1031 exchange basics

Video – 708 Spin-Off: When a Partnership is Involved in a 1031 Exchange

When a partnership is involved in a 1031 exchange, one way to do the deal is a 708 spin-off. That’s where the original LLC divides like a cel in a petri dish and multiple new iterations of that LLC are produced.

Each of those new LLCs (or subsidiaries) are considered for tax purposes to be spun-off continuations of the original entity. You can then choose to weight the ownership of the new LLCs so they’re mostly on one particular taxpayer. For example, one of the spun-off subsidiaries might be 98% owned by Jim and 2% by the other owners (and vice versa) so each LLC has a 98% owner and a 2% owner. The idea is to divide the LLC under the partnership division rules so that each LLC can do a sale of its proportionate share of the underlying real estate. It’s sort of like a hybrid version of the crude drop and swap, but we don’t have to worry about the holding period as much because each spun-off subsidiary is a continuation of the predecessor. So a 708 spin-off is a great way to have a more airtight, defensible break up when you’re trying to divide up a property that’s been held in a partnership entity.

Contact the Team at CPEC1031, LLC

Thinking about a 1031 exchange of real estate? Contact the team at CPEC1031, LLC today to learn more about how to begin the process of deferring your capital gains taxes when selling investment real estate. With more than two decades of experience, our qualified intermediaries are well suited to help you through the details of your 1031 exchange, regardless of its complexity. Whether you are doing a forward exchange, a reverse exchange, or a construction exchange, we can help you defer money in capital gains taxes. Reach out to our team of intermediaries today for help with your next exchange.

  • 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

Video – Understanding 1031 Exchange Tax Forms

In a 1031 exchange transaction, the title agent is the party responsible for reporting the sale to the IRS on form 1099-S. That’s an electronic tax filing that goes directly to the IRS. All title companies, escrow companies, closing agents, or whomever is closing on your sale must do a 1099-S to report the grantor that’s conveying the property and how many gross proceeds they’re receiving.

So the IRS will be informed of the property sale. Then it’s the taxpayer’s job to do a 1031 exchange and report the completion of the exchange on IRS form 8824 so they can see how the pieces of the puzzle fit together – the sale of the relinquished property and the purchase of the replacement property.

Capital Gains Tax Deferral via 1031 Exchange

A 1031 exchange can help you defer capital gains taxes on the sale of your investment or business real estate. This is a powerful tool that can be utilized by any United States taxpayer who owns qualifying real estate. Contact the qualified intermediaries at CPEC1031, LLC today to learn more about the benefits of section 1031 and see how we can help you defer capital gains taxes on the sale of investment real estate. You can reach out to us at our Twin Cities office today to see if your property qualifies for 1031 exchange treatment.

  • 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

Can You Use a 1031 Exchange for Profits from Real Estate Development?

At first glance, a 1031 exchange might seem like a smart way to reinvest proceeds from the sale of developed real property, especially if you are planning to roll those profits into your next project. But the IRS draws a line between real estate being held for investment or business purposes and real estate held primarily for sale.

A Real-World Scenario

A developer recently posed this thoughtful question:

We developed a 20-unit condominium complex. Twelve units have been sold, and the proceeds paid down our construction loan. We have since paid off the balance and have some net proceeds. The last eight units will soon sell. Can we roll all (or some) of the proceeds from these final sales into a new parcel of land for development using a 1031 exchange?

This is a great question and the answer is: it depends on the specific facts and circumstances.

Why All Real Estate Doesn’t Qualify for 1031 Exchange

When real estate held for investment or productive use in a trade or business is exchanged for like-kind property, Section 1031 of the Internal Revenue Code allows for the deferral of capital gains tax.

However, property held primarily for sale, such as property developed with the intent to sell to customers, is excluded from 1031 treatment.

This is spelled out in IRC §1031(a)(2):

“This subsection shall not apply to any exchange of real property held primarily for sale.”

In short: if your property is considered “inventory” in the eyes of the IRS, rather than held for investment, 1031 tax deferral is not an option.

How the IRS Determines “Held for Sale”

Courts look at a variety of factors to make this call, including:

  1. Why you acquired the property

  2. How long you held it

  3. What improvements you made

  4. The number, frequency, and permanency of sales

  5. The scale and substance of your transactions

  6. The nature of your business

  7. Whether you marketed the property

  8. Whether you used brokers or listing services

(Cited cases include Mathews v. Commissioner, 315 F.2d 101 (6th Cir. 1963) and Gardner v. Commissioner, T.C. Memo. 2011-137.)

If your activity looks more like a development business rather than long-term investment holding, the IRS may view the property as held for sale even if you only develop occasionally.

Development Projects and the “Dealer” Trap

In our condo example, the developer created a project with the intent to sell individual units. That’s a red flag for the IRS. Paying off a construction loan, profiting from individual unit sales, and rolling the gains into new land for further development mirrors the activities of a property dealer, not a long-term investor.

While it’s possible that some portion of the project might qualify, it’s a gray area that could lead to an audit or challenge. This is why consulting a qualified tax advisor early in the process is essential.

See if Your Property Qualifies for 1031 Exchange

1031 exchanges are powerful tools, but not all real estate deals qualify. If you are a developer or builder looking to defer taxes on your next project, it is important to understand the IRS rules and how your specific facts stack up.

When in doubt, get professional advice. Every situation is unique, and your tax advisor can help you evaluate your eligibility and avoid costly surprises.

  • Thinking about a 1031 exchange? Feel free to call me, Jeff Peterson, at 612-643-1031, or email me at jeffp@CPEC1031.com.

Defer the tax. Maximize your gain.

© 2025 Copyright Jeffrey R. Peterson All Rights Reserved     

Video – Important Players in a 1031 Exchange: CPA or Accountant

At CPEC1031, LLC we are great qualified intermediaries who can facilitate the mechanics of your 1031 exchange. However, we’re only allowed to wear one hat in the exchange – that of the neutral unbeholden third party. There are a lot of other people that you may need at some point in the process to help you make an informed decision and to have the necessary inputs for a successful 1031 exchange.

Many times, taxpayers need to bring their existing accountant or tax advisor into the decision making process. Your accountant is going to know what the depreciation schedule is on the old property. They’re going to know what your remaining basis is. Basis is critical in a 1031 exchange because your gain is not how much cash proceeds you walk away with, but rather the difference between your current adjusted basis and the net selling price. So even though you walk away from closing with little or no cash proceeds, you may have an enormous gain because your basis may have been whittled down over years of depreciation.

Your accountant is critical in helping you make an informed decision. Without your accountant, your transaction is like an airplane that doesn’t have any instrumentation.

Your Like-Kind Exchange Resource – CPEC1031, LLC

The qualified intermediaries at CPEC1031, LLC are your go-to resource for all things related to section 1031 of the Internal Revenue Code. Our team is ready and waiting to guide you through the like-kind exchange process from beginning to end, ensuring that you are comfortable and well-informed every step of the way. Reach out to us today to learn more about the 1031 exchange process and see how you can save money with a 1031 exchange by reinvesting into a bigger, better replacement 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.

© 2025 Copyright Jeffrey R. Peterson All Rights Reserved

 

PIGs (Passive Income Generators): A Smart Strategy for Unlocking Passive Income and Building Wealth

In the world of real estate investing and tax planning, there is a saying worth remembering: “Pigs get fed, hogs get slaughtered.” When it comes to generating passive income and making the most of your passive losses, it pays to be the right kind of pig: a Passive Income Generator, or PIG.

Why Passive Income Matters

Passive income is the dream: money that shows up whether you are laboring or not. But in the tax world, the IRS has its own definition and a strict set of rules about what counts as passive activity and how losses can be used.

Back in 1986, the Reagan administration rewrote the rules with the Passive Activity Loss (PAL) limitations, designed to shut down abusive tax shelters. The result? The losses from passive investment activities can only be used to offset the income from other passive investment activities. That’s where PIGs come in.

The Problem: Trapped Losses

Real estate investors often find themselves with passive losses they cannot use, at least not immediately. Unless your income is under certain thresholds, or you qualify for one of the key exceptions, those losses just sit there.

Here are the three most common paths to unlock those losses:

  1. The $25,000 Passive Loss Allowance: For rental property owners under certain income limits, this exception allows up to $25,000 of losses to be used against non-passive income.

  2. Real Estate Professional Status (REPS): Qualifying as a real estate professional allows you to treat rental activities as non-passive, but the requirements are strict and well-documented.

  3. Short-Term Rental (STR) Loophole: If your average rental stay is 7 days or less, and you materially participate, those rentals may be treated as non-passive, even without REPS status.

But what if none of these apply?

The Strategy: Find a PIG

Enter the Passive Income Generator (PIG), an investment that produces income without material participation. When the income is passive, it can unlock the value of your passive losses.

Think of a PIG as a tool in your wealth-building toolbox. It does not reduce your taxes on its own but when paired with existing passive losses, it can create meaningful tax savings and improved after-tax cash returns.

What Qualifies as a PIG?

Not all “hands-off” investments qualify as passive under IRS rules. Here are some examples that do qualify:

  • Real Estate Limited Partnerships (RELPs): You invest capital, receive distributions, and leave the operations to someone else.

  • Rental Properties (when the management is outsourced): If you are not materially involved, your income is passive.

  • Private Equity Real Estate Funds: These funds are designed for limited partner investors, providing income and potential appreciation without active participation.

  • Peer-to-Peer Lending: Returns from P2P platforms can generate passive income in the form of interest.

On the other side of the spectrum, here are a couple of examples that do not qualify as passive investments under IRS rules:

  • Dividend Stocks, Real Estate Investment Trusts (REITs) or Capital Gains: While they may feel passive, this is technically portfolio income, and it cannot be used to offset passive losses. Under Treasury Regulation §1.469-2T(c)(2 & 3), portfolio income is not considered income from passive activity and that includes interest, dividends, annuities, and royalties not derived in the ordinary course of a trade or business.

  • Your Own Business (if you materially participate): Even if you are not grinding it out every day, your involvement may still be deemed active under IRS rules.

Use Caution, Not Just Optimism

A true PIG isn’t just a tax strategy; it is an investment. That means due diligence is critical. Before jumping in, ask:

  • How much income will this realistically generate?

  • What’s the risk profile?

  • What’s the liquidity and redemption policy?

  • Does the tax benefit justify this investment?

The goal isn’t just to feed your losses; it is to feed your future wealth.

PIGs and the Bigger Picture

Finding and funding a PIG is a strategic move for investors who have already done the hard work of building a portfolio and accumulating passive losses. When used wisely, PIGs can accelerate your returns and reduce your tax liability without requiring you to qualify as a real estate professional or convert to short-term rentals.

But don’t forget the bigger picture: a good PIG should stand on its own as a solid investment. The tax benefit is icing on the cake, not the cake itself.

Think Like a Strategist

When it comes to wealth building, passive income plays a powerful role, but the IRS rules mean it is not as simple as “make money while you sleep.” Understanding the role of PIGs, and how to unlock passive losses with passive income, can make all the difference in your long-term strategy.

Think carefully. Choose wisely.

  • If you are considering a 1031 exchange, feel free to call me, Jeff Peterson, at 612-643-1031, or email me at jeffp@CPEC1031.com.

Defer the tax. Maximize your gain.

© 2025 Copyright Jeffrey R. Peterson All Rights Reserved