What to Know About Earnest Money Deposits in a 1031 Exchange

Earnest Money Deposit

Many people have questions about the earnest money deposit on the sale of their old relinquished property in a 1031 exchange. Oftentimes a title company or real estate broker will hold the deposit from the buyer as a fiduciary both for the buyer and the seller. They're acting as a sort of neutral third party to hold this deposit.

In the normal sequence of events the closing will eventually occur and that earnest money deposit will be applied towards the purchase of the relinquished property. Then all of the net proceeds, all of the consideration for the sale, will come to the qualified intermediary. That's just fine so long as that earnest money deposit is merely just a deposit.

It's not the sellers deposit until the closing is fully complete. So the deposit is really sort of in limbo until the closing occurs and the benefits and burdens of ownership shift.

Nonrefundable Earnest Money

There is a subset of deposits that you do need to be more careful with. That is the hard, nonrefundable earnest money deposit that effectively is the sellers cash once the deposit is made.

In those situations, you want to insulate the taxpayer that's doing the exchange from taking and holding their own deposit and instead have that deposit placed with the qualified intermediary who's ultimately going to receive all of the cash proceeds from the sale of the old property.

So with hard nonrefundable money you need to coordinate with your qualified intermediary before the deposit is paid over to make sure that you don't inadvertently receive the proceeds for the deposit.

  • 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

Potential Risks in Doing a 1031 Exchange

1031 Exchange Risks

Many people are worried about the potential risks of doing a 1031 exchange. In this article, we will walk through some of those risks and discuss how to mitigate them.

Replacement Property Identification

One of the risks is that you're under the gun to make an identification of replacement property within 45 days of the sale and closing of the old relinquished property. You may be under the gun and feel the pressure and be forced to make an identification of property that doesn't really meet your investment criteria. You may be picking properties for tax reasons and not necessarily for business reasons and that could result in purchasing replacement property that either does or doesn't fit your needs. How can you mitigate the risks of making a bad decision in a 1031 exchange?

Think Three Moves Ahead

If you think about this like a chess player thinking three moves ahead you will be searching out and targeting replacement properties even before you sell your old relinquished property. You will use all of that time productively to ascertain what it is you want to buy and maybe even tie that property up with a purchase contract so that you know at the onset of your exchange that you've got a sure thing to exchange into that meets your investment and business criteria.

The other thing that you can use to mitigate risk in a 1031 exchange is to park a replacement property in a reverse exchange by having the qualified intermediary close on the replacement property even before you have closed on the sale of your old relinquished property.

  • 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

 

1031 Exchange Extensions & National Holidays

1031 Exchange National Holidays

Happy President’s Day! We get a lot of questions on the topic of 1031 exchange extensions and rollovers on national holidays. Can you extend your 45 day or 180 day 1031 exchange time frames if a national holiday lands within those time periods? In this article, we are going to talk about 1031 exchange extensions and national holidays.

National Holidays

Sadly, there are no extensions or roll-overs for national holidays as to the 45-day identification period or the 180-day exchange period. So if President’s Day, or another national holiday falls within your 1031 exchange time periods, it will be treated as any other day. You do not get any extension on your exchange period.

Answers to Your 1031 Exchange Questions

Any more questions about 1031 exchanges? The qualified intermediaries at Commercial Partners Exchange Company are here to help! We have more than two decades of experience facilitating like-kind exchanges for clients throughout Minnesota and across the United States. We can help you through every aspect of your exchange and make sure your bases are covered every step of the way. Contact us today at our downtown Minneapolis office to learn more about our services and how we can help you with 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

The Important Difference Between Investment Property & Inventory

Investment Property vs. Inventory

What's the difference between investment property that qualifies for 1031 exchange and inventory?

Investment property is property that you're holding for appreciation. You're hoping that it goes up in value and that it's a good investment. Inventory, on the other hand, is property that you acquire with the intention of reselling.

What’s the Purpose of the Property?

Your primary purpose in acquiring inventory is to flip it. This is an important and somewhat fuzzy distinction for some people to understand because the investment property qualifies for 1031 tax deferral and the inventory the property that you hold primarily for resale is excluded from 1031 treatment.

Knowing what your mental intention is and conforming your behavior in the holding of real estate to make it fit into the 1031 category can be very important. If you have real estate and you want to be able to qualify for the 1031, you don't want to immediately list your acquisitions for resale because that would be an indicator that you're holding it as your stock-in-trade (that you're primarily engaged in flipping the property). You want to evidence your intention to hold the property for a qualifying purpose which is to hold it for investment for business purposes.

  • 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 Use 1031 Exchanges to Set Yourself up for Retirement

1031 Exchange Retirement

How can a 1031 exchange help you turn your investment property into your dream retirement home?

Let's say that you sell an industrial property in New Jersey for $4 million and you take your gains (your equity) from that sale and reinvest it into a condo in Palm Springs. That condo in Palm Springs will need to be held for investment or business purposes for a substantial period of time after conducting the exchange. But once you’ve satisfied the holding requirement you may have a long-term indeterminate intention as to what you're going to do with the property. Perhaps you'll retire to Palm Springs, kick the tenants out of the property, and eventually convert the property to your principal residence.

Intentions Are Important

The key here is that you want to be able to substantiate that your exchange was valid and that your initial intention when you acquired the property qualified for 1031 - that you intended to hold it for investment or business purposes.

Eventually, down the line your intentions may change and you may convert that property to your personal use. Once you've satisfied the section 121 principal residence exclusion requirements you may be able to eventually sell that replacement property as your principal residence and exclude a portion of the $500,000 exclusion for married couples or $250,000 for individuals on the sale of your now principal residence. This requires a great degree of coordination with your accountant and your qualified intermediary so have the conversation with your professional advisers first and lay the groundwork for eventually having a dream home.

  • 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