How to Handle Holdbacks & Escrows in a 1031 Exchange

Recently, we had a client that owned land that had a bunch of debris and junk on it. The buyer didn’t want to take the property with all of this debris so they required the seller to escrow a bunch of money to assure the buyer that the junk was going to be removed. If you’re going to do this, escrow money out of your own pocket and not out of the 1031 exchange proceeds because you want to have all of your exchange funds immediately available for deployment so they’re ready for closing. Whenever possible, if you have holdbacks or escrows on the sale of the relinquished property, fund those out of pocket rather than sales proceeds. This will alleviate a lot of logistical difficulty.

Jumpstart Your 1031 Exchange

Jumpstart your 1031 real estate exchange today by contacting CPEC1031, LLC. Our qualified intermediaries have over twenty years of experience in the realm of 1031 exchanges. We can help you through the various steps in the 1031 exchange process, answer any questions you have along the way. Reach out to us today at our Minneapolis office to learn more about the process of deferring capital gains taxes with a 1031 exchange. We are headquartered in Minnesota but we facilitate like-kind exchanges throughout 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.

© 2024 Copyright Jeffrey R. Peterson All Rights Reserved

What is the 1031 Rule for Deferred Taxes?

Since roughly 1921, the Internal Revenue Code has contained provisions that defer the recognition of gain. It was originally conceived of as a situation in which you’re trading or swapping property. Since you’re not cashing out in this situation, but rather continuing your investment in other property, that was viewed as a fair tax deferral.

When this provision was introduced, it was shortly after World War I and the United States was in debt. The country needed to stimulate the economy. This predecessor to the 1031 exchange came into the code at a time when Congress was trying to move capital to the most advantageous place because they wanted to encourage investment and created jobs. This highlights another great advantage of the 1031 exchange – it’s great for moving capital throughout the economy. It’s like water going through a mountainside – it’s going to get to the mountain somehow, and it’ll get there faster if it’s not impeded.

1031 Exchange Services in Minnesota

CPEC1031, LLC offers 1031 exchange services throughout Minnesota and the United States as a whole. Our team consists of skilled 1031 exchange accommodators who are here to help you navigate the waters of section 1031 of the Internal Revenue Code. We have decades of experience working with clients across the country on all types of 1031 exchanges of real property. Give us a call to get more information about the benefits of section 1031 and see if your property is eligible for 1031 tax deferral.

• 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.

© 2024 Copyright Jeffrey R. Peterson All Rights Reserved

Removing Ambiguity in Your 1031 Exchange Settlement Statement

When dealing with incidental items of personal property in a 1031 exchange, it’s a good idea to dress up the settlement statement to remove ambiguity and create certainty. If you are receiving appliances, tools, or other equipment as part of the purchase of your 1031 exchange real property, it’s a good idea to include a line item on the settlement statement that shows that those items were paid for pursuant to the purchase agreement and bill of sale. Furthermore, it’s an even better idea to pay for all of these items outside of closing, using your own out-of-pocket funds (and not the 1031 exchange funds). Don’t muddle up your 1031 exchange by using exchange funds to pay for incidental items of personal property.

This is a pretty conservative approach to dealing with these incidental items, but it’s typically beneficial to be as conservative and careful as possible in a 1031 exchange to avoid putting your exchange in jeopardy.

1031 Exchanges Provide Many Tax Benefits

A 1031 exchange of real estate provides many tax benefits. Any United States taxpayer can avail themselves of these tax-advantageous benefits of section 1031 of the Internal Revenue Code. If you have questions about the like-kind exchange process and how it may be beneficial for your situation, contact a qualified intermediary at CPEC1031, LLC today. Our intermediaries have two decades of experience facilitating 1031 transactions of all sizes. We can answer all of your questions and make sure you are well equipped to make the best possible decision about your investment 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.

© 2024 Copyright Jeffrey R. Peterson All Rights Reserved

The Many Ways 1031 Exchanges Can Be Used

One of the benefits of section 1031 of the Internal Revenue Code is that it can be used for a variety of different purposes. In this article, we are going to discuss a few of the common reasons why taxpayers decide to conduct 1031 exchanges with their like-kind real estate.

Lateral 1031 Exchanges

Some people do lateral 1031 exchanges simply to move from one geographical area to another. If you are nearing retirement and you’d like to sell your property in one state and move to another state in which you plan to retire, this is a great option to do that. In a lateral 1031 exchange, you’re not necessarily going up in terms of your value, equity, and debt – but you’re still able to defer your capital gains taxes by exchanging into a like-kind property of equal value, equity, and debt.

Levering Up with a 1031 Exchange

Other taxpayers want to stretch their equity as far as possible and lever up into a bigger and better property. This is the real power of the 1031 exchange as a tax-deferral tool. Over time you can continue to exchange into bigger and better property and compound your wealth into the future.

Like-Kind Exchanges of Qualifying Real Estate

Under section 1031 of the Internal Revenue Code, you can exchange qualifying investment real estate for other like-kind real estate and defer your capital gains taxes in the process. This is a tried-and-true method of tax deferral, with a long history of use among investors big and small. Learn more about the many benefits of the 1031 exchange by contacting the 1031 intermediaries at CPEC1031, LLC. Our team of 1031 exchange accommodators can help guide you through the process of your like-kind exchange form identification to closing.

•  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.

© 2024 Copyright Jeffrey R. Peterson All Rights Reserved

G(7) & Transactional Expenses in a 1031 Exchange

In a 1031 exchange, the G(6) limitation says that a taxpayer can’t pledge, borrow, or receive the 1031 exchange funds that are held by the qualified intermediary. When the sale of the relinquished property occurs, the money goes into a “qualified intermediary containment chamber.” The qualified intermediary holds that money until the exchange is over so that the taxpayer can’t receive it.

Transactional Expenses

You also have to deal with transactional expenses involved in the 1031 purchase. For that we need to look at the G(7) treasury regulations. G(7) is kind of an exception to the G(6) limitations.

In a 1031 exchange, your sales proceeds should, in theory, be applied to the acquisition of the replacement property. However, the reality is that you don’t get all of your proceeds because some of them may be siphoned off to pay certain transactional expenses (such as real estate commissions, title fees, state deed taxes, recording fees, settlement charges, and more). G(7) basically says that you can pay some of the fees that appear on the settlement statement under local standards without blowing up your entire exchange.

Of course, there are only certain transactional expenses that apply. It’s important to talk with a qualified intermediary to ensure you are abiding by all the guidelines set out in G(7).

Work with a Qualified Intermediary on Your 1031 Exchange

Working with a skilled and experienced intermediary on your 1031 exchange is the best way to ensure its success. At CPEC1031, LLC we have spent over two decades helping taxpayers defer their capital gains under section 1031 of the Internal Revenue Code. Allow us to put our vast experience to work on your next like-kind exchange of real estate. You can contact us today to set up an appointment with one of our qualified intermediaries at our downtown Minneapolis office.

• 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.

© 2024 Copyright Jeffrey R. Peterson All Rights Reserved