section 1031

What is the Idea Behind Section 1031?

Section 1031

1031 exchanges allow capital to flow to best “ Like-kind ” investment. They also stimulate the economy and encourage investment.

Benefits of §1031

  • Capital gains rates are now, generally, 15%.

  • Depreciation recapture rates are 25%.

  • State income taxes differ from state to state.

Tax Regulations

IRC §1031 (a)(1) states 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 such property is exchanged solely for property of like kind which is to be held for productive use in a trade or business or for investment .”

Basic Requirements

To qualify, the Relinquished Property conveyed and the Replacement Property received must both be:

  • Qualifying Property - held for productive use in a trade or business or for investment

  • Like-kind Property – real property for real property

Real Property

Different types of “real property” are like-kind:

  • Office Buildings

  • Industrial Warehouses

  • Retail Stores

  • Multi-family Apartment Buildings

  • Farms

  • Raw Undeveloped Land

  • Factories

  • Shopping Centers

  • Leasehold interest of 30 years * including options to renew

State Law Controls What Is Real Property

  • You must look to the state laws where the property is located to determine if it constitutes real property.

  • Time-share Interests

  • Mobile Homes

  • Windmills

  • Houseboats (without a motor attached to the dock)

  • Water rights, mineral interest, oil and gas royalties

Foreign Real Property

Real property located in the United States and real property located outside the United States are not considered like-kind property.

Non-Qualifying Property

  • Property you use for personal purposes , such as your home and your family car.

  • Dealer Property, stock in trade or other property held primarily for sale, such as inventories, raw materials, and real estate held by dealers.

  • Stocks, bonds, notes, or other securities or evidences of indebtedness, such as accounts receivable.

  • Partnership interests. (note a business entity may conduct an exchange)

  • Certificates of trust or beneficial interest. * Illinois land trusts

  • Goodwill. The exchange of the “goodwill” or going concern value of a business for the goodwill or going concern value of another business is not a like-kind.

  • Cost segregation Section 1245 property is not like-kind with Section 1250 property.

  • Significant tax benefits can be derived from utilizing shorter recovery periods and accelerated depreciation methods for computing depreciation deductions

  • Property is separated into individual components or asset groups having the same recovery periods and placed-in-service dates in order to compute depreciation.

Minnesota 1031 Exchange Professionals

At Commercial Partners Exchange Company (CPEC1031), our qualified intermediaries have over two decades of experience working with clients on their exchanges of commercial real estate. We can walk you through all the steps of your like-kind exchange. Reach out to our 1031 exchange professionals to discuss your next 1031 exchange and how we can help save you money on capital gains taxes. You can find us at our primary office in downtown Minneapolis or one of our satellite offices across 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.

 

© 2019 Copyright Jeffrey R. Peterson All Rights Reserved

 

How a 1031 Exchange Can Benefit Big & Small Investors Alike

1031 Exchange Investments

Many people have heard of 1031 exchanges but assume that they are only for the big time real estate investors. Not true! Section 1031 of the Internal Revenue Code applies to all United States taxpayers. In this article, we are going to talk about how a 1031 exchange can benefit both big and small investors alike!

How to Utilize Section 1031

Section 1031 of the IRC provides U.S. taxpayers the opportunity to defer their capital gains taxes when selling investment real estate. In order to do so, you must take all of your sales proceeds and reinvest them into a new replacement property of equal or greater equity, value, and debt. It’s important to note that the benefits of section 1031 only apply to real estate that’s used for investment or business purposes. Personal property is excluded from 1031 treatment.

When done correctly, you will be able to avoid a huge tax windfall and instead put that money to use in a continued investment.

Section 1031 is Available to All Taxpayers!

Section 1031 of the Internal Revenue Code is available to all taxpayers! You don’t have to be a big time real estate investor to avail yourself of the benefits of a 1031 exchange. Our qualified intermediaries can walk you through every step of the exchange process and make sure you have all your bases covered when it comes time to close on your property. Contact us today to learn more about our 1031 exchange services and to see if you are a good candidate for like-kind 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.

 

© 2019 Copyright Jeffrey R. Peterson All Rights Reserved

 

IRS Proposal Would Cut Benefits of 1031 Exchanges

IRS 1031 Exchange Proposal

The Tax Cuts & Jobs Act that went into law earlier this year preserved like-kind exchanges of real estate (though it axed personal property exchanges). A recent regulation proposal from the Internal Revenue Service would diminish the benefits of exchanging property. In this article, we are going to discuss the recent IRS proposal and its potential impact on the economy.

IRS Proposal

The IRS is responsible for interpreting the new tax law and how it impacts taxpayers. When Congress passed the TCJA and preserved like-kind exchanges, they did not specify how investors should determine their cost basis for such exchanges. The new IRS proposal would set this cost basis much lower than anticipated, essentially penalizing investors who choose to do 1031 exchanges of property.

Economic Benefits of the 1031 Exchange

The purpose of section 1031 of the IRC is to stimulate investment and (as a consequence) economic growth. If the benefits of exchanging property are diminished, more and more investors are simply going to not sell in order to avoid a tax windfall. That can have an adverse impact on the economy as a whole – if investors don’t continue putting money into the real estate market in continued investments, it can lead to economic stagnation.

Get Help with Your Exchange

For assistance with your next 1031 exchange of real estate, contact the qualified intermediaries at Commercial Partners Exchange Company! Our intermediaries have been helping clients in Minnesota and across the country with their exchanges for over twenty years. We can prepare your 1031 documents, answer all of your questions, and advise you every step of the way. Give us a call at our downtown Minneapolis office to get your 1031 exchange of real property set up now.

  •  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

 

The Text of IRC Section 1031

Section 1031 Text

We talk a lot about section 1031 of the Internal Revenue Code and how it can help taxpayers defer capital gains on the sale of real estate. However, it’s always a good idea to return to the source and revisit the actual text of section 1031. So here is the actual text of section 1031 – straight from the IRS.

Section 1031 Text

(a) Nonrecognition of gain or loss from exchanges solely in kind

(1) In general

No gain or loss shall be recognized on the exchange of real property held for productive use in a trade or business or for investment if such real property is exchanged solely for real property of like kind which is to be held either for productive use in a trade or business or for investment.

(2) Exception for real property held for sale

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

(3) Requirement that property be identified and that exchange be completed not more than 180 days after transfer of exchanged propertyFor purposes of this subsection, any property received by the taxpayer shall be treated as property which is not like-kind property if—

(A) such property is not identified as property to be received in the exchange on or before the day which is 45 days after the date on which the taxpayer transfers the property relinquished in the exchange, or

(B) such property is received after the earlier of—

(i) the day which is 180 days after the date on which the taxpayer transfers the property relinquished in the exchange, or

(ii) the due date (determined with regard to extension) for the transferor’s return of the tax imposed by this chapter for the taxable year in which the transfer of the relinquished property occurs.

(b) Gain from exchanges not solely in kind

If an exchange would be within the provisions of subsection (a), of section 1035(a), of section 1036(a), or of section 1037(a), if it were not for the fact that the property received in exchange consists not only of property permitted by such provisions to be received without the recognition of gain, but also of other property or money, then the gain, if any, to the recipient shall be recognized, but in an amount not in excess of the sum of such money and the fair market value of such other property.

(c) Loss from exchanges not solely in kind

If an exchange would be within the provisions of subsection (a), of section 1035(a), of section 1036(a), or of section 1037(a), if it were not for the fact that the property received in exchange consists not only of property permitted by such provisions to be received without the recognition of gain or loss, but also of other property or money, then no loss from the exchange shall be recognized.

(d) Basis

If property was acquired on an exchange described in this section, section 1035(a), section 1036(a), or section 1037(a), then the basis shall be the same as that of the property exchanged, decreased in the amount of any money received by the taxpayer and increased in the amount of gain or decreased in the amount of loss to the taxpayer that was recognized on such exchange. If the property so acquired consisted in part of the type of property permitted by this section, section 1035(a), section 1036(a), or section 1037(a), to be received without the recognition of gain or loss, and in part of other property, the basis provided in this subsection shall be allocated between the properties (other than money) received, and for the purpose of the allocation there shall be assigned to such other property an amount equivalent to its fair market value at the date of the exchange. For purposes of this section, section 1035(a), and section 1036(a), where as part of the consideration to the taxpayer another party to the exchange assumed (as determined under section 357(d)) a liability of the taxpayer, such assumption shall be considered as money received by the taxpayer on the exchange.

(e) Application to certain partnerships

For purposes of this section, an interest in a partnership which has in effect a valid election under section 761(a) to be excluded from the application of all of subchapter K shall be treated as an interest in each of the assets of such partnership and not as an interest in a partnership.

(f) Special rules for exchanges between related persons

(1) In general If—

(A) a taxpayer exchanges property with a related person,

(B) there is nonrecognition of gain or loss to the taxpayer under this section with respect to the exchange of such property (determined without regard to this subsection), and

(C) before the date 2 years after the date of the last transfer which was part of such exchange—

(i) the related person disposes of such property, or

(ii) the taxpayer disposes of the property received in the exchange from the related person which was of like kind to the property transferred by the taxpayer,

there shall be no nonrecognition of gain or loss under this section to the taxpayer with respect to such exchange; except that any gain or loss recognized by the taxpayer by reason of this subsection shall be taken into account as of the date on which the disposition referred to in subparagraph (C) occurs.

(2) Certain dispositions not taken into accountFor purposes of paragraph (1)(C), there shall not be taken into account any disposition—

(A) after the earlier of the death of the taxpayer or the death of the related person,

(B) in a compulsory or involuntary conversion (within the meaning of section 1033) if the exchange occurred before the threat or imminence of such conversion, or

(C) with respect to which it is established to the satisfaction of the Secretary that neither the exchange nor such disposition had as one of its principal purposes the avoidance of Federal income tax.

(3) Related person

For purposes of this subsection, the term “related person” means any person bearing a relationship to the taxpayer described in section 267(b) or 707(b)(1).

(4) Treatment of certain transactions

This section shall not apply to any exchange which is part of a transaction (or series of transactions) structured to avoid the purposes of this subsection.

(g) Special rule where substantial diminution of risk

(1) In general

If paragraph (2) applies to any property for any period, the running of the period set forth in subsection (f)(1)(C) with respect to such property shall be suspended during such period.

(2) Property to which subsection appliesThis paragraph shall apply to any property for any period during which the holder’s risk of loss with respect to the property is substantially diminished by—

(A) the holding of a put with respect to such property,

(B) the holding by another person of a right to acquire such property, or

(C) a short sale or any other transaction.

(h) Special rules for foreign real property

Real property located in the United States and real property located outside the United States are not property of a like kind.

Qualified Intermediaries in MN

At Commercial Partners Exchange Company, we work with taxpayers across the country on their 1031 exchanges of real estate. With over twenty years of experience in the industry, we have the skills needed to ensure your exchange goes off without a hitch. We can help you prepare your 1031 documentation and answer all of your questions throughout the process. Contact us today at our downtown Minneapolis office to learn more about our services and set up a time to chat with one of our qualified intermediaries.

  • 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

 

Save the 1031 Exchange - Contact Your Representatives

Section 1031 Tax Reform

The 1031 exchange has been around for almost 100 years. But it may be on the chopping block as President Trump and Congress look at potential tax reform. Many people have called me and they're concerned about saving section 1031 and they want to know what they can do to help. 

How Your Can Help

There's a grassroots movement brewing up among real estate Investors and entrepreneurs that have real estate with substantial potential gains and they're thinking “What am I going to do? What is my exit strategy if Congress arbitrarily just eliminates section 1031 as part of an overall tax reform?”

Contact Your Representatives

Click on this link to find your Congressional representatives and voice your concerns directly to the legislature that hold your future in their hands.

Let them know that you're concerned that if they eliminate this provision in the tax code that’s been around since 1921 it will adversely affect the economy, it will reduce economic growth, and real estate values will plummet. Let them know that you support a very surgical and thoughtful revision of the tax code that would save and preserve this very beneficial tax strategy.

  • 1031 Hotline: If you have questions about section 1031 and tax reform, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved