Clarifying the 1031 Exchange 200% Rule

In this article, we're going to offer a bit of clarification on the 200% rule. Specifically, we're going to answer the question: Is the relinquished property value determined by the net proceed amount or the contract amount?

Treasury Regulations

The best way to answer these questions is to look to the Treasury Regulations. The Treasury Regulations state the following:

1. The 200% rule is applied to a multiple of the aggregate fair market value of the Relinquished Property, and assuming in an arms length transaction that the contract price is the fair market value, then you use the contract price and not the net sales price:

   • Any number of properties as long as their aggregate fair market value as of the end of the identification period does not exceed 200 percent of the aggregate fair market value of all the relinquished properties as of the date the relinquished properties were transferred by the taxpayer (the “200-percent rule”).

2. The “three-property rule” and the “200% rule” are ALTERNATIVE ways or rules under which to designate or identify the Replacement Property, and you only have to satisfy one of the rules to have a valid 1031 exchange. You do not have to satisfy both rules at the same time.

3. If you designate or identify more than three properties, then you are kicked out of the “three-property rule” and must satisfy EITHER the “200% rule” or the rarely used 95% Exception.

For more information on this topic check out a Primer on 1031 Identification Rules and 1031 Identification Best Practices.

• Start Your Exchange: If you have questions about the 200% rule, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2018 Copyright Jeffrey R. Peterson All Rights Reserved

How to Identify Your 1031 Property to the Qualified Intermediary

Like-kind replacement properties should be clearly and specifically (unambiguously) identified to the Qualified Intermediary using the common property (street) address, and/or the legal description, and/or the Assessor's Parcel Number (APN).  Generally, the more specific the identification the better; the more general or less specific the more risk that the 1031 Exchange could be disallowed during a Federal or state audit.

Alternative Rules

The 1031 proceeds of the sale must be re-invested in a like kind asset within 180 days of the sale. Restrictions are imposed on the number of properties which can be identified as potential Replacement Properties. More than one potential replacement property can be identified as long as you satisfy one of these ALTERNATIVE rules:

• The Three-Property Rule - Up to three properties regardless of their market values. All identified properties are not required to be purchased to satisfy the exchange; only the amount needed to satisfy the value requirement.

• The 200% Rule - Any number of properties as long as the aggregate fair market value of all replacement properties does not exceed 200% of the aggregate Fair Market Value (FMV) of all of the relinquished properties as of the initial transfer date. All identified properties are not required to be purchased to satisfy the exchange; only the amount needed to satisfy the value requirement.

• The 95% Exception - Any number of replacement properties if the fair market value of the properties actually received by the end of the exchange period is at least 95% of the aggregate FMV of all the potential replacement properties identified. In other words, 95% (or all) of the properties identified must be purchased or the entire exchange is invalid.

NOTE: The replacement property received must be substantially the same as property identified within the 45-day limit described above.

Minnesota 1031 Exchange Intermediaries

At CPEC1031, our experienced qualified intermediaries have over two decades of experience facilitating exchanges of real estate for clients throughout Minnesota and across the country. We can help you through all the phases of your exchange – from the sale of your relinquished property to the purchase of your replacement property. Our intermediaries can advise you, answer all of your questions, and prepare your necessary 1031 exchange documents so you don’t have to worry about a thing. Contact us today at our downtown Minneapolis office and set up a time to chat with one of our Minnesota qualified intermediaries about your exchange.

• Start Your 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

1031 Exchanges Made Simple

1031 exchanges of real estate can be complex, but we do our best to simplify the process whenever possible. In this article, we are going to strip the 1031 exchange down to its most basic elements for easy consumption.

Like-Kind

1031 exchanges are also commonly known as “like-kind” exchanges. That’s because all property involved in a 1031 exchange needs to be like-kind, as designated by the IRS. Thankfully, like-kind is pretty simple when it comes to real estate, as most real property is considered like-kind to most other real property.

Investment or Business Use

Another important thing to remember is that your 1031 exchange property needs to be held for the appropriate use. Specifically, your property needs to be held for investment, or use in your trade / business. Property held primarily for personal use does not qualify for 1031 treatment.

Boot

Boot is any non-like-kind property that the taxpayer receives during an exchange. Receiving boot will trigger taxavle gain. The best way to avoid boot is to hire a qualified intermediary for your exchange so they can insulate you from receiving any taxable boot.

1031 Exchange Professionals

Get started with your 1031 real estate exchange by contacting a qualified intermediary. At CPEC1031, our intermediaries have two decades of experience and can help you through every step of your exchange – from start to finish. No matter what type of property you’re selling, a like-kind exchange is a great tool for deferring your capital gains taxes and keeping your money working for you in a continued investment. Reach out to us today at our downtown Minneapolis office to chat with our team of intermediaries about your exchange.

• Start Your 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

Timing Rules of a 1031 Exchange

When you’re doing a 1031 exchange of real estate, timing is everything. There are specific deadlines you have to abide by, and if you fail to do so, your exchange may be unsuccessful. In this article, we are going to offer a brief refresher on the timing rules associated with a 1031 exchange of real estate.

Basic Time Frames

First and foremost, there are some basic deadlines you need to be aware of in any 1031 exchange. You have a total of 180 days to finish your exchange (starting when you sell your relinquished property). Those first 45 days are your identification period, in which you need to identify in writing the replacement properties you wish to exchange into.

Exceptions to the Rule

While these time periods are pretty steadfast, there are some situations in which circumstances change. The IRS wants you to report your replacement property on the same tax return as your relinquished property. So depending on when you begin your 1031 exchange, you may only have until your federal tax filing deadline to complete your exchange.

Like-Kind Exchange Services

At CPEC1031, we provide like-kind exchange services to clients in Minnesota and across the country. It doesn’t matter if you’re a huge investor, or you’ve never sold real estate before in your life – a 1031 exchange can help you defer capital gains taxes when you sell real property. Our qualified intermediaries have over two decades of experience and can help facilitate your like-kind exchange under section 1031 of the Internal Revenue Code. Contact us today to set up a time to chat with one of our qualified intermediaries about your 1031 real estate exchange.

• Start Your Exchange: If you have questions about 1031 exchange timing rules, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2018 Copyright Jeffrey R. Peterson All Rights Reserved

Will the New Tax Law Lead to an Increase in 1031 Exchanges?

There have been a lot of questions surrounding the Tax Cuts & Jobs Act over the past several months. We’re going to continue exploring the ramifications of the TCJA on 1031 exchanges. In this article, we are going to talk about whether or not the new tax law will lead to an increase in 1031 exchanges moving forward.

Real Estate Exchanges

The new Tax Cuts & Jobs Act preserved the 1031 exchange as part of the GOPs tax overhaul. That was welcome news to real estate investors who understand the true benefit of the 1031 exchange as an investment tool and economic driver. Since there were no massive changes to 1031 exchanges of real estate with the new law, one might predict that exchanges of real property will remain relatively steady moving forward.

Goodbye Personal Property Exchanges

The opposite is true for 1031 exchanges of personal property. As we’ve mentioned before, personal property exchanges got the axe with the passage of the TCJA. That means personal property 1031 exchanges will not be allowed moving forward (as of January 1, 2018).

1031 Intermediaries

At CPEC1031, we help clients defer their capital gains tax on the sale of real estate using section 1031 of the Internal Revenue Code. We have been facilitating exchanges across the country for more than twenty years, and have the experience needed to help you through your transaction. We can prepare all of your documents for and advise you of your options every step of the way. Contact us today to speak with one of our skilled 1031 exchange qualified intermediaries.

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

Defer the tax. Maximize your gain.

© 2018 Copyright Jeffrey R. Peterson All Rights Reserved