Wealth Opportunities in Commercial Real Estate: Management, Financing, and Marketing of Investment Properties

Problem Number 1

Assume the following factual scenario:

1. Peter and John own Highpointe Center, a 100,000-net-rentable-square-foot shopping center located in Chino Hills, California. They purchased the center in December of 1998 through a limited liability company, Highpointe, LLC. Peter and John each have a 50 percent interest in Highpointe, LLC. They purchased the Center for $4,000,000. At the time of acquisition they put $1,000,000 down and financed the balance with a purchase money mortgage of $3,000,000.
2. Two months after they purchased Highpointe Center, John finds a buyer who is willing to pay the partners $5,000,000 for Highpointe: a one-million-dollar profit in two months! Peter and John get into an argument about the ability to defer the gain if they trade into a larger property. Peter argues that the IRS will consider their company a “flipper,” a party who holds a property for “resale,” and would therefore disallow any trade. John avers that the key test is “intent” and he claims “his heart is pure.” When he bought Highpointe Center, he intended to keep it long-term as investment real estate; just because a great opportunity came along, that should not taint his intention. Also, they will straddle two tax years. They bought in 1998 and will sell in 1999. John argues that the Code does not spell out any precise holding period to qualify for a Section 1031 exchange.
3. Peter and John decide to let their tax attorney friend, Alfred, decide the issue. Alfred agrees to act as ...