3 Pro Tips For Dealing with Boot in a 1031 Exchange

Receiving any taxable boot during the 1031 exchange process can completely derail your like-kind exchange. In this article, we are going to walk through three pro tips for dealing with boot in a 1031 exchange of real estate.

Watch for Prorated Taxes, Rents & Security Deposits

Keep an eye out for prorated taxes, rents, or security deposits charged back at closing. These can created unintended boot. Have your tax advisor review your settlement statement before you close on your property.

Do The “Boot Test”

Use the “Boot Test” – if your replacement property value and debt assumed is greater than or equal to your relinquished property value and debt paid off, then you are probably safe.

Keep Your Hands Off the Proceeds

Never touch the proceeds yourself. The moment you (or your agent) have access to the funds, it is considered constructive receipt and your 1031 exchange will fail.

Like-Kind Exchange Company in Minnesota

Don’t let boot catch you off guard in a 1031 exchange. Even small details can turn your tax-deferred exchange into a taxable event. Partner with a qualified intermediary who keeps every dollar segregated and compliant.

If you’ve been searching for a like-kind exchange company in Minnesota, you’re in the right place! CPEC1031, LLC is a Minneapolis-based like-kind exchange company with more than two decades of experience in the 1031 exchange industry. We have a skilled team of qualified intermediaries standing by to walk you through the specifics of your next 1031 exchange. Whether you’re doing a forward exchange, reverse exchange, construction exchange, or something more complex – we’ve got the knowledge and expertise to make sure you are able to defer 100% of your capital gains taxes.

• 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.

© 2025 Copyright Jeffrey R. Peterson All Rights Reserved

Property that Doesn’t Qualify for 1031 Exchange Treatment

The first question many taxpayers have when they're considering a 1031 exchange is: "does my property qualify?" Here is a quick breakdown of property that does not qualify for 1031 deferred exchange treatment.

Disqualified 1031 Property

Anything that's not used for investment or business purposes or used in one's trade does not qualify for 1031 treatment because section 1031 is only for that which is used in investment, business, or trade. Certain assets are also excluded specifically such as stocks, bonds, and evidences of indebtedness. Partnership interests are also excluded, although there are some exceptions. If you want to do a 1031 exchange, you need to stay inside of the strike zone for 1031 exchanges. For more information check out: The 1031 Strike Zone - Does My Property Qualify?

Troublesome Property Types

Some of the troublesome issues and types of properties to look out for are:

• § 1031s with lake cabins or second homes that may have been used for personal use.

• § Flip and rehab properties that may have been held primarily for re-sale.

• § Buying sheriff certificates and foreclosed properties subject to long redemption right.

• § Partnership interests, stock in corporations and cooperatives.

Finally, bear in mind that foreign property is not-like kind to US property.

• Start Your 1031 Exchange: If you have questions about what types of property qualifies for 1031 treatment, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2025 Copyright Jeffrey R. Peterson All Rights Reserved

Exploring the Drop and Swap 1031 Exchange

As with most real estate transactions, 1031 exchanges can be relatively simple, or extremely complex depending on the various factors involved. This is especially true when you’re dealing with property owned by a business entity. The drop and swap is a common 1031 exchange tactic used when there are multiple co-owners of a property. In this article, we are going to talk about drop and swap exchanges of like-kind property.

What is a Drop & Swap Exchange?

Real estate can often be held collectively by multiple owners in a partnership, trust, or LLC. This type of set up can make things tricky if some of the owners want to sell the property while others want to do a 1031 exchange. This is where a drop and swap can come in handy. Essentially, this involved reconfiguring the ownership of the property to tenancy-in-common. That allows each individual owner to do a 1031 exchange on their interest in the property.

It’s important to get ahead of the curve with a situation like this and get planning well before the sale of the property. If you scramble at the last minute (right before closing) to set up a tenancy-in-common, the IRS may not treat the exchange as legitimate. Early planning is key.

Commercial Real Estate 1031 Exchange

Are you looking to sell commercial real estate, but don’t want to be saddled with a capital gains tax bill? A 1031 exchange may be the best option for your situation. Working with a qualified intermediary can ensure that your exchange of real property goes off without any issues. Reach out to our qualified intermediaries today to discuss the details of your like-kind exchange. Our offices are located in downtown Minneapolis but we work with clients all over the state and across the country.

• 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.

© 2025 Copyright Jeffrey R. Peterson All Rights Reserved

2 FAQs About 1031 Exchanges in Minneapolis

We recently assisted a real estate broker with a 1031 exchange for their client who was selling a duplex in the Twin Cities. They intended to move the proceeds from the sale into a fourplex property in a 1031 exchange. Here are some pertinent questions relating to this particular 1031 exchange that may be applicable to other exchanges.

Commercial Plus Residential Space

Is there a problem with one of the properties having commercial rental space as well as residential? One place, in particular, has three apartments with 2800 sq ft of commercial space below.

The replacement property must be held for investment or business purposes and may be residential or commercial rentals (or a combination of both).

Rolling Proceeds into More than One Property

Is it possible to roll the sales proceeds from the relinquished property into more than one replacement property?

You are allowed to purchase multiple replacement properties (provided that they are designated / Identified in writing within 45 days of the closing of the 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.

© 2023 Copyright Jeffrey R. Peterson All Rights Reserved

How to Take Title to a 1031 Replacement Property

In a 1031 exchange, taxpayer “A” typically sells their relinquished property and receives the replacement property, and everything matches up identically. But sometimes taxpayers want to take title to the replacement property in a different fashion. Let’s talk about some of the different ways you can do that.

Form a Single Member LLC

One idea is to form a single member LLC that is wholly owned by taxpayer “A.” The new LLC (let’s call it NewCo) can purchase the replacement property and from the perspective of the IRS it’s still taxpayer “A” that’s receiving the replacement property through its ownership of NewCo.  This is because NewCo is disregarded and seen as transparent by the IRS.

Revocable Living Trust

Another possibility is that a taxpayer may want to take title to the replacement property in a revocable living trust. A revocable living trust operates under the taxpayer’s social security number and for tax purposes it’s a disregarded entity – no different from the taxpayer. As long as they’re in a revocable trust and the grantor of that trust is the taxpayer, then taxpayer “A” could buy the replacement property as trustee of their own revocable trust.

• 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.

© 2023 Copyright Jeffrey R. Peterson All Rights Reserved