Can you 1031 Exchange Property you Already 'Sold' on a Contract for Deed?

Contract For Deed 1031 Exchange

A client of ours recently sold a house under a contract for deed with the balloon going due in 2019. The client wanted to know if it would be possible to do a 1031 exchange on the property after receiving finial payment for it in 2019? That's our topic for this article.

Contract for Deed

If you already 'sold' a property on a contract for deed, can you do a 1031 exchange once you get paid-off on the seller-backed financing? Possibly not because the IRS may no longer view you as the equitable owner for tax purposes. Here are some questions to consider:

  • Are you the holder of a lender's interest now?
  • Who has the risk of loss if the property is damaged or destroyed?
  • Who has the obligation to pay taxes and insurance?
  • Who has the ability to depreciate or deduct expenses related to the property?
  • Is the contract for deed vendee in exclusive possession of the property?
  • If the contract for deed vendee constructed improvements on the property, who would own the improvements?

The answers to these questions will help you determine your viability of a 1031 exchange. As always, it's important to consult with a qualified intermediary about your 1031 situation.

  • 1031 Hotline: If you have questions about contracts for deed, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved

Common Questions when 1031 Exchanging Real Estate in Minneapolis

1031 Exchange Real Estate Broker

Recently we helped a local real estate broker facilitate a 1031 exchange for their client. The client was selling am up/down duplex in Minneapolis, with the intention of rolling the proceeds into a fourplex property with a like-kind exchange. Here are some questions relating to this particular 1031 exchange.

Commercial Plus Residential Space

Is there a problem with one of the properties having commercial rental space as well as residential? One place in particular is three apartments with 2800 sq ft of commercial space below.

The replacement property must be held for investment or business purposes and may be residential or commercial rentals (or a combination of both).

Rolling Proceeds into More than One Property

Is it possible to roll the sales proceeds from the relinquished property into more than one replacement property?

You are allowed to purchase multiple replacement properties (provided that they are designated / Identified in writing within 45 days of the closing of the relinquished property).

  • 1031 Hotline: If you have questions about your or your client's 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

The Importance of Involving Your CPA in your 1031 Exchange

CPA 1031 Exchange

In a 1031 exchange, when you look at a HUD closing statement there a lot of confusing facts, figures, prorations, debits and credits, etc. These items can seem foreign and unfamiliar to many taxpayers. One of the concerns that many people have is “what if there are expenses on this closing statement that I'm not allowed to pay for with my exchange funds?”

Specifically, what about the following items:

  • tax prorations
  • security deposits
  • rent prorations
  • other lender related transaction expenses

The best course of action to take is to bring in your circle of advisers before you sign the closing statement. The way you can do that is to ask the title company to provide a preliminary closing statement and circulate it to your CPA or accountant for their review and comment. If you share the closing statement with them before closing you can adapt it and make some changes. But if you wait until April 15th of the next year to give them the completed signed closing statement there's nothing anyone can do after the transaction is closed.

  • 1031 Hotline: If you have questions about involving your CPA in your 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

Borrowing Too Much Money in a 1031 Exchange

Borrowing Money in a 1031 Exchange

In a 1031 exchange, the taxpayer needs to redeploy (or reinvest) all of their proceeds or exchange funds into the replacement property. However, if they have two large of a mortgage or deed of trust on their replacement property, the net result may be that they are receiving funds back at the replacement property closing. Here are some tips to keep in mind if you find yourself in this situation.

Avoiding Taxable Boot

If the taxpayer receives back money from the closing of the replacement property, these funds may be treated as taxable boot by the IRS.

In order to avoid receiving access exchange funds back at the closing it may be necessary to lower the amount of debt being taken out in conjunction with the purchase of the property.

Consult Your CPA

It's always a prudent practice to have your CPA or tax advisor review your settlement or closing statement before completing the purchase of your replacement property to make sure everything is in order and the 1031 exchange goes off without issue.

  • 1031 Hotline: If you have questions about borrowing too much money 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

Is a Helicopter Like-Kind to an Airplane in a 1031 Exchange?

Helicopter 1031 Exchange

1031 exchanges of personal property like aircraft are a bit more complex than exchanges of real estate. Many people wonder whether helicopters are considered like-kind to airplanes under Section 1031. In this article, we are going to talk about exchanging helicopters for airplanes with a 1031 exchange.

Like-Kind Aircraft

Aircraft (a type of tangible depreciable personal property) that are assigned to the same asset General Asset Class (typically 00.21 of Rev. Proc. 87-56) are considered like-class and therefor like-kind for 1031 exchange purposes. General Asset Class 00.21 includes airplanes (except those used in commercial or contract carrying of passengers or freight), and all helicopters.

General Asset Classes

An aircraft may be assigned into one of two asset classes within Rev. Proc. 87-56. Asset class 00.21 generally includes aircraft other than those used in commercial or contract carrying of passengers or freight.

Aircraft placed into asset class 00.21 are assigned a GDS recovery period of 5 years, and an ADS recovery period of 6 years.

Asset class 45.0 generally includes all other aircraft (i.e., those aircraft used in commercial or contract carrying of passengers or freight). Aircraft placed into asset class 45.0 are assigned a GDS recovery period of 7 years, and an ADS recovery period of 12 years.

  • 1031 Hotline: If you have questions about helicopters or aircraft exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved