your choices here are 1) fill out the form yourself and bring it to the Division of Taxation and see if they give it to you, or 2) pay your accountant to fill out the form for you and then get a copy so you can see where/how he identifies the property, and submit it to the Division of Taxation.

He may not be wrong, there is often a delay between when policies change and when they start getting enforced. For example, supposedly a letter of good standing from Division of Taxation is required even for single member LLCs now, but I've found that different closing attorneys are asking for that very inconsistently.

I just know that as recently as last month I submitted the Request for Letter of Good Standing the way I usually do, including bringing it to the window, and I got the letter back 2-3 weeks later with no problem.

If you do choose #2 (having him fill it out and getting a copy) please let us know what his solution was, whether he hand wrote it somewhere on the form or stapled an attachment to the usual form, etc.
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Anthony Petrarca
OP
Member since 2018 · 16 posts · 7 votes
7y
I have a call in to the Division of Taxation....we'll see how that goes
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Stanley Bronstein
Attorney, CPA, Broker & Author · Scottsdale, AZ · Member since 2018 · 532 posts · 488 votes
7y
@Anthony Petrarca From a federal perspective, the letter of good standing from your state has absolutely nothing to do with identifying the property on your 1031 exchange. From a state tax perspective, it is possible it could be different.
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Dave FosterBusiness Member
Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
7y
@Anthony Petrarca, Your accountant is so wrong :)

First of all, as @Stanley Bronstein said, the 1031 is a federal statute and everything hinges on the tax return that your LLC files or if it is a disregarded entity, your own return. You don't do anything ever with a letter of good standing when filing a tax return. That is a state issue. The IRS cares about your tax return and that is determined by either your EIN for the LLC or your TIN for your personal return. If the LLC is a disregarded entiy then the TIN for the LLC is your SSN.

And guess what - the IRS don't care what RI says, They will want and will accept a tax return for your LLC regardless of it's standing in RI based on it's EIN. And they will not give you an extension on your tax filings just because your LLC is no longer in good standing with the state. Do you have issues with the state? - Sure but not with the fed and not with 1031.

!031 is also a federal statute and is performed the same way in all 50 states - no difference. Get a new accountant, and if the QI you selected hasn't already told you the same thing then get a new QI. This is all pretty basic 1031 stuff. Your exchange could be in jeopardy.

State issues can and do differ. But no state can prevent you from doing a 1031 exchange for any reason. They just may not recognize it at the state level (like PA). Or they may require a letter of good standing for your state return.

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Steven Hamilton IIPro Member
Accountant, Enrolled Agent · Grayslake, IL · Member since 2011 · 5k+ posts · 2k+ votes
7y
Originally posted by @Anthony Petrarca:
@Anthony Thompson, that is a good idea, thank you. Have you done any 1031's lately?
Yes I already have a qualified intermediary in place and understand the rules of the exchange very well, until he hit me with this. We close at the end of October on the property I'm selling.
Just got off the phone with my accountant, he is digging his heels in on this and saying everyone fights him on this and he has become an expert on this, because he went through this in December. He said it's a state rule and not federal. I even told him there is no spot to identify the property to be bought on the form and he maintains the same attitude.

Technically he is correct.

What state are you a resident of?

If it is not RI then yes, he does in order to prevent there being a withholding tax which could be considered boot.

NONRESIDENT CORPORATE INFORMATION
If the seller is a nonresident corporation, the buyer will be deemed to be in compliance with the remittance
requirements if the seller provides the buyer with a Letter of Good Standing issued by the Tax Administrator for
the purposes of the sale.

If a limited liability company is deemed to be a nonresident the
buyer must withhold at seven percent (7%) unless the nonresident
limited liability company produces a letter of good standing issued
by the Division of Taxation for purposes of the sale. See § 1.7 (B)
of this Part.

http://www.tax.ri.gov/regulations/other/nrw91-01.php
http://www.tax.ri.gov/forms/1997/pers/7131.pdf
https://risos-apa-production-public.s3.amazonaws.com/DOR/REG_9219_20180806200412.pdf
http://www.tax.ri.gov/Tax%20Website/TAX/Letters%20of%20Good%20Standing/index.php
[email protected]224-381-2660
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Anthony Petrarca
OP
Member since 2018 · 16 posts · 7 votes
7y
@Dave Foster, thank you very much for the info. I just got off the phone with the division of taxation and my RE atty had spoken to him already. He told me all he needs in order for the letter of good standing is a tentative return and a statement saying we will be doing a 1031 exchange and we have not yet identified a replacement(s) yet and will do so under the guidelines of a 1031 exchange. The atty and QI are up to speed, it's the accountant that is the holdup.
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Stanley Bronstein
Attorney, CPA, Broker & Author · Scottsdale, AZ · Member since 2018 · 532 posts · 488 votes
7y
@Dave Foster and @Anthony Petrarca - Glad you figured it out.

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Ralph Galdorisi
Investor · Northport, NY · Member since 2016 · 27 posts · 8 votes
7y
@Anthony Petrarca you have options I know because I'm going through it and did a ton of research.
I'll dm you my info
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Brandon Ingegneri
Rental Property Investor · Providence, RI · Member since 2015 · 1k+ posts · 594 votes
7y
@Anthony Petrarca you typically need a cert of good standing from the Secretary of State. When doing a 1031, there is ancillary paperwork where you will have to identify a specific property or properties. You can in fact trade several for one and vise verse so long as the sale proceeds do not exceed the purchase price(s). In that case, the non utilized balance would be subject to taxation.
There are a number of subsets and structures for 1031’s that can be utilized depending on the particular situation.
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Anthony Petrarca
OP
Member since 2018 · 16 posts · 7 votes
7y
@Brandon Ingegneri
Thank you, Brandon.
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