Who Qualifies as an Accredited Investor & How Can it Help Your 1031 Exchange?

Accredited Investor 1031 Exchange

In the context of a 1031 exchange, taxpayers want to be able to access the best investments possible. However, not all properties are readily available to the general public because the Securities and Exchange Commission (SEC) regulates what kind of properties can be advertised and marketed to the public.

Certain types of people (accredited investors) are deemed not to need the same level of protection as the average consumer. These people are thought to be more sophisticated and appropriate to market these types of securities to.

Who Qualifies as an Accredited Investor?

In order to be deemed an accredited investor, an individual must demonstrate that they have an annual income of at least $200,000 (or $300,000 if you’re married filing a joint tax return), or show that you have a net worth exceeding $1,000,000.

If you meet the threshold then you can be given access to securitized real estate Investments that allow you to roll your money into what are typically very low management, passive Investments that generate steady streams of income without your having to engage in the day-to-day management of the business.

Delaware Statutory Trusts & Tenancy-in-Common Syndications

These offerings (often referred to as Delaware Statutory Trusts or tenancy-in-common syndications) are very popular among older investors that are getting out of management-intensive property such as farms and apartment buildings, and are looking for a place to put their replacement property proceeds into that will allow them a steady stream of income and perhaps some leisure time to travel and enjoy life.

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

Defer the tax. Maximize your gain.

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved

How to Hold Title to the Replacement Property in a Reverse 1031 Exchange?

Replacement Property Title Holder

In a back leg reverse 1031 exchange, how must title to the replacement property be held? This is a common question when it comes to reverse exchanges.

Exchange Accommodation Title Holder

A back leg reverse exchange is where the qualified intermediary forms an LLC called an exchange accommodation title holder (E.A.T.). That LLC purchases the replacement property rather than having the taxpayer receive it.

The reason that we’re parking the replacement property with the exchange accommodation title holder is we want to put it on ice - hold it in a parking arrangement until the relinquished property can be disposed of.

The Purchase Agreement

But before the closing of the replacement property the exchanger typically enters into that purchase agreement. It may say “Joe Blo and/or his assigns.”

We want Joe to remain the purchaser right up until the moment before the closing is completed so that Joe can enter into amendments, and work through the due diligence period and inspections. Then, if and only if Joe decides to purchase the replacement property as part of a reverse exchange, Joe will then at the last moment assign that purchase agreement to the exchange accommodation title holder, who will take title to the replacement property and hold it for up to 100 days while Joe goes about trying to dispose of and liquidate the old relinquished property.

  • 1031 Hotline: If you have questions about holding title 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

Tips for Buying Replacement Property on a Contract for Deed

Replacement Property on a Contract for Deed

Some taxpayers considering a 1031 exchange wonder whether or not they can buy replacement property on a contract for deed. That's our topic for this article.

Factors to Examine

The quick answer is yes. If the contract for deed gives you equitable title such that you've received enough of the benefits and burdens of ownership that for federal tax purposes you’re deemed the owner of the property.

Some factors to look at are:

  • Did the vendee receive exclusive possession of the property?
  • Does the vendee bear the risk of loss if the property is destroyed?
  • Does the vendee have the obligation to pay the property taxes and insurance?

The more these benefits and burdens rest on the vendee’s shoulders the more likely the IRS will concur that you are the owner of the property.

Push & Pull

If you’re doing a 1031 exchange bear in mind that you need to reinvest all of your equity, all of your net proceeds from the sale of your relinquished property into your replacement property.

That may mean that your downstroke or down payment on your contract for deed may be more substantial than the vendor wants to take. This is because the vendor is often entering into the contract for deed with the idea that they're wanting to delay the receipt of proceeds and take that money in small increments over a long period to take it in more efficiently.

So there is a little bit of push and pull between you and the seller as to how much down payment the seller is willing to accept in a contract for deed.

  • 1031 Hotline: If you have questions about contract for deeds 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

What if Construction Isn’t Completed Before Day 180 of my Exchange?

Construction Exchange 180 Days

In a build-to-suit exchange you are racing the clock to construct like-kind improvements so that  the value of the acquired land plus the value of the partially completed improvements exceed the value of your relinquished property. By the end of your 180 day exchange period, you want to have received the replacement property of equal or greater value than what you disposed of. But what if construction doesn't finish by the end of your 180 days?

Uncontrollable Variables

The problem with construction is that there a lot of variables that are outside of your control, such as:

  • Supply Issues
  • Work Issues
  • Economic Issues
  • Permitting
  • Licensing
  • Weather

All of these factors can hurt your ability to manufacture improvements within the exchange period.

Incomplete Construction

So the question arises: what if construction isn't fully finished? Or what if it isn't finished enough so that you've received a replacement property of equivalent value?

If you don't continue your investment into a property of equivalent or greater value within the hundred and eighty days, you may recognize some gains to the extent you've received a lesser valued property.

Partial Tax Deferral

But even that may still give you partial tax deferral. It's a factor of how low your basis was in the old property to determine how great your victory may be, even if it's just a partial victory.

If you're thinking about doing a build-to-suit we suggest you get planning early and have all of your contractors, permits, and plans in place perhaps even before you dispose of the relinquished property so that you can win the race against the 180 day clock.

  • 1031 Hotline: If you have questions about construction exchanges and timelines, 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 Finding 1031 Replacement Property

Finding 1031 Replacement Property

If you're doing a 1031 exchange you may find that the 45-day identification period goes by way too fast. So today we're going to talk about some tips for locating or finding the 1031 replacement properties to identify during those first 45 days.

Other Trusted Advisors

If you’re a real estate investor you may not have the biggest window on the world of all of the potential replacement properties that may be available to satisfy your exchange. So other trusted advisors can be brought in to widen your window of potential replacement properties.

Financial Planner

A very good resource to talk to is a financial planner that specializes in products that satisfy 1031. These are typically either Delaware Statutory Trusts or tenancy-in-common investments. These are syndicated securities that can only be marketed to accredited investors.

Commercial Real Estate Broker

Another important resource that can widen your window of potential properties is a commercial real estate broker that has the designation CCIM or SIOR. These are real estate agents that have specialized experience in commercial real estate and can offer up possibilities you may not have been aware of.

The most important thing is to start the process early. Get out there looking even before you’ve sold your relinquished property to get a feel for what you may want to designate, understanding that the 45 day identification period goes by way too fast.

  • 1031 Hotline: If you have questions about finding 1031 replacement property, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved