If Congress Repeals Section 1031, will Previous Exchanges Still Hold?

If section 1031 is repealed by Congress the question arises: “what about previous 1031 exchanges that were already completed? Will those still hold up even if the like-kind exchange is removed from the tax code?”

Date Certain

Congress typically sets a date certain when a tax change will be implemented and any 1031 exchanges you have been previously completed before that date certain will probably be just fine. The unfortunate situation will be for 1031 exchanges that are in the works and can't be completed before that effective date or change occurs. Those exchanges may not be able to be completed even though they are going through the motions.

Contact Your Reps

We don't know if Congress will eliminate the 1031 exchange. We hope that it doesn't. But if they do affect the change we’re hoping that all previously commenced 1031 exchanges will be respected, even if they're completed after the transition date.

Congress is currently working on tax reform. If you want to make sure that the 1031 exchange is preserved in this reform, contact your representatives and let them know where you stand.

• Start Your 1031 Exchange: If you have questions about 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

What's the First Step in the 1031 Exchange Process?

Many taxpayers who are interested in a like-kind exchange don't know how to get the process rolling. In this article, we outline the first steps you need to take to get your 1031 exchange started.

Consulting Your Qualified Intermediary

Talking to your qualified intermediary, exchanging information, and letting the qualified intermediary know about your situation is the first critical step in any 1031 exchange.

Here are some questions your qualified intermediary might ask during your initial conversation:

• How do you own the relinquished property?

• Is it vested in your own name, in a trust, or a in business entity?

• Do you have a spouse in title with you?

• What's the value of your relinquished property?

• How much debt do you have encumbering the property?

• What do you expect is your net amount of proceeds or walking away money going to be?

• What is your basis? How much do you have into this relinquished property?

• When is your transaction closing? Is the closing eminent or is it a long ways out?

There are so many questions and unique circumstances to discuss with your qualified intermediary at this first initial call that you want to get started early.

Replacement Property

Another very important discussion point is what you want to buy for your replacement property. Do you want to have a management free, relatively low-risk investment? Or are you looking to accelerate your depreciation by leveraging up and buying a much more expensive perhaps more management intensive property?

Early discussions with your professional advisers and qualified intermediary are critical to setting the stage for a successful 1031. The first step is to pick up the phone and start the process with your qualified intermediary.

• Start Your Exchange: If you have questions about the first steps in the exchange process, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved

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