How to Use 1031 Exchanges to Set Yourself up for Retirement

How can a 1031 exchange help you turn your investment property into your dream retirement home?

Let's say that you sell an industrial property in New Jersey for $4 million and you take your gains (your equity) from that sale and reinvest it into a condo in Palm Springs. That condo in Palm Springs will need to be held for investment or business purposes for a substantial period of time after conducting the exchange. But once you’ve satisfied the holding requirement you may have a long-term indeterminate intention as to what you're going to do with the property. Perhaps you'll retire to Palm Springs, kick the tenants out of the property, and eventually convert the property to your principal residence.

Intentions Are Important

The key here is that you want to be able to substantiate that your exchange was valid and that your initial intention when you acquired the property qualified for 1031 - that you intended to hold it for investment or business purposes.

Eventually, down the line your intentions may change and you may convert that property to your personal use. Once you've satisfied the section 121 principal residence exclusion requirements you may be able to eventually sell that replacement property as your principal residence and exclude a portion of the $500,000 exclusion for married couples or $250,000 for individuals on the sale of your now principal residence. This requires a great degree of coordination with your accountant and your qualified intermediary so have the conversation with your professional advisers first and lay the groundwork for eventually having a dream home.

• 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.

© 2019 Copyright Jeffrey R. Peterson All Rights Reserved

1031 Exchanges of Student Housing

Many people are looking to do 1031 exchanges into student housing or other multifamily housing.

That segment has been one of the hottest and most popular segments in the real estate market. Why are people exchanging into student housing and multifamily? The reason is that other segments of the real estate market are viewed as being too risky or unstable.

Retail vs. Multifamily Property

Retail has been dramatically changed by Amazon and other online retailers. Maybe we don't need as many strip malls and brick-and-mortar shops any longer, but apartments and multifamily housing? Those areas are in high demand and it's argued that we're not building enough workforce housing to keep up with the demand of all the new households that are being created in the United States.

Furthermore, if we go through a period of high inflation, short-term substantial leases will be able to be ratcheted up and increased so that the rents stay current with inflation. Other types of commercial real estate that have long leases with relatively few and minor rent escalators won't be able to keep up with inflation like multi-family using will.

• 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.

© 2019 Copyright Jeffrey R. Peterson All Rights Reserved

1031 Exchanges vs. Qualified Opportunity Zones

Many people are excited about the new qualified opportunity zones. Congress created this tax provision to incentivize investors to move their capital into areas that are economically challenged. The state governors have designated census tracts, geographic areas within their state, that they want to drive capital to. These are called the qualified opportunity zones.

Benefits of Qualified Opportunity Zones

You can take your gains from the sale of a business, stocks, real estate, etc. and reinvest those profits through a qualified opportunity fund and defer the recognition of the gain until December 31st, 2026. But you will eventually recognize the gain on December 31st, 2026.

There is an incentive to do this because if you hold the investment for 5 years you have 10% of your gains forgiven, and if you hold the investment for 7 years you have another 5% of your gains forgiven. But come December 31st, 2026, phantom income may be taxed. You may have to pay the piper for these deferred gains but you may not have the liquidity to do so. This is going to create some potential problems in 2026.

1031 Exchanges

For real estate investors the better alternative may still be to use the 1031 provision, because under 1031, the gain is perpetually deferred. There is no paying the piper in 2026 under 1031. For people that are selling businesses, stocks, and other assets that cannot be exchanged under 1031, the new qualified opportunity zone is an awesome tax planning opportunity. For the traditional real estate investors, the old tried-and-true 1031 is still perhaps the more advantageous way to go.

• 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.

© 2019 Copyright Jeffrey R. Peterson All Rights Reserved

The Name of the Game for 1031 Exchanges in 2019

In 2019, the name of the game is to exchange your appreciated real estate for other like-kind real estate that’s also going to be held for investment or business purposes.

Post Tax Reform

Post tax reform there's no exchanging of personal property or non-real estate. With real estate values high and a seller's market in place, this is the time to take your under-producing assets and management intensive assets or assets that have a lot of potential deferred maintenance, and exchange out of those Troublesome properties into more advantageous Investments.

This is the time to clean up your portfolio and re-position for the future. The name of the game in 2019 is to avail yourself of a tax-deferred transition into a healthier and more productive asset class.

• 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.

© 2019 Copyright Jeffrey R. Peterson All Rights Reserved

Remember the Same Taxpayer Rule When Conducting a 1031 Exchange

There are many rules and regulations to remember when exchanging property under section 1031. In this article, we are going to revisit the same taxpayer rule and the importance of abiding by it when conducting a 1031 exchange.

What is the Same Taxpayer Rule?

In essence, the same taxpayer rule is very basic. It states that the same taxpayer who sells the relinquished property in a 1031 exchange needs to acquire the replacement property.

That sounds simple enough on the surface, but there are a number of potential pitfalls that can result from this rule. For example, the taxpayer may own the relinquished property in their name and want to acquire the replacement property with their new spouse. Or, a taxpayer may wish to acquire their new property as an LLC.

The good news is there are strategies for approaching these scenarios. The taxpayer can set up a single-member LLC to acquire their property – this allows the taxpayer some liability protection while satisfying the same taxpayer rule. Another option would be to acquire the new property as a member of a tenancy-in-common.

Minneapolis Qualified Intermediaries for 1031 Exchanges

Are you thinking about availing yourself of the tax-saving benefits of a 1031 exchange? If so, you’ve come to the right place. CPEC1031 has been helping taxpayers with their like-kind exchanges for more than two decades. Our qualified intermediaries bring that level of experience to each and every exchange we facilitate. When you work with us, we guide you through the entire 1031 exchange process and make sure you have all of your bases covered. Contact us today at our Minneapolis office to chat with one of our 1031 exchange professionals.

• 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.

© 2019 Copyright Jeffrey R. Peterson All Rights Reserved