Common Questions About 1031 Exchanges & "Flipped" Property

Real estate investors have a lot of questions when it comes to 1031 exchanges and flipped property. In this article, we’re going to discuss some of the IRS regulations surrounding this topic.

According to the IRS

According to the instructions for IRS form 8824, Section 1031 doesn't apply to exchanges of real property held “primarily for sale,” so flip properties probably don’t fit the definition of “held for productive use in a trade or business or for investment.” 

See also IRS PUB 544 which states: “the nonrecognition rules for like-kind exchanges apply only to exchanges of real property not held primarily for sale.”

 26 U.S. Code § 1031.Exchange of real property held for productive use or investment

(a) Nonrecognition of gain or loss from exchanges solely in kind

(1) In general

No gain or loss shall be recognized on the exchange of real property held for productive use in a trade or business or for investment if such real property is exchanged solely for realproperty of like kind which is to be held either for productive use in a trade or business or for investment.

But

1031 (a)(2) says that:

(2) Exception for real property held for sale

This subsection shall not apply to any exchange of real property held primarily for sale.

Commercial Partners Exchange in Minneapolis, MN

Exchanging property under section 1031 can be a complicated process, but we are here to help! The qualified intermediaries at Commercial Partners Exchange Company have over two decades of experience helping clients through 1031 exchanges. If you want to save money in capital gains taxes when selling investment property, a like-kind exchange may be right for you. Give us a call today to learn more about our 1031 exchange services and how we can help you through the 1031 exchange process.

• 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.

© 2019 Copyright Jeffrey R. Peterson All Rights Reserved

How to Avoid Common Missteps During the 1031 Exchange Process

The 1031 exchange process can be complex, and less experienced taxpayers can easily mess things up if they aren’t working with a professional. In this article, we are going to discuss how to avoid some of the most common missteps during the 1031 exchange process.

Make Sure Your Property Qualifies

Before you do anything, it’s important to determine if your property even qualifies for 1031 exchange treatment. First off, your property needs to be real estate that’s used primarily for investment or business purposes. No personal property or real estate used primarily for personal use allowed.

Hit Your Deadlines

Section 1031 outlines very strict deadlines for any taxpayer conducting a like-kind exchange. You need to complete your exchange within 180 days, and you have the first 45 of those days to identify your replacement property.

Don’t Wait Until the Last Minute

When you don’t give yourself (or your intermediary) enough time, mistakes are more likely to occur. Contact your qualified intermediary well before you want to sell your relinquished property, and keep in constant communication with them throughout the identification process. That way you will be fully prepared for the closing table.

Qualified Intermediaries in Minnesota

Of course, the best way to avoid all of these missteps is to work with a skilled intermediary throughout your exchange. Commercial Partners Exchange Company employs qualified intermediaries in the state of Minnesota who can help you facilitate your next 1031 exchange transaction. Like-kind exchanges should be considered by anyone looking to sell a piece of investment real estate because they allow you to defer your capital gains taxes on the sale. This can help you avoid a huge tax windfall. Contact our 1031 exchange professionals today to learn more about the 1031 exchange process and how we can help you through the steps of your 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.

© 2019 Copyright Jeffrey R. Peterson All Rights Reserved

Essential Things to Know Before Starting a 1031 Exchange

A lot of taxpayers want to jump right into a 1031 exchange. But there are some things you should know before starting the process. In this article, we are going to walk through a few essential things to be aware of before starting a 1031 exchange of real estate.

Understand the Recent Changes

Prior to 2019, it was possible to exchange both real and personal investment property under section 1031 of the Internal Revenue Code. The recent Tax Cuts & Jobs Act changed that and got rid of the personal property aspect of the 1031 exchange. As a result, it’s important to be aware that you can only do a 1031 exchange of investment real estate. Personal property items like aircraft, artwork, and the like are all excluded from 1031 treatment. If you are exchanging real estate and your real estate includes items that are classified as Section 1245 property, these items are fully taxable. So be aware of that when conducting your exchange.

Mind Your Time Limits

In a 1031 exchange you only have 180 days total from the start of your exchange to its completion. That may seem like a long time, but it’s not when it comes to real estate. Make sure you are fully aware of your time limits so you don’t miss any deadlines.

Minnesota 1031 Exchange Tax Deferral

If you own invest real estate and want to learn more about how to defer your capital gains taxes, contact a qualified intermediary at Commercial Partners Exchange Company! Our intermediaries have been guiding taxpayers through the ins and outs of the 1031 exchange process for the past twenty years. Reach out to us today to learn more about the 1031 exchange process and how it can benefit you from a tax perspective. Our main office is located in downtown Minneapolis but we work with clients throughout the state of Minnesota and the United States.

• 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.

© 2019 Copyright Jeffrey R. Peterson All Rights Reserved

If You Start a 1031 Exchange, Are You Required to Buy Replacement Properties?

One of the most common questions regarding 1031 exchanges is - what happens if you change your mind after starting the process? If you’ve already begun the 1031 exchange process, do you need to go through with it?

Options After Starting the Exchange

The short answer is no. By setting up the 1031 exchange with the qualified intermediary you are keeping your options open to potentially completing an exchange (and deferring the gains), but you are not obligated to buy any replacement properties. After the closing of the relinquished property, you will have 45 days to designate or identify in writing the potential replacement properties, and if you do not designate any properties, then the 1031 exchange will fail, and the unused exchange funds will be returned to you on the next business day.

If you do designate some potential properties, then you will continue to keep the your options open to potentially completing an exchange as to those designated properties that you listed for the remainder of the exchange period (180 days). Any remaining unused exchange funds will be returned to you on the next business day after the 180th day has elapsed. 

Both the 45-day identification period and the 180-day exchange period run from that day after closing of the relinquished property.

For more information, please check out this educational video on the 1031 Identification rules.

• 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.

© 2019 Copyright Jeffrey R. Peterson All Rights Reserved

Combining Both Principle Residences & 1031 Exchanges

Per Revenue Ruling 2005-14, partially nontaxable exchanges are allowed under Section 1031 of the Internal Revenue Code for the portion of the real property used for investment or business purposes.  See IRS Publication 544. 

If, in addition to like-kind property (used for used for investment or business purposes), you also dispose of non-qualified property (not used for investment or business purposes), then you must recognize gain or loss on the non-qualified property you sell. The gain or loss is equal to the difference between the fair market value of the non-qualified property and the adjusted basis of the non-qualified property. This portion of the gain may nevertheless be excluded under Section 121 of the Internal Revenue Code for principle residences. Both Sections 1031 and 121 may be applied to the same sale transaction.

Minnesota Qualified Intermediaries

 At Commercial Partners Exchange Company (CPEC1031), we give each of our clients the individualized attention that they deserve. Our intermediaries have twenty years of experience facilitating 1031 exchanges in the Twin Cities, and throughout the United States! We’ve got all the resources needed to make your 1031 exchange a reality. Reach out to our qualified intermediaries today at our office in downtown Minneapolis.

• 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.

© 2019 Copyright Jeffrey R. Peterson All Rights Reserved