If Congress Repeals Section 1031, will Previous Exchanges Still Hold?

If section 1031 is repealed by Congress the question arises: “what about previous 1031 exchanges that were already completed? Will those still hold up even if the like-kind exchange is removed from the tax code?”

Date Certain

Congress typically sets a date certain when a tax change will be implemented and any 1031 exchanges you have been previously completed before that date certain will probably be just fine. The unfortunate situation will be for 1031 exchanges that are in the works and can't be completed before that effective date or change occurs. Those exchanges may not be able to be completed even though they are going through the motions.

Contact Your Reps

We don't know if Congress will eliminate the 1031 exchange. We hope that it doesn't. But if they do affect the change we’re hoping that all previously commenced 1031 exchanges will be respected, even if they're completed after the transition date.

Congress is currently working on tax reform. If you want to make sure that the 1031 exchange is preserved in this reform, contact your representatives and let them know where you stand.

• 1031 Hotline: If you have questions about 1031 and tax reform, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved

Can I Pay my Legal Fees out of the Sales Proceeds in a 1031 Exchange?

Many people ask if they can pay their legal fees out of the proceeds from the sale of their old relinquished property in a 1031 exchange.

Fees Related to Your 1031 Exchange

The answer to the question is yes, if the legal fees relate to your 1031 exchange or relate to the real estate matter. However, you can't pay unrelated legal fees out of the 1031 sales proceeds. For example, if you were doing estate planning or had a criminal action unrelated to your 1031 exchange - those cannot be paid out of the net proceeds. You can’t pay legal fees unrelated to your transaction.

Treasury Regulations

The treasury regulations state that you can pay ordinary, standard, customary transactional expenses out of the exchange funds and certainly your legal fees related to the exchange are ordinary and customary.

• 1031 Hotline: If you have questions about legal fees associated with your like-kind exchange, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved

Like-Kind Exchange Deed & Transfer Tax

In a reverse 1031 exchange, the qualified intermediary forms an entity that acts as a straw man to acquire the replacement property.

Exchange Accommodation Title-Holder

That straw man is called an Exchange Accommodation Title-Holder (EAT). This EAT typically holds title to the replacement property until the old relinquished property is disposed of and then the EAT (or straw man) deeds the property to the exchangor to complete their like-kind exchange.

The sad situation is that the Exchange Accommodation Title-Holders already paid deed tax pid once when it received the parked property from the seller and now is being subjected to transfer tax again when the replacement property is deeded to the exchangor.

State Differences

Some states are very aggressive in taxing the transfer of the parked replacement property to the exchangor in what’s called deed tax or transfer tax. Not all states are as aggressive as say Pennsylvania or Wisconsin in collecting deed tax from the intermediaries entity to the exchangor. 

In Minnesota, the Minnesota Department of Revenue has been much more accommodating in limiting the transfer tax to the value of the exchange services provided by the exchange accommodation title holder. Other states are imposing the transfer tax on the entire value of the property being conveyed.

• 1031 Hotline: If you have questions about deed tax or transfer tax in a 1031 exchange, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved

How Much Lead Time Does the Title Company Need in a 1031 Exchange?

If you're thinking about doing a 1031 exchange, you don't want to drop that bombshell on your title company the eve of the closing. How much lead time should you give your title company in a 1031 exchange?

Don't Wait Until the Last Minute

By waiting until the eleventh hour when everyone's already got their documents set up and prepared in a certain fashion, if you throw a curve ball and tell them that you want to do a 1031 exchange at the last second it's going to create some drama and disruption for a lot of parties involved in the transaction.

The best advice is to get your 1031 exchange set up with the intermediary well in advance of the closing so that the closer is aware of what's needed and can get the extra 1031 documents circulated and signed by all of the parties well before the closing.

Smooth Closing Process

We still get calls from the closing table from folks that didn't know that they needed to get their 1031 set up in advance. We can have a fire drill, prepare the documents quickly and get them out when needed, but my advice is to take the time and get it set up well in advance so that you have a smooth signing ceremony rather than a chaotic closing.

• 1031 Hotline: If you have questions about 1031 exchange lead timing, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved

Tips for Accelerating Deductions & Deferring Gains on Real Estate

If you want to become financially successful your first job is to learn how to acquire a lot of money. The next job that you have is to manage your tax liability.

Accelerate Deductions & Defer Gains

To do that you want to accelerate deductions and defer gains. What's the perfect vehicle to accelerate depreciation deductions and to defer gains?

The perfect vehicle is real estate - particularly improved multifamily real estate. With an apartment building you're allowed to take a deduction each year for the theoretical wear and tear or wasting of your building. When in fact the property may be going up in value you're taking a write off on your taxes (what we call a non-cash loss) because of the theoretical wear and tear or depreciation.

Depreciation Deduction

That depreciation deduction can be used in particular by real estate professionals to offset and lower their taxable income from other sources. So real estate agents and other real estate professionals have almost an uncapped amount of losses that they can use against the earned income to make their tax liability as low as possible.

• 1031 Hotline: If you have questions about real estate depreciation, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved