Unexpected Recapture In a 1031 Exchange

Normally in a 1031 exchange, you defer all of your capital gains (both from appreciation in value and depreciation deductions taken over the years) by acquiring a like-kind replacement of equal of more value; and equal of more equity.

In Tax Law Nobody Wants Surprises

There are some situations when the relinquished property will have some tax complications (snakes in the grass) that could cause you to unexpectedly recognize gain.  To make matters worse, the surprise gains could be characterized as ordinary income and taxed at higher rates than mere capital gains rates.

What Do You Need to Check Out?

Here are some things to check out with your CPA, accountant or tax attorney:

Tax Credits

When Congress wants to encourage investors to do something they provide tax incentives.  One of the most effective tax incentive is to offer tax credits.  Tax credits are more valuable than mere deductions because they off-set your tax liability dollar-for-dollar. The problem is that tax credits on your relinquished property for either rehabilitation expenditures under Section 47; or from low income housing under Section 42 may be recaptured. Both of these Tax Code Sections allow for recapture of the amount of the tax credits. It is always prudent to check with your accountant BEFORE you sell just to make sure you do not have any problems with old tax credits.

Special Recapture for Rapid Deprecation

If you were able to take rapid deprecation under Section 179 or you qualified for bonus deprecation for investment in the Gulf Opportunity (GO) Zone areas impacted by hurricanes Katrina, Rita, and Wilma, then you need to check into the recapture provisions of those specific programs if your property ceases to be Qualified GO Zone Property.

Section 1245 Gain

Cost segregation engineering studies are often used by property owner to peel out those components of a piece of real estate that can be more rapidly deprecated.  A typical commercial building is deprecated over 39 years.  That is a long deprecation schedule.  A multi-family apartment building can be deprecated over 27.5 years.  Certain components of real-estate can be re-classified and more rapidly deprecated over a 5..10..15 year schedule. Those components can cause you to have recapture, unless you are mindful and when you buy your replacement property you buy qualifying property that matches up component for component with those Cost Segregation properties that were more rapidly deprecated.

•  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

Can I Do a 1031 Exchange on My Contract for Deed Balloon Payoff?

Contract Deeds or Executor Contracts, basically installment sales, create a lot of questions. Here is one that I get a lot. I sold my property ten years ago on an installment sale, a Contract for Deed. And now, I am being paid off, and I am getting this balloon payment from the buyer. Question: Can I do a 1031 Exchange on this influx of cash that I am receiving?

Understand the Timing – When Did the Sale Take Place

If you look at this transaction, it may appear that the sale is now occurring because when the balloon payment is given to the vendor, the deed will be delivered to the vendee. So, it feels like perhaps the sale is occurring now. But, for Federal Tax purposes, the sale probably occurred ten years ago when the Contract for Deed or the installment sale was entered into.

Who is Really the Owner of the Property

When a Contract for Deed is given, the purchaser or vendee is considered to be the equitable owner of the property. They probably bear the risk of loss if the property is destroyed. They probably bear the burden of paying the property taxes to the local property tax assessor. And, under the contract, they probably enjoy the possession, the exclusive use of the property. So, for Federal Tax Purposes, the Contract for Deed vendee probably acquired the property way back when the initial Contract for Deed was entered into. Now, when this influx is coming in, we are not really selling the property anymore, we are just receiving payoff like any other lender who has loaned money to a purchaser.

Section 1031 Does Not Apply to "Evidence of Indebtedness"

When a Contract for Deed vendor holds that legal title, they don't necessarily own the property anymore. They really own an enforcement mechanism. In the event of a default under the Contract for Deed, they can swoop in and cancel the Contract for Deed. This is an enforcement mechanism much like a mortgagee's interest or bank's interest in a mortgaged property. They are really a creditor, not so much a property owner for Federal Tax Purposes.

Your Go-To 1031 Resource

Like-kind exchanges allow taxpayers to defer capital gains taxes when selling investment real estate. CPEC1031 is your go-to source for all things related to 1031 exchanges. Our qualified intermediaries have decades of experience working on 1031 exchanges of all sorts. We can answer all of your questions, advise you on your replacement properties, and prepare your 1031 exchange documents so you are ready for the closing table. Contact us today at our downtown Minneapolis office to discuss your 1031 exchange.

• 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

Mergers, Acquisitions & 1031 Exchanges

Many people conducting mergers, acquisitions and the purchase and sale of businesses have so many things in the air to keep track of, that they often lose sight of the important tax efficiencies under section 1031.

The Most Tax Efficient Way to Sell Business Property

Remember, if we convert a transaction from a sale to an exchange, under section 1031, we can defer all the taxes on the disposition of like kind property indefinitely. The fundamental requirements of section 1031 are as follows: The relinquished property that is given up must have been held for investment or for use in a trade or business, it must be exchanged for like-kind property that must also be held for an investment or for use in a trade or business. By characterizing the transaction as an exchange, as opposed to a sale, we get to defer or have the gain go unrecognized indefinitely.

1031 Exchange Rules

Imagine we are selling a restaurant chain. Each of those restaurants sits on real estate and have some buildings or improvements that are considered real estate. Real estate is very easy to implement a 1031 exchange on. As a matter of fact, when most people think of 1031 exchanges, they often think of commercial real estate because commercial real estate is frequently exchanged as opposed to sold.

Some Property will Not Qualify for 1031 Exchanges or Deferral of Taxes

Remember that the good will of one business will never be considered like-kind to another business’s good will. This comes out of the treasury regulations [1.1031(a)-2(c)], so unfortunately part of the sale of the business will likely be subject to some tax. It’s a good idea to set out in your asset purchase and sale agreement, some value for good will. Attribute your value to it, pay your taxes on it; but as to the other components, the real estate, you want to layer in a 1031 exchange to get the most tax efficient disposition of the business as a whole.

Like-Kind Exchange Services

At CPEC1031, our like-kind exchange intermediaries have over two decades of experience facilitating 1031 exchanges for clients. We can help you through every stage of your 1031 exchange by answering your questions, preparing your documents, and making everything as easy as possible for you. Get help with your like-kind exchange today by contacting our qualified intermediaries at our Minneapolis office.

• 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

Year-End 1031 Exchange Tips

2018 is coming to a close and with it, so are many 1031 exchanges. This article offers some year-end tips for your 1031 exchange of real estate.

Remember Your Deadlines

It’s always important to be aware of your 1031 exchange deadlines. As a quick reminder – you have 180 days total to complete your 1031 exchange, with the first 45 of those days being set aside for replacement property identification.

Don’t Forget About the New Rules

There was a big change-up in the 1031 exchange universe in 2018. The Tax Cuts and Jobs Act preserved like-kind exchanges of real estate, but eliminated 1031 exchanges of personal property. If you were hoping to exchange your art, gold coins, business equipment, or other items of personal property, I’m afraid that’s no longer in the cards.

Consult with Your CPA

No one knows your unique tax situation better than your CPA. It’s a good idea to consult with them if you are considering a 1031 exchange. They will be able to offer you guidance as to when you should do the exchange and how an exchange can fit into your tax strategy.

1031 Exchange Accommodators

If you are considering a 1031 exchange of your real estate, a third-party administrator can help you through the process and ensure your exchange is a success. The intermediaries at CPEC1031 have more than two decades of experience assisting taxpayers with their like-kind exchanges. We bring that level of experience to each and every transaction – so you can rest assured you are in good hands with us. Contact our like-kind exchange professionals today to get your exchange started.

• 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

A Reminder About 1031 Exchange Limitations

Earlier this week, the IRS issued a reminder to taxpayers about the limits of 1031 exchanges.  It seems that some may still be unaware of the recent changes to 1031 exchanges brought on by the Tax Cuts and Jobs Act. In this article, we are going to offer a quick reminder about the recent 1031 exchange limitations.

A Quick 1031 Refresher Course

There was a big change in the 1031 exchange industry in 2018. The Tax Cuts & Jobs Act, which passed in late 2017 and went into effect in early 2018, restricted 1031 exchanges to like-kind real property only. Prior to the TCJA, items of personal property could be exchanged under section 1031, as well as real estate. This is now a bygone era.

If you have been intending to conduct a 1031 exchange of personal property – think again. Such an exchange will not be recognized by the IRS and you will end up recognizing your capital gains on the sale.

That being said, 1031 exchanges of real property are still a viable and advantageous option for taxpayers. If you’re considering selling investment real estate, you can still avail yourself of the tax-saving benefits of a 1031 exchange.

CPEC 1031

At CPEC1031, our qualified intermediaries have more than two decades of experience working with clients throughout the country on their real estate exchanges under section 1031 of the Internal Revenue Code. We can help you through every stage of the exchange process – answering your questions and advising you throughout the proceedings. Contact us today to set up a time to chat with our 1031 exchange professionals at our downtown Minneapolis office.

• 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