Tips for 1031 Exchanging Rental Property

In a 1031 exchange, both the relinquished property that's sold, as well as the replacement property have to be held for a qualifying purpose of investment or business use.

Renting to Related Persons

Many people that are acquiring replacement properties in a 1031 exchange may be inclined to rent them out to related persons such as a son or a daughter. The concern with this situation is that this rental arrangement with your related-party may be perceived by the IRS as just a sham. That you're really intending to put a roof over your kid’s head instead of using the property for investment or business purposes.

Tips for Upholding your Qualifying Purpose

If you are actually acquiring the property with business intent to rent it out and you're renting it out to a son or daughter, you want to make sure that you are legitimately using the property for business purposes and you're able to substantiate that. Make sure you have all of the following:

• A real written lease between the taxpayer and the tenant at market rate.

• Rent checks coming in incrementally and regularly according to the terms of the lease.

• Finally, you want to report your rental activity on your tax return just like you would with any other investment or business property that's not rented out to a related party.

If you intend to move into the replacement property after some years of renting it out you need to be cautious that it doesn't appear that this whole rental arrangement was just a sham to make the replacement property fit into an investment or business paradigm when in fact you never really intended to rent it out. Getting too cute with the IRS and jumping through a charade of renting it out may backfire for taxpayers.

• Start Your Exchange: If you have questions about 1031 exchanges of rental properties, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved

What is a Drop & Swap in a 1031 Exchange?

1031 exchanges sound simple on the surface, but can actually be quite intricate in many cases. In this article, we are going to discuss a strategy for tenants-in-common carrying out a 1031 exchange - the drop and swap.

Real Estate with Multiple Owners

Often, people will own real estate collectively in a trust, partnership, or other business entity, and maybe one or some of those owners in the entity really want to do a 1031 exchange on the sale of the entity’s property.

Well before the closing - maybe even before the listing agreement is signed - those owners of the entity have a planning opportunity in which they can reconfigure the ownership of the property to make it most advantageous and flexible for those owners to do separate 1031 exchanges.

The Drop & Swap

A drop and swap can occur where the entity transfers out some or all of the property to the various co-owners as tenants-in-common. So rather than having the business entity own the property, the owners of the entity become the tenant-in-common co-owners of the real estate.

Remember that section 1031 states that you must have held the property for investment or business purposes. So these individual owners are going to want to satisfy the holding requirement and receive ownership well prior to any sale or disposition of the relinquished property.

Plan Early

If you do the drop and swap at the eleventh hour right before the sale is to occur the IRS may not respect that transfer to the various co-owners. Furthermore, they may say that those co-owners have not satisfied the holding requirement because they only held it for a brief period of time before immediately selling it. And if they did hold it for such a short period of time, their argument would be that they held it primarily for resale and not for investment or business purposes.

• Start Your 1031 Exchange: If you have questions about drop and swaps in a 1031 exchange, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2025 Copyright Jeffrey R. Peterson All Rights Reserved

Can You 1031 Exchange Property in Two Different Industries?

1031 exchanges are very versatile and allow you to exchange out of and into different market segments. In this article, we are going to talk about how you can 1031 exchange from one industry into another.

Like-Kind

When it comes to 1031 exchanges, one of the most important rules you need to follow is that all property involved needs to be like-kind. Thankfully, the term “like-kind” in the realm of real estate is very broadly construed. Nearly all qualified real estate is considered like-kind to all other qualified real property. That means you can do a like-kind exchange from a relinquished property in one industry into a replacement property in a completely different industry – so long as you meet all the other requirements.

An Example

Let’s say you own an apartment complex and you are interested in selling that property and getting into another market segment. You could sell your apartment complex in a 1031 transaction, and roll your sales proceeds into a hotel (your replacement property). This showcases the versatility of the 1031 exchange.

1031 Exchanges in St. Paul, MN

1031 exchanges offer a fantastic way to defer your capital gains tax when you sell real estate. Instead of writing a check to the government, you can move your hard-earned money into a continued investment and keep your money working for you over time. At CPEC1031our qualified intermediaries have over twenty years of experience facilitating 1031 exchanges of all shapes and sizes. Contact us today to set up a time to chat about your 1031 exchange and see how we can help you save money on your next real estate transaction.

• 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.

© 2018 Copyright Jeffrey R. Peterson All Rights Reserved

Can You Use a 1031 Exchange to Pay Off Property You Already Own?

A 1031 exchange must be used to purchase replacement property that you do not already own. This is an "exchange" or swap into something new that is like kind to what was disposed of.

Making improvements to property that you already own, or paying off debt on real property that you already own is generally not viewed as an exchange by the IRS.

If you purchase personal property (chattel) such as furnishings, these would not be considered like-kind to the sale of real estate because real estate and personal property are not viewed as like-kind to one another in the eyes of the IRS.

3 Rules of Thumb

There are three general rules of thumb to quickly see if you will defer ALL of the recognition of gain:

1. Typically you will acquire replacement property that is “up or equal” in Value* (price); {*net of sales commissions and customary transactional expenses}

2. You will roll over all of your Equity (net proceeds) from the relinquished property into your replacement property.

3. And to the extent that you were relieved of liabilities and DEBT, such as mortgages on your old  relinquished property, the debt relief is offset by (1) new liabilities or mortgages taken on in conjunction with your purchase of the replacement property; OR (2) by investing additional cash in the replacement property equal to the amount of liabilities and debts that were discharged.

You can have a partial tax deferral if you miss these general benchmarks.

Be sure to check with your CPA about these general rules of thumb, to make sure they apply to your specific situation.

• 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.

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved

How to Determine if a 1031 Exchange is Right for You

There are many factors that you need to take into account when beginning a 1031 exchange. In this article, we are going to explain how to figure out if a 1031 exchange is a good fit for your situation.

Questions to Consider

Here are some questions to consider that will help you determine whether a 1031 exchange is a good option for you:

• When are you closing on the sale of your relinquished property?

• How have you used the relinquished property?

• How long have you owned the relinquished property?

• How do you hold title to the relinquished property?

• What is the Fair Market Value of the relinquished property?

• What is the estimated amount of sales proceeds?

• How much did you pay for the old relinquished property when you purchased it?

• What is your estimated remaining basis or current adjusted basis in the property?

• What title company - or law office is closing the relinquished property?

• What is the value of replacement property?

• How do you plan to take title to your replacement property?

• Will you have debt on your replacement property?

All of these items must be taken into account to determine whether or not you can move forward with a 1031 exchange. To find out if you are a good candidate for a 1031 exchange, fill out our form.

MN 1031 Exchange Services

At CPEC1031, we have decades of experience helping taxpayers navigate the 1031 exchange process. If you are selling real estate or an item of personal property, a 1031 exchange may be able to help you defer capital gains taxes on the sale. Start realizing the benefits of a 1031 exchange today and defer your gains on the sale of real property! Our primary office is located in downtown Minneapolis, but we serve clients throughout the country. Contact us today to speak with one of our qualified intermediaries about your 1031 exchange.

• Start Your Exchange: If you have questions about whether a 1031 exchange is right for you, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved