Inherited Investment Property & 1031 Exchanges

Many taxpayers who inherit investment property want to know what their options are, and more importantly, the best way to proceed in their particular situation. In this article, we’re going to talk about inheriting 1031 exchange investment property and the options available to you.

Inherited Property

Let’s say you inherited a property that had been 1031 exchanged into by the previous owner. You have a few general options: hold on to the investment property, or sell it.

However, before you get trigger happy and sell your inherited property, it’s important to consider whether that’s the best option for you in the long-term. There is a reason why the previous owner did a 1031 exchange on the property before handing it down to you (and any other heirs). That reason is tax deferral. 1031 exchanges allow you to defer your capital gains taxes on the sale of real estate as long as you move the net proceeds into a replacement property. Over time, you can continue exchanging into bigger and better property, while avoiding capital gains taxes. Indeed, this is a much more tax-advantageous plan than selling the property outright.

Twin Cities 1031 Exchanges

At CPEC1031, we have twenty years of experience facilitating 1031 exchanges for clients in many industries. Our intermediaries work directly with our clients to make sure the exchange process goes as smoothly as possible. We can advise you on your replacement properties, prepare all of your 1031 documents, and more. Reach out to our 1031 exchange professionals today to set up your exchange. Our office is located in downtown Minneapolis but we work with clients all throughout the state, as well as across the country.

• Start Your 1031 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

Pre-Exchange Refinancing in a 1031 Exchange

Recently, a client came to us with a great question about pre/post exchange refinancing. Here's the situation in question:

My husband and I are considering doing a 1031 exchange on our property because of the current hot seller's market in Minneapolis. We own this property free of mortgages. I am now refinancing another rental property and was planning on pulling funds through a new HELOC on this investment property to cover the gap or buy down what we need to refinance the other investment property. If we do this and a month later, put the property on the market to sell and do a 1031 exchange, will that new HELOC cause a problem with the 1031 exchange?  

Avoid Pre-Exchange Refinancing

I would not suggest that you pull the equity of the property just prior to selling it as part of a 1031 exchange. Pre-exchange refinances done in anticipation of exchanges have been challenged by the IRS.

The reason that the IRS does not like pre-exchange refinances is that by pulling the equity out prior to the sale it is equivalent to taking a portion of the sales proceeds at the time of closing, which would be “cash boot” or taxable proceeds.

Most tax commentators prefer post exchange refinancing in a separate, subsequent transaction. The second mortgage should be put in a subsequent post exchange transaction. They may want some space and time between the end of the exchange, and the later refinance.

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

Defer the tax. Maximize your gain.

© 2018 Copyright Jeffrey R. Peterson All Rights Reserved

When NOT to Do a 1031 Exchange

We talk a lot about the tax-saving benefits of 1031 exchanges. But the reality is that 1031 exchanges are not right for every single situation. In some instances it just doesn't make sense to pay the associated 1031 exchange fees. The proceeds from your relinquished property generally need to hit a certain threshold to warrant the 1031 exchange fees.  

When NOT to Do a 1031 Exchange

If your state and federal tax liability (including deprecation recapture) on the sale are lower than $1,100, then you would not want to do a 1031.

Also if you sold the property and had a loss, rather than a gain, then you would not want to do a 1031 exchange.

Check with Your CPA

Best to check with your CPA before you set up the 1031 exchange to make sure you have enough profits to justify the costs involved. In most cases, the taxes far exceed the exchange fees; but you should have a clear dashboard from your CPA to know you are making the correct decision.

• Start Your 1031 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

Why to Consider Debt-Free DST Property for your 1031 Exchange

When it comes to 1031 exchanges, you have several options when it comes to properties and it can be hard to decide what your best option is. In this article, we are going to explain a few reasons to consider debt-free DST properties for your 1031 exchange.

No Refinancing or Lender Foreclosure Risk

With all-cash, debt-free DST property, there is no risk of refinancing or lender foreclosure.

Safety & Simplicity

Buying your property free and clear is perhaps the safest way to own real estate. It also protects your principal and reduces the risk of future issues with the property.

Flexibility

With debt-free property you have the flexibility to weather any market fluctuations, recessions, or other related issues.

Eliminates Potential Debt Issues

In a typical 1031 exchange, your replacement property has to be of equal or greater debt compared to your relinquished property. This can be an issue if interest rates are high at the time of the exchange. Debt-free DST property avoids this issue entirely.

Save Money with a 1031 Exchange!

A 1031 exchange is a fantastic vehicle to save money when selling real estate. At CPEC1031, we work directly with investors and taxpayers to facilitate their 1031 real estate exchanges. With over twenty years of experience, our intermediaries are well-versed in the 1031 exchange process and can walk you through every step from closing to closing. Don’t hesitate to reach out to us at our downtown Minneapolis office to chat with one of our qualified intermediaries about your situation.

• Start Your 1031 Exchange: If you want to get your 1031 exchange started, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2018 Copyright Jeffrey R. Peterson All Rights Reserved

The 1031 Exchange Process Part 2: Identification & Replacement Property

Recently, we began a conversation about the 1031 exchange process. In this article, we are going to continue our discussion of the 1031 exchange process - from replacement property identification to completion.

Identification & Exchange Period Commence

You are now in the 45-day identification and 180-day exchange periods.  These time frames run concurrently.   Note that the 180-day period can be shortened to your deadline for the filing of your federal tax return, for the year in which the sale occurred.

Identify the Replacement Property

Before the end of the 45-day identification period, you must fax or send us a detailed list of the Replacement Property you intend to acquire. We prefer that you use the form we supplied you in our initial timeframe letter.  You must sign the identification form and clearly and unambiguously describe the Replacement Property.  We recommend that your letter be postmarked and sent by US Mail to prove that you sent us the identification during the 45-day period. If you plan on faxing in your identification, please fax to CPEC at (612) 395-5475.

Purchase/Sale Agreement for the Replacement Property

Enter into a purchase/sale agreement(s) and add a cooperation clause as you did in the first transaction. Please fax the replacement property purchase/sale agreement to CPEC at (612) 395-5475.

Select a Closing Company

Arrange for a title company or attorney to close your transaction.  Make sure you tell the closing agent that this transaction is going to be a 1031 exchange and that CPEC is serving as your Qualified Intermediary. Once you have your closing title company selected, please notify CPEC of your pending closing.

Replacement Property Closing

CPEC will contact the closing agent and obtain any additional information needed to set up the replacement closing for you.  We will prepare the 1031 replacement documents and send two sets of these documents directly to the closing agent. At closing, you will sign the replacement property exchange documents along with your other closing documents.  The closing agent should give you one set of the documents for you to keep for your tax records and send one set to CPEC, together with a copy of the closing statement and deed transferring title to you.

End of Exchange

When you have closed on the last identified property, or at the end of the 180-day exchange period, your exchange ends.  CPEC will return any unused proceeds to you.  In order to defer all gains, you should reinvest all of your proceeds in like-kind replacement property of equal or greater value and equity. Talk with your accountant or tax advisor to make sure this requirement is correctly satisfied.

Report The Exchange on Your Tax Return

 When you file your tax return for the year in which the relinquished property was transferred, you will need to attach IRS Form 8824 to report your exchange to the IRS.

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

Defer the tax. Maximize your gain.

© 2018 Copyright Jeffrey R. Peterson All Rights Reserved