Sample Text for 1031 Exchange Sale & Purchase Agreements

Sale & Purchase Agreements

In a 1031 exchange, it is a very prudent practice to ‘shout it from the mountaintops’ at every juncture that you intend to conduct a 1031 exchange. That way if there is ever a misstep, mistake or problem, everyone knows what you are trying to accomplish, and will give you the benefit of their understanding. Here is some sample text that you may use or adapt for your sale and purchase agreements:

When Selling Relinquished Property

The Buyer herein acknowledges that it is the intention of the Seller to conduct an IRC Section 1031 Tax-Deferred Exchange and that the Seller's rights under this Purchase Agreement shall be assigned to Commercial Partners Exchange Company, LLC, to facilitate such exchange. However, any warranties that may be expressed in this contract shall remain and be enforceable between the parties executing this document. Buyer agrees to cooperate with the Seller and/or its assigns in a manner necessary to enable the Seller to initiate said exchange at no additional cost or liability. This Purchase Agreement is part of an integrated, interdependent, mutual and reciprocal plan intended to effectuate an exchange by Seller of a like-kind real properties pursuant to and in accordance with the provisions of Section 1031 of the Internal Revenue Code. The Buyer shall execute and provide to Seller prior to closing, an acknowledgement, that Buyer has received written notice of the assignment of the Seller’s rights under this Purchase Agreement to Commercial Partners Exchange Company, LLC.

When Buying Replacement Property

The Seller herein acknowledges that it is the intention of the Buyer to complete an IRC Section 1031 Tax-Deferred Exchange and that the Buyer's rights under this Purchase Agreement shall be assigned to Commercial Partners Exchange Company, LLC, for the purpose of completing such exchange. However, any warranties that may be expressed in this contract shall remain and be enforceable between the parties executing this document.  Seller agrees to cooperate with the Buyer and/or its assigns in a manner necessary to complete said exchange at no additional cost or liability. This Purchase Agreement is part of an integrated, interdependent, mutual and reciprocal plan intended to effectuate an exchange by Buyer of a like-kind real properties pursuant to and in accordance with the provisions of Section 1031 of the Internal Revenue Code. The Seller shall execute and provide to Buyer prior to closing, an acknowledgement, that Seller has received written notice of the assignment of the Buyer’s rights under this Purchase Agreement to Commercial Partners Exchange Company, LLC.

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

Defer the tax. Maximize your gain.

 

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved

 

Exhausting the 1031 Exchange Option Before Converting into an Installment Sale

Deferred Sales Trust Installment Sale

It is a common and prudent practice to exhaust the 1031 exchange option before converting into a Deferred Sales Trust (installment sale), so that sufficient like-kind replacement property investments with debt may be received to off-set any debt relief you may have over your basis. This is a method of fixing MOB (Mortgage Over Basis) to maximize the tax efficiency of your transaction. The end result is that it becomes a part 1031 exchange, and part installment sale for tax purposes

Develop a Plan

You should develop a solution or plan that entails your investing some portion of the 1031 funds into one or more 1031 syndicated investments (DST - Delaware Statutory Trusts) to cover the debt relief, and then put the rest into a deferred sales trust.

DST Debt

The debt in a DST - Delaware Statutory Trusts comes part and parcel with the investment and is not recourse to the beneficial owners, so you do not have personal liability for the loan, but the properties are encumbered. You are deemed to have taken the debt for tax purposes by purchasing the investment subject to the pre-existing financing put on by the syndicator or sponsor.

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

Defer the tax. Maximize your gain.

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved

I've Already Sold My Property, Can I Still Do a 1031 Exchange?

1031 Exchange Regulations

We often hear from investors who sell property intending to buy other property, but are unaware of the rules and regulations of 1031 exchanges for deferring capital gains tax. If you've already completed your sale, can you still do a 1031 exchange?

Relinquished Property Sale

If the sale of your relinquished property has already occurred (the benefits and burdens of ownership have shifted and payment received) then you may have engaged in a closed transaction and may have recognized the gains if you have received the payment. You should talk to your own CPA or tax advisor who knows your specific situation.

Safe Harbor Exchanges

There are a number of requirements for conducting a safe-harbor exchange and requisite written notices that must be given to comply with the provisions of Section 1031 of the Internal Revenue Code.

Generally for a safe-harbor exchange, before the sale occurred you would have had to retained a third party administrator (often referred to as a qualified intermediary or facilitator) to step into your position as the seller, and to receive (and escrow) the net proceeds. 

Prepare for the Closing

If you have already closed on your sale and conveyed the relinquished property to the purchaser, then it is too late for our company to assist you as a qualified intermediary. Our policy is to have an exchange agreement in place prior to the sale being completed, and to provide written instructions and notices to the parties involved in the transaction.

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

Defer the tax. Maximize your gain.

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved

Is There a Difference Between Income vs. Investment Property in a 1031 Exchange?

Income vs. Investment Property

Is there a difference between income and investment property? Do both fall within the 1031 exchange guidelines? That's our topic for today's article.

What is the Held for Requirement in a 1031 Exchange?

Section 1031 provides that no gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if the property is exchanged solely for property of a like kind that is to be held either for productive use in a trade or business or for investment. 

Whether the property exchanged is held for productive use in a trade or business or for investment is a question of fact. The manner in which the relinquished property is held at the time of the exchange controls, not the manner in which it was held when acquired - see Wagensen v. Commissioner, 74 T.C. 653 (1980).

Neither the Internal Revenue Code nor the Income Tax Regulations under § 1031 provide further guidance concerning the phrase “held for productive use in a trade or business or for investment” (the “held for” requirement).   

Rev. Proc. 2008-16

The Internal Revenue Service (the “Service”) deals with this issue in Rev. Proc. 2008-16, 2008-10 I.R.B. 547 in the context of properties in a rental pool that may be used sparingly for personal use.

Rev. Proc. 2008-16 provides circumstances under which the IRS will not challenge whether a dwelling unit qualifies as property that meets the “held for” requirement even though the property is occasionally used for personal purposes. If the safe harbor provisions of the Rev. Proc. are met, the entire property meets the “held for” requirement for purposes of § 1031. The Rev. Proc. provides the following:

The Service recognizes that many taxpayers hold dwelling units primarily for the production of current rental income, but also use the properties occasionally for personal purposes. In the interest of sound tax administration, this revenue procedure provides taxpayers with a safe harbor under which a dwelling unit will qualify as property held for productive use in a trade or business or for investment under § 1031 even though a taxpayer occasionally uses the dwelling unit for personal purposes. 

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

Defer the tax. Maximize your gain.

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved

Paying Off a Mortgage with 1031 Exchange Funds

1031 Exchange Funds

Can a taxpayer do a 1031 exchange of real estate and use the sales proceeds to pay down or pay off a current investment property mortgage?

1031 Rule Number 1

First and foremost, in a 1031 exchange the taxpayer conducting the transaction needs to relinquish an old property and receive a new like-kind replacement property. If the taxpayer uses the proceeds from the disposition of the old relinquished property for anything other than the purchase of new replacement property then the exchange may fail.

Paying Off Debt

Paying off debt on land that you already own is not (in the eyes of the IRS) a valid use of the exchange funds. They do not view the receipt of this debt relief as being a replacement property. Bottom line, you need to move your exchange proceeds into your new property. Using these funds for any other purpose - such as paying off a mortgage - will jeopardize your 1031 exchange.

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

Defer the tax. Maximize your gain.

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved