1031 Exchange

How CPAs can Advise Their Clients on Reverse 1031 Exchanges

Reverse 1031 Exchanges

Reverse exchanges offer a lot of benefits in a hot seller’s market, but many taxpayers are unaware of how to properly utilize this effective tool. In this article, we are going to offer some tips that CPAs can use to advise their clients on reverse 1031 exchanges of real estate.

Use Reverse Exchanges in a Hot Seller’s Market

When the market favors sellers (as it does at the time of this writing), a reverse exchange can be a huge asset. Reverse 1031 exchanges operate a bit differently than standard forward exchanges. In a forward exchange, here is the order of operations:

  1. The taxpayer sells their relinquished property.

  2. The taxpayer identifies new replacement property.

  3. The taxpayer acquires their replacement property and reinvests their sales proceeds into it.

In a reverse exchange, the order of operations is reversed:

  1. The taxpayer acquires their new replacement property first.

  2. The taxpayer identifies their new replacement property in writing.

  3. The taxpayer sells their relinquished property and reinvests the sales proceeds into the replacement property.

Minnesota 1031 Exchanges of Real Property

Looking for a qualified intermediary to facilitated your 1031 exchange? Your search stops here! At CPEC1031, we focus on like-kind exchanges under section 1031 of the IRC. With twenty years of experience under our belts, we have the knowledge and expertise needed to bring your exchange across the finish line. Contact us today at our Minneapolis office to learn more about the 1031 exchange process and get your exchange off the ground!

  • 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

 

How to Approach Related Party 1031 Exchanges

1031 Related Party Transactions

Many taxpayers have questions about related-party 1031 exchange transactions. The IRS has imposed special rules that limit your ability to do like-kind exchanges with related parties. In particular, when you’re buying a replacement property, you have to be careful so that your transaction isn't deemed to be motivated by an intention to avoid the imposition of tax. It’s often hard to discern any difference between the legal intention to defer taxes and the improper intention of avoiding the imposition of tax.

But if both the party that’s acquiring the property and the party that’s selling the property aren’t paying any taxes, that might be a perfect storm for the IRS to be worried about.

What is a Related Party?

Your parents, your children, ancestors, and anyone to whom you’re related by blood or familial relationship are considered related parties. In addition to that, you can be a related party with people that you’re in business with (partners, people that are in corporations or trusts with you, etc.).

Looking at your specific situation and working with your tax advisor is essential if you’re considering doing a related party exchange. Many people think that all they have to do is hold the property for two years and they’ll have satisfied the related party rules. But there's more to it than that.

You also can't have an intention to avoid the imposition of the tax. The IRS has litigated cases that have further muddied the waters and made it hard to navigate what is and is not appropriate. Anyone considering buying a property from a related party should do so with their eyes wide open and work with their accountant and tax advisor to make sure that they're doing it right. If you want to avoid all of these hassles, just don't buy from a related party.

  • 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

Issues to Be Aware of with 1031 Exchanges & Seller Financing

Seller Financing 1031 Exchanges

If you're doing a 1031 exchange, you want to be able to take all of your equity (or net proceeds) in the relinquished property and reinvest those proceeds into the replacement property.

If your buyer of the relinquished property asks you to finance a portion of their purchase, you may want to do that just to get the deal done. But if you're taking a portion of your proceeds from the sale and loaning it back to the buyer, that's going to hamper your ability to move all of your equity and redeploy into the replacement property.

An Easy Workaround

One easy workaround is to loan the money to the buyer out of your own pocket rather than out of the proceeds of the sale.

The old expression is: “cash is king.” So if you've got the cash to loan to your buyer – great! That's a good workaround. If you don't have the cash and you want to maximize the tax efficiencies of your exchange, tell the buyer that you want cash on the barrelhead - that you don't want to be their banker, you just want to sell them the property.

If you can get the buyer to pay you cash and finance the property with a traditional loan or from other sources, so much the better. Keep your exchange simple and make it as easy for you to redeploy all of your equity into that bigger and better like-kind replacement property, and do so in in a way that allows you to compound and build your wealth without the drag of unnecessary recognition of taxes.

  • 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

Defer the tax. MAXIMIZE your gain.

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