Can I 1031 Exchange Property in the Virgin Islands & Other US Territories?

How would you like to sell your 1031 relinquished property in the United States and buy your replacement property in Ecuador, Belize, or Poland? Well, unfortunately the Internal Revenue Code says that foreign property is not like-kind to US property, so you can't exchange into these foreign countries. 1031 exchanges need to be for property within the United States.

1031 Exchanges in US Territories

However, what about the US territories, like the US Virgin Islands? There is scant authority in this area, but one private letter ruling authorized the exchange of US property into the US Virgin Islands (a territory of the United States) if the replacement property was to be income producing. This seems to be a higher threshold than the mere held for investment or business purposes requirement that's typically applied in 1031 exchange.

So it may be possible to conduct a like-kind exchange for property in the Virgin Islands or other US territories, but the requirements are much more strict, and certainly require the help of a qualified intermediary.

• Start Your 1031 Exchange: If you have questions about exchanging into the Virgin Islands or any of the other US territories give us a call, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved

Benefits of a 1031 Exchange in a Hot Seller’s Market

In a hot seller's market, people are making money and there is velocity in the marketplace. In this article, we'll talk about the benefits of conducting a 1031 land exchange in a hot seller's market.

What is a "Hot Seller's Market?"

A hot seller's market is where there are more buyers than there are sellers. When the demand is high, values go up. That's what we like to see - values going up, because it means we're all building equity and the economy is gaining strength.

Values, Profits & Taxes

When values go up that also means that potential profits or gains are going up. That's where the 1031 exchange is so valuable because when you have high profits or gains you have a lot to lose in potential taxes. By using a 1031 exchange to gain the deferral and defer that gain indefinitely by acquiring a replacement property of equal or greater value, equal or greater equity, and offsetting our debt relief, we can defer the gain and keep our hard-earned equity growing and compounding without the drag of taxation diminishing our net worth or slowing the building of our wealth.

• Start Your 1031 Exchange: If you have questions about the benefits of a 1031 exchange in a hot seller’s market, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved

Tenancy-in-Common Distributions in a 1031 Exchange

Many taxpayers who are looking to do a 1031 exchange on tenancy-in-common property have questions about distributions. In Giurbino v. Franchise Tax Board, the California Board of Equalization discusses many of the concepts that would be involved in an application of section 1031 to such a transaction.

Tenancy-in-Common Distributions

In general, the determination of whether the TIC (Tenancy-in-Common) distributions would be sustained as actual (vs. fictional) distributions would involve an assessment of the following:

• Who negotiates the sale

• Who enters into the purchase agreement

• The amount of time that passes between negotiation and consummation of the sale

• The motivation behind the distributions (whether the court thinks this was done solely to obtain a different tax outcome without changing the underlying nature of ownership)

"Substance Over Form"

In making this determination, courts apply a “substance over form” approach. Notably, some of the decisions referenced in Giurbino also took into consideration when the distribution deeds were recorded and whether there were restrictions under lending arrangements on a transfer of the property.

The IRS has also recently (in 2008) amended the partnership tax return by the addition of questions relating to the completion of like-kind exchanges and distribution of TIC interests in partnership property during the current or prior tax year. For this reason, some commentary on “drop and swap” transactions suggest waiting for a period of up to two years following distributions before completing a like-kind exchange. However, there is no particular holding period requirement, nor is there any particular holding period which would absolutely insulate the transaction from scrutiny.

• Start Your 1031 Exchange: If you have questions about earnest money deposits or other items on the closing statement in a like-kind exchange, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved

Save the 1031 Exchange - Contact Your Representatives

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

Let your representatives 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.

• Start Your 1031 Exchange: 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

1031 Case Study: Bank Rules & 1031 Exchange Protocol

Recently, a client came to us with the following 1031 exchange scenario. The client was looking to do a like-kind exchange on their condo. After crossing their t’s and dotting their i’s with 1031 exchange protocol, they discovered that the rules for 1031 did not coincide with the banking protocol.

The Importance of Qualified Purpose

In order to qualify for 1031 treatment, the client would have to rent the condo out for two years in order to satisfy the qualified purpose requirement. This did not gel with the banking protocol. The bank would not allow a regular loan if the client was to rent out their newly purchased property. This means that in order to qualify for 1031, the client must change it to an investment loan, have a different type of appraisal done, and acquire a higher interest rate for this new type of loan - all which is more than likely add time to the approaching 1031 deadline. 

Preparing for Your 1031 Exchange

The replacement property must be held for a qualified purpose of investment or business use; that may or may not necessitate an investment loan. To some degree the lender may be able to underwrite it as a regular loan. This is why it’s always a good idea to prepare for your 1031 exchange as early as possible to ensure it complies with all parties involved.

• Start Your Exchange: If you have questions about bank rules and 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