1031 Exchanges & Charitable Contributions

Many people want to exchange out of their current real property investments, and into like properties that may eventually be transferred to a charity. In this article, we will discuss how to do such a 1031 exchange successfully.

Motivation to Exchange Property

The initial reason for exchanging investment property may be motivated by a desire to:

1. get out of a toxic type of property that has potential environmental liability;

2. sell while the property values are high (at the top of the bubble);

3. get out of management intensive properties;

4. get out of low-income properties and into higher yielding properties;

5. diversify into different types of real estate, or into different geographic locations.

After completing the 1031 exchange, the taxpayer must continue to hold the replacement property for a qualified purpose of investment or business purposes for a substantial period of time (the longer the better). The Internal Revenue Service has successfully challenged 1031 exchanges where the taxpayers did not hold the replacement properties for a qualified purpose and made gifts shortly after completing the exchanges. See the Click v. Commissioner, 78 T. C. 225, 231 (1982) case. 

Gifting to Charity

Once they have held the replacement property for the requisite time period, they may later wish to make an inter vivos gift of the replacement property directly to a charity (while they are alive), put their replacement property into a charitable remainder trust, or provide for it to be transferred upon their death to a charity (through estate planning such as a revocable living trust).

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

Defer the tax. Maximize your gain.

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved

What Does it Cost to Record a Deed in a 1031 Exchange?

A common question we get from clients during a like-kind exchange is: “how much does it cost to record a deed in a 1031 exchange?” That's our topic for this 1031 exchange education article.

Minnesota County Recorder

In Minnesota, the charge to record a document in the county records is $46 per document. In addition to the recording fee there may also be a $5 conservation fee imposed as well.

On top of the recording fees, there can also be transfer tax or deed tax imposed. The rate of tax may depend on the value or consideration paid for, and the county in which you're located.

Hennepin & Ramsey Counties

In Hennepin and Ramsey counties the rate is .0034 multiplied by the total amount of net consideration. In out-state counties the rate is .0033 multiplied by the net consideration.

If you have questions about recording fees deed tax or other facets of 1031 exchanges give us a call.

• Start Your 1031 Exchange: If you have questions about real estate recording fees, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved

Tips for 1031 Exchanging Residential Rental Properties

Many people may think CPEC1031 facilitates only large or complex transactions, but we also act as the third party administrator for 1031 exchanges of smaller residential rental properties.

Like-Kind Exchanges of Residential Rental Property

Here are some tips for conducting a like-kind exchange of residential rental properties:

• Put language in the sale and purchase contract evidencing your intent that the sale/purchase is part of a 1031 exchange and obtain the other parties cooperation.

• Let your real estate agent and title closing/escrow agent know early that you are conducting a 1031 exchange and ask them to coordinate with the qualified intermediary.

• Get set up with your qualified intermediary well prior to the closing of your sale. If you wait until after the sale has occurred, it will be too late to insulate yourself from receiving the proceeds or giving the requisite written notice to the other parties.

• Start exploring your replacement property purchase options early so you can get a jump on the 45 day identification period. 

We are fast, and responsive to client inquires even if the transaction is small, because it’s important to the people involved.

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

Defer the tax. Maximize your gain.

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved

1031 Exchange Wealth Building Tips

In this article, we will offer a few tips for building your wealth over time with a 1031 exchange.

Real Estate as a Wealth Building Vehicle

Real estate is a preferred vehicle for wealth building because you can defer your gains and continue to compound and build your wealth over time.

For example, let's say that we start off by purchasing a single-family rental. We're good stewards and managers of that property, and guess what? It goes up in value after a few years and we've acquired quite a bit of equity in that property.

Single Family to Multi-Family Property

Now, we're not complacent so we're not going to stay in that single family rental property. Instead we're going to defer the gains on its sale and acquire a fourplex or four unit multi-family property. We're going to take all of our proceeds from that single family rental, roll them tax-free into the new apartment building. Again, we're going to be good stewards and that property will continue to go up in value. After a few years of managing that property, it will have increased our equity position again.

Fourplex to 16-Unit Apartment Complex

Now, we're not complacent and we're going to continue to compound and build our wealth so we're going to dispose of the fourplex using a tax-deferred 1031 exchange and buy a 16 unit apartment complex. Again we're going to compound and build our wealth tax free over time. We're going to be good stewards and operators of that apartment complex and over time again we're going to build equity.

Parlay Your Investment Over Time

We're always going to be buying a bigger, better, more expensive property. Over the course of time we're going to parlay our initial investment from a single-family rental property into perhaps a hundred plus units. The reason that we’re able to do that is twofold:

1. We’re using a very tax-efficient strategy where we’re able to keep our wealth building and compounding for us

2. We’re using other people's money (OPM) to finance the bulk of our acquisitions. With only a little bit down (say 20%) we can take down a much more expensive property. The interest that we pay to the bank is tax deductible. Who really ends up paying the debt service anyway? It's our tenants. The tenants are paying the rent and we're using the rent to pay the debt service.

By building wealth through real estate we’re able to amass so much wealth tax-deferred so much more quickly than we could if we were burdened with laborious taxes.

• Start Your Exchange: If you have questions about building your wealth with 1031, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved

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