A Few Tips for Balancing Value, Equity & Debt in a Like-Kind Exchange

In a 1031 exchange, it’s important to balance your value, equity, and debt. Some taxpayers assume that all they need to do is reinvest the equity from their relinquished property into their replacement property. These taxpayers are not thinking about their need to continue their investment into properties of equivalent or greater value, equity, and debt.

It’s important to remember that the first dollars off the table are the profit dollars and the last dollars off the table are the return of your original basis. If you are going to take some boot (non-1031 proceeds), it can be reflected on the settlement statement, but know that those first dollars off the table are all going to be taxable.

Taxpayers should have their CPA or tax accountant on speed dial before the sale of the relinquished property and the purchase to review the settlement statements. If you drop your closing statement in your accountant’s lap on April 15th of the following year there’s not much they can do to change how the settlement statement was prepared. The time to do that is before the closing date.

Call Now to Start Your 1031 Exchange of Real Estate

1031 exchanges are excellent vehicles for deferring tax and building wealth over time. If you own qualifying real property, you may be able to avail yourself of the benefits of a 1031 exchange. Talk to a qualified intermediary about whether or not your property is a good match for 1031 exchange treatment. Give our 1031 exchange intermediaries a call at our downtown Minneapolis office today to set up a time to chat about the specifics of your next 1031 exchange of real estate.

• Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2024 Copyright Jeffrey R. Peterson All Rights Reserved

Be Careful When Paying Operational Expenses in a 1031 Exchange

There are various items on a typical 1031 exchange closing statement. Many people have questions about whether various operational expenses can be paid using 1031 exchange funds. In this article, we are going to discuss why you need to be extra careful when paying operational expenses in a 1031 exchange.

Operational Expenses

You have to be careful when paying operational expenses (like prorated property taxes) using your 1031 exchange funds. You’re going to pay your property taxes whether you sold the property or not. That tax bill is coming no matter what and it creeps into the settlement statement because you have to settle up between the buyer and seller and prorate each party’s share.

Siphoning off your 1031 exchange proceeds to pay such operational expenses is going to trigger gain because you took some of your cash equity from the sale of the relinquished property and you didn’t reinvest it into the replacement property. Instead, you used it to pay for a non-qualified operational expense.

The safest way to handle this and protect your 1031 exchange is to pay all of your transactional expenses out of pocket.

1031 Qualified Intermediary Services

CPEC1031, LLC provides qualified intermediary services to taxpayers conducting 1031 exchanges in Minnesota and across the United States. Our team facilitates exchanges of all types of qualifying real property – from apartment complexes to retail buildings. No project is too large or small. Realize the tax-saving benefits of a like-kind exchange today by reaching out to our 1031 exchange intermediaries and see if your property is a good fit for like-kind exchange treatment. Reach out today to set up an appointment with our team of intermediaries and start deferring your capital gains taxes.

• Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2024 Copyright Jeffrey R. Peterson All Rights Reserved

1031 Exchanges for Businesses That Own Land & Buildings

If you’re selling a business that also has land and buildings, you are going to want to allocate in the purchase agreement the highest value to the land and buildings and the lowest value to the other stuff (personal property that can’t be included in a 1031 exchange). You may have very low basis in that other stuff because there’s been some rapid depreciation that’s been available. In some situations, it can make a big difference.

Let’s say you’re selling a trucking company. After paying the bank back, and then paying the taxes on your recaptured depreciation, you may not have much to show for the sale. So you have to think about how to maximize the tax-efficiency of your transaction, and make sure that you have enough cash left over to reinvest into something that’s going to give you a steady stream of cash in your retirement years. You can utilize 1031 exchanges to redeploy into real estate investments that will generate a steady stream of retirement income, but you have to keep that equity available for deployment. Otherwise, it might not make sense to sell your business.

Start Your Like-Kind Real Estate Exchange

Are you ready to start saving money on the sale of investment real estate? If the answer to that is yes, then a 1031 exchange might be the right option for you! With a 1031 like-kind exchange, you can defer your capital gains tax burden by reinvesting your sales proceeds into a continued investment replacement property. This keeps your money working for you over time while delaying a potentially huge capital gains tax bill. Contact CPEC1031, LLC today to speak with our intermediaries about your next 1031 exchange!

• Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2024 Copyright Jeffrey R. Peterson All Rights Reserved

Items to Pay Out of Pocket in a 1031 Exchange

There are some items that you generally do not want to pay using your 1031 exchange proceeds. These items will likely trigger some taxable gain. They may also have some offsetting deductions that will mitigate that taxable gain. Nevertheless, it’s important to keep these in mind when conducting your 1031 exchange:

• Prorated Rents

• Security Deposits

• Utility Payments

• Real Property Taxes

• Insurance

• HOA, Condo/Townhome/Coop Associations Dues

• Repair or Maintenance Expenses

• Loan Acquisition Fees

Repair & Maintenance Expenses

Let’s say that you own a duplex that’s in rough shape and you need to do some repairs on the property to prepare it for sale. Generally speaking, repair expenses are an operational expense, not a marketing expense. You may not be able to recoup on the settlement statement your outlays made to maintain the property. This gets even more tricky when you consider the difference between repair or maintenance expenses and capital improvement expenses (such as replacing an HVAC unit or adding a new roof). These are treated differently and it’s essential to talk about these items with your 1031 exchange team before you get to the closing table so you can avoid any potential issues.

CPEC1031, LLC – Here to Help You Through Your 1031 Exchange

The qualified intermediaries at CPEC1031, LLC are here to help you through all the nitty gritty details of your 1031 exchange. Our skilled professionals have over two decades worth of experience facilitating exchanges of like-kind real estate. Let us put our vast array of knowledge to work for you as you defer capital gains taxes on the sale of your qualifying real estate. Contact us today to set up a time to chat about your exchange at our downtown Minneapolis office.

• Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2024 Copyright Jeffrey R. Peterson All Rights Reserved

The Importance of the Settlement Statement in a 1031 Exchange

In a 1031 exchange, the settlement statement should document all the details of your particular exchange. Have the parties sign it and ratify their approval and, most importantly, spell everything out so that it’s clear as day. Make the accountant’s job easy by itemizing in great detail. When possible, have the taxpayer bring in cash from their own pocket to cover operational expenses (such as prorated rents and security deposits).

That’s an ideal 1031 exchange scenario. But the reality is that some taxpayers conducting 1031 exchanges are cash poor. It’s easy for these taxpayers to have selective amnesia when they get their tax bill and realize that they are going to be taxed on the security deposits and other expenses that they pocketed. It’s important to understand that siphoning off your exchange funds to pay non-qualified expenses can trigger some gain.

A savvy CPA or tax attorney may recommend that you reinvest all of your equity and do a super clean 1031 exchange. Later, in a subsequent transaction, the taxpayer may refinance the replacement property to access their equity post-exchange. When you borrow money and you have a corresponding obligation to repay that loan, it’s not taxable income. So you can get your hands on the same amount of cash if you’re patient and you delay your gratification.

1031 Exchange Services in Minnesota & Beyond

CPEC1031, LLC offers 1031 exchange services throughout Minnesota, as well as the entire United States. If you are a US taxpayer looking to defer your capital gains taxes on the sale of investment real estate, a like-kind exchange may be the best course of action for you. Reach out to the qualified intermediaries at CPEC1031, LLC today at our offices in downtown Minneapolis to learn more about the like-kind exchange process and see how we can help you through the specifics of your next exchange of real estate.

• Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2024 Copyright Jeffrey R. Peterson All Rights Reserved