1031 Exchange

Non-Safe Harbor 1031 Exchanges

non-safe harbor 1031 exchange

Many people are interested in reverse 1031 exchanges but they are not interested in the 180 holding period cap. The big complaint about rev proc 2037 is that you are only allowed to park a property for up to 180 days, and you can't do much in 180 days. This is especially true if you're doing a construction reverse exchange where you want to construct an enormous amount of improvements. Here are some important things to remember about non-safe harbor 1031 exchanges.

Rev Proc 2037

It's important to note that the IRS does not necessarily say that non-safe harbor exchanges are bad, or make any judgments about them, they just say “if you want to be inside of the safe harbor, stay within the four corners of this revenue procedures.”

Why would you ever want to go outside of the safe harbor? The primary reason is if you need to park a property for longer than 180 days.

  • Start Your 1031 Exchange: If you have questions about Non-Safe Harbor Exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

 

© 2016 Copyright Jeffrey R. Peterson All Rights Reserved

The Benefits of a Build-to-Suit 1031 Exchange

Sometimes taxpayers will sell their relinquished property and want to buy a new replacement property that is built specifically to their specifications. This article will focus on the rules and regulations that govern build-to-suit 1031 exchanges.

General Build-to-Suit Rules

The general rule for build-to-suit exchanges is that you can’t construct improvements on land that the taxpayer already owns. The IRS takes the position that any improvements you construct on the land that you already own don't count for the 1031.

So in order to do a build-to-suit construction exchange, the taxpayer sells their old relinquished property and the money comes to the intermediary and is held in an escrow account. Then the intermediary forms an LLC to be the straw man purchaser that acquires title to the new property and holds title to it while the improvements or remodeling is completed.

The Benefits

The idea is that the taxpayer gets two awesome benefits:

  1. They get a property built to their specific needs and specifications.

  2. They get to defer the gains built into this property built to their specific needs.

Take this example: you sell a relinquished property for a million dollars, buy a piece of raw land for five hundred thousand, and then you make construction improvements of five hundred thousand dollars or more during the 180 day exchange period, then you get to defer every penny of tax. You have acquired or received a replacement property of equal or greater value than what you relinquished. And the beauty of a build-to-suit is you get to construct those improvements to get the requisite value up and you get to construct them to your specific values and needs.

  • Start Your Exchange: If you have questions about build to suit 1031 exchanges in Minneapolis, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

 

© 2016 Copyright Jeffrey R. Peterson All Rights Reserved

The History of 1031 Exchanges

Many people have questions about the history of section 1031. In this article we will talk about the origins of 1031 exchanges – how they came to be and what they look like today.

A 1031 History Lesson

Going back to 1921, there have been provisions in the Internal Revenue Code that have allowed for the tax-fee swapping for exchanges in property. These iterations of Section 1031 have survived the overhauls of the Internal Revenue Code of 1939, 1954, and the most recent comprehensive revision in Tax Reform Act of 1986.

The big development in the 1031 world came from the Starker decision wherein a non­simultaneous exchange occurred - see Starker v.United States, 602 F.2d 1341 (9th Cir. 1979). This was the first deferred exchange where a taxpayer sold a relinquished property and didn’t instantaneously receive the new replacement property, but instead received the replacement property subsequent to the disposition of the old property. Essentially, this was the first “deferred” or “delayed” exchange where the replacement property came in later.

The Benefits of a Deferred Exchange

The benefits of a deferred 1031 exchange are that you don't necessarily have to line up the stars so that you can sell the relinquished property and instantaneously receive your replacement property. Instead, under the current Treasury Regulations you can sell the relinquished property on day 1 and receive your replacement property up to 180 days thereafter.

Additionally, you don't have to contract directly with the same party to receive your replacement property. You can sell your relinquished property to party A, and receive your replacement property from somebody completely different, party B. The benefits of a deferred exchange are that you have much more flexibility in time and in the relationships with the parties to structure a clean sale of your relinquished property to a third party purchaser and structure a clean purchase from someone completely different up to 180 days after you sold your old property. This gives you much more flexibility to get deals done and to defer the taxes.

The modern Treasury Regulations also require you to designate or identify your new replacement properties in writing within 45 days after the closing of the sale of your old relinquished property. For more information on identification rules see our Primer on 1031 Identification Rules.

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

Defer the tax. Maximize your gain.

© 2016 Copyright Jeffrey R. Peterson All Rights Reserved

Can Water, Oil, Gas & Other Like Rights be Exchanged in a 1031?

oil and water 1031 exchange

Many people think of 1031 exchanges solely in the arena of fee-title where you own all of the bundle of rights. But in some instances taxpayers have more narrowly defined rights in the property such as just the water rights, mineral interests, or gravel rights. Here are some things you need to keep in mind when exchanging these types of like rights in a 1031.

Real Property Interests

These interests are typically considered real property interests in the state where the property is located. If that’s the case you can do a 1031 on that narrow property interest into other like-kind property (i.e. real estate).

The Advantage of 1031 Exchanging Like Rights

So 1031 exchanges can be a very advantageous way of disposing of oil rights, gas rights, etc. or other interests that are generally considered appurtenant to any estate in real property, but are sometimes severed or separately held estates in property.

  • Start Your 1031 Exchange: If you have questions about exchanging oil, gas, or water, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

 

© 2016 Copyright Jeffrey R. Peterson All Rights Reserved

721 Contributions & 1031 Exchanges

721 contributions and 1031 exchanges

Sometimes a property seller is interested in contributing a portion of his or her real estate into the project as equity, but also wants to take some cash out for a 1031 exchange. Here's a strategy to accomplish that.

721 Tax-Free Contributions

One way to structure the sale agreement is to have the taxpayer (seller) enter into two agreements with the buyer — typically an LLC taxed as a partnership.

  • First, the taxpayer agrees to sell to the LLC an undivided X percent of the property for cash that will be assigned to a qualified intermediary for a 1031 tax-deferred exchange.

  • Second, the taxpayer agrees to contribute the remainder of his or her interest in the property to the same LLC in a 721 tax-fee contribution in exchange of a partnership interest (LLC membership interest).

By splitting the transfers in two and doing the 1031 sale first, the taxpayer is able to get the most tax efficient treatment on both transfers.

Potential Complications

There are some potential complications if the LLC distributes cash to the members after the contribution, so you need to be careful when taking-out construction financing. Here are some issues to consider:

  • What amount of debt — if any — encumbers the property at this time?

  • What is the seller’s current adjusted basis in the property? (check for “MOB” mortgage over basis)

  • What is the cash price allocated for the sale portion of the transaction?

  • What is the value or amount of the LLC/partnership interest being given in exchange for the contribution or the remainder of the property?

Having a qualified intermediary on your side to tackle these issues can ensure the most tax-efficient strategy possible.

  • Start Your 1031 Exchange: If you have questions about the 1031 exchanges combined with 721 contributions, feel free to call me at 612-643-1031.

Defer the tax. MAXIMIZE your gain. 

© 2016 Copyright Jeffrey R. Peterson All Rights Reserved