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  1. What To Know About 1031 Tax Exchange

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    At Black Diamond Realty, one of our goals is to educate our clients and help them build wealth over time via real estate investments and holdings.

    Tremendous perks exist in real estate that are not available through investing in stocks, bonds or other investments. One of those major perks is a 1031 tax exchange. A 1031 tax exchange can be described as a real estate transaction without immediate tax implications to the seller.

    It is important for you to understand your tax bracket and effective tax when completing a 1031 transaction. You do not simply sell an asset and walk away with the net amount on the closing statement. Your transaction is, most likely, subject to capital gains and depreciation recapture. We recommend all clients consult their accountant to better understand the ins and outs of their tax liability associated with any contemplated transaction. With that disclosure in mind, consider how a seller’s capital gains tax liability is one wealth building tool permitted by the federal government.

    In a traditional transaction, the seller is subject to capital gains and depreciation recapture. This article is only focusing on capital gains. A capital gains tax is defined as a tax on the increase in the value of an investment.  Short-term capital gains are characterized as gains from a sale in which an asset was owned for less than one year. Short-term capital gains are taxed according to your income tax bracket (seven total tax brackets in 2018).  Long-term capital gains are classified as monetary gains in which an asset was owned for more than one year.

    For single filers, the capital gains tax rate ranges from 10% to 37% for short-term capital gains versus 0% to 20% for long-term capital gains. Check out the charts (single versus joint filing) to get a better understanding of your potential capital gains tax obligation if you sell real estate. In addition to the capital gains tax outlined in the chart, high earning individuals (making $200,000+ filing individually or $250,000 filing jointly) are subject to an additional 3.8% tax which the government calls the “net investment income tax”.

    So, you may be saying, “I get the tax percentages and know where I fall, but how do the numbers look in a real-world example? And, is there any way I can defer these taxes?

    Let’s take a look at an example. You are successful entrepreneur who found an office building for $500,000. Over the years, the asset increased in value as the economy grew and the market improved. Seven to eight years (average hold on a commercial asset) after your initial purchase, you agree to sell the asset for $1,000,000. In this example, you are facing a capital gain of $500,000. (The basic formula for calculating your capital gain is to take the basis sale price minus the property’s basis (purchase price +/- depreciation, amortization, improvements and selling expenses). The net amount is your capital gain.)

    Review the chart above to see what your tax liability would be. We will assume the top capital gains tax rate of 20% plus the 3.8% (net investment income tax). In this example, your federal capital gains tax would be a total of 23.8% which is $119,000. That’s right… $119,000! So, your gain goes from $500,000 down to $381,000. This sounds like a lot of money but your accountant will remind you that is not the money you get to keep. Your accountant will need to give you the calculation for the depreciation recapture you owe. The term is exactly as it sounds… You need to recapture the “paper write-offs” you have been taking over the years, via “depreciation” tax reductions and repay them. Whew, are we done? Not yet. You also need to remember state taxes will apply. Having a trusted real estate accountant is a must when investing in real estate.

    You may have been thinking this entire article was slated for doom and gloom. But, what if there were a way you could defer those taxes and continue building your portfolio, tax deferred? Section 1031 of the federal government’s tax code permits a seller to complete a like-kind exchange (real estate asset to real estate asset) in which a replacement property is purchased within 180 days. Completing a 1031 like-kind exchange, often referred to as “1031” or “like-kind exchange,” allows you to roll all of the proceeds of your sale into a “like-kind” asset.

    In the sale example used above, a 1031 exchange would allow you to roll the $500,000 into another asset without paying the $119,000 in capital gains tax. Over time, this strategy could allow you to “scale up” into larger assets public, in broad strokes, on the subjects of capital gains tax and 1031 exchanges that produce greater cash flow and potentially greater returns. Completing a 1031 transaction requires the participation of a real estate attorney who specializes in that process.

    Please remember to consult your accountant and real estate attorney to better understand your personal options.

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  2. White Oaks continues development in 3-phase build-out

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    White Oaks continues development in 3-phase build-out. The White Oaks planned business community comprises 470 acres that are home to offices, FBI support services, medical support services, oil ad gas businesses, national retailers, restaurants and vital amenities.

    Located at the intersection of Interstate 79 and W.Va. 279, the busy corridor sees an estimated average of 48,500 vehicles per day. It is adjacent to the $350 million United Hospital Center, at the doorstep of the FBI’s CJIS Division and the Biometric Center of Excellence. White Oaks is also located in the heart of Marcellus Shale play.

    Retail Village Building 1 is fully occupied, with the newest tenants being Rominger Dental, Bonnie Belle’s Pastries and Hermasilla’s Deli. They all opened their doors in 2017.

    Retail Village Building 2 is under construction, with the first tenant to be Starbucks, Bridgeport Community Development Director Andrea Kerr said.

    Starbucks occupies 2,200 square feet of the 8,749-square-foot building located directly across from Building 1, she said.

    “Starbucks is estimated to cost about $175,000, while the entire Retail 2 shell is $884,320. The second building will be similar in size to the first one, with room for additional tenants,” Kerr said.

    Thrasher said Starbucks will be located in the far right end of Retail Village 2 and feature a drive-through.

    “We are looking to turn over that portion of the building to the company by June 1,” Thrasher said. “It will also have a 550-square-foot patio. I anticipate it opening late this year.”

    Cove Run Construction is doing the site work on Retail 2. Lee Reger Builds is the building construction contractor.

    “There are four more bays available, with interested parties in discussion. We have no final contracts at this time,” Thrasher said.

    Clear Mountain Bank will be located directly behind Retail Village 2. Cove Run is doing the site work.

    “They are about ready to bid the architectural work,” Thrasher said. “Regional Eye Associates will be located near Friday’s, with Cove Run preparing the site and Elite Custom Builders doing the construction.”

    Phase II and Phase III are being marketed now, with Elite Custom Builders to be located across from the W.Va. 131 entrance to White Oaks near Bear Express and the Shell fuel station in an area referred to as The Wedge, Thrasher said.


    A large vehicle dealership, Freedom Kia, opened in 2017 in Phase III of White Oaks, located off W.Va. 131.

    Hermasilla’s Deli Market, a longtime staple of the Fairmont community, recently opened the doors to a 32-seat second location at White Oaks.

    Along with its signature sandwiches — which feature hand-sliced meats, a wide selection of cheeses and an array of toppings, condiments and vegetables — the establishment also offers salads and sells meats and cheeses in bulk.

    “White Oaks has been very aggressive in developing their property. They don’t stop in the winter. It is a year-round operation,” Kerr said. “It is good for them and great for us. It is a fantastic partnership that we hope to see continue for many more years.”

    Craig Baker, Architecture Division manager for the Thrasher Group, agreed with that sentiment.

    “White Oaks should be commended for their steadfast commitment to the architectural design covenants of the park. They had a vision of what they wanted the park to be and stuck with it,” Baker said. “One thing that makes White Oaks special is how they continually strive to maintain their identity as one of West Virginia’s premier business locations. With the addition of the park and trail system, White Oaks has maintained its identity as a great place to work and play.”

    White Oaks Phase II does not currently have any lots sold. It is located just past the Manchin Clinic Assisted Living Facility that opened late last year.

    Thrasher explained that while Phase I and II are primarily billed as a high-end business park, Phase II will also be for industrial use. Freedom Kia is the first business to locate in that area.

    Freedom Kia was previously located on Emily Drive. However, it began to outgrow its space and decided to move in October.

    “It came to a point where the volume of sales, our service department could not support. It was a situation where to continue to grow and provide our customers the support and service we want them to continue to have, we needed to give them a facility to be able to do that,” General Manager Jadd Buchanan said.

    The dealership facility cost around $5 million, an investment that allowed the company to stay local.

    “This became our home. We built a business here, and we didn’t want to abandon the customers we had sold to or serviced over the years,” Buchanan said. “We wanted to provide a location that was much more user-friendly as far as access — now it’s right off I-79, Exit 125 on Saltwell Road. It’s easier to get to for our employees who live in the area, and our residents in this direct area, so I think that was an easy decision.”

    In its new location, Freedom Kia has tripled the size of its service department, having gone from four lifts to 12, and added a substantial amount of inventory. The space also includes a car wash, which is complimentary when a car is brought in for servicing, and it’s generally more accessible.

    General Sales Manager Dorsey Larew said the larger facility has several perks.

    “We can house more mechanics, and therefore get you in and out faster. Sales display was a little tough when you’re parking in a parking lot versus an actual dealership that was built for that, so that’s been good,” Larew said. “With the lot, you can drive around and be able to look at all of our cars without having to get out of yours.”

    Located at 97 Joy Lane near Bridgeport, accessibility is a prime feature of the new location.

    “We’re a lot more convenient to get in and out of,” Larew said. “Going down Emily Drive, it was tough to get in and out.”

    In addition to offering online credit applications and service appointments, a two-year maintenance plan and a lifetime of state inspections on every car purchased at the location, Freedom Kia also has people who truly enjoy their work, said Jeannie Boyles, who has been the receptionist for six years.

    “We have great people who work here. They’re dedicated, friendly, and are happy to be here,” Boyles said. “That’s important for the company — to be able to come to work and know what you’re doing. It brings a lot of customers in from around the area, and the customers appreciate that, knowing we care about them that much.”

    For the future, Buchanan is looking forward to continued growth and being able to enhance customer service even more, staying focused on giving every individual personal help. At the new location, Freedom Kia offers several complimentary amenities, including local transportation, a kids entertainment room, and more.

    Baker-Hughes owns a parcel in Phase III, but there has been no word on the future plans of the company for the site, Thrasher said.

    “We work with other developers, but own main developer is White Oaks Business Park and we work with Black Diamond Realty, Morgantown.

    Staff writer Darlene J. Swiger, The Exponent Telegram

  3. Legislators Updated on China Energy Deal

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    Commerce Secretary Hopes China Energy Project Will Begin This Year.

    CHARLESTON – Commerce Secretary Woody Thrasher offered legislators a few new tidbits — though still no specifics — on the $83.7 billion China Energy agreement. Thrasher addressed a Jan. 9 joint meeting of the interim Natural Gas Development and Energy committees. Answering a question if this is a deal to simply sell off our resources, he said no. “It is bricks and mortar facilities for the purpose of generating value-added products in the petrochemical industry.”

    The immediate goal is a single project, though he wouldn’t say what it is. “We are working actively on that project one step at a time.” He continued, “Our goal is to expedite the initial project as quickly as we can for a variety of reasons. And I’m hopeful that the details of that begin to unfold in the next few months.” He hopes to see some construction by the end of this year, he said.

    Most people guess that the unspecified projects are some sort of manufacturing facilities that would use the products generated from cracker plants being developed for the region. Thrasher speculated that the majority of the market for the China Energy-related projects would be overseas, predominately China. But the focus is on employing local residents in businesses that pay taxes to West Virginia, and selling the products those businesses produce. “It makes sense from a business model.”

    Thrasher said he had no specific timeframe for any aspect of what’s unfolding, but during three visits with the people from China Energy, he’s seen a “great sense of urgency.” He’s heading back to China on Saturday, he said, to meet the company’s new board. “These are big projects. They’re significant.”

    Thrasher said last week’s announcement from Appalachia Development Group – a subsidiary of Charleston-based high-tech firm MATRIC – provides an important step forward. The group announced on Jan. 3 that it was invited to submit a Part II Application for a $1.9 billion U.S. Department of Energy loan guarantee to support the development of infrastructure for the Appalachia Storage & Trading Hub, which would store natural gas liquids for a regional plastics industry.

    The group said that the American Chemistry Council believes the hub would serve as a catalyst for the creation of an estimated $36 billion in follow-on petrochemical investments and more than 100,000 new long-term jobs, drawing resources from Marcellus, Utica and Rogersville shale deposits.

    Thrasher said that the Department of Energy’s action “has significant impact in terms of the risk level of folks coming in.” Jim Crews, vice president of business development for MArkWest Energy Partners, offered the legislators additional prospective on the region’s potential.

    “The United States, and the Appalachian Basin, is the Saudi Arabia for the production of natural gas liquids,” he said.

    Colorado-based MarkWest is a midstream gas processor with three West Virginia facilities. It’s Sherwood plant in the Doddridge County is the nation’s fourth largest and will soon be expanded to become the largest. He offered a somewhat technical slideshow on how the gas liquids – ethane, propane and butane – are separated from the methane and sent on for further production.

    The wet natural gas in this region, he said, contains enough ethane – used in light plastics – to feed six cracker plants. Some of it now gets shipped south to the Gulf for processing, but most goes to waste because it’s too expensive to ship and there’s no industry here yet to process it.

    Article By David Beard, The Dominion Post