COVID-19 Update – CPEC1031 Remains Open Remotely

CPEC1031 is here to help! We are open for business and ready to help you with your 1031 exchange during the COVID-19 pandemic.

Minnesota Gov. Tim Walz has issued a stay-at-home order to slow the spread of COVID-19 in our communities. As part of our commitment to the health and safety of CPEC1031 clients and team members, CPEC1031 has transitioned to fully-remote operations.

Please contact us for assistance regarding your legal questions and concerns, whether they involve COVID-19 or other issues. We can advise you over the phone or via video conference. Documents can be emailed securely or mailed to you.

We wish you health and safety during this time.

• 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.

© 2020 Copyright Jeffrey R. Peterson All Rights Reserved

How COVID-19 Impacts 1031 Exchanges

The ongoing COVID-19 outbreak is causing a lot of uncertainty in all industries – and commercial real estate is no exception. Many people have questions about whether COVID-19 is disrupting the 1031 exchange process. In this article, we are going to discuss how the COVID-19 pandemic is impacting 1031 exchanges.

Deadlines & Timeframes

In a typical 1031 exchange, the taxpayer conducting the exchange has to abide by strict deadlines. Specifically, you only have 180 days to complete your exchange once you initiate the process. The first 45 of those days are set aside as your identification period in which you must identify in writing your replacement property.

There are rare circumstances in which these deadlines can be changed. IRS Revenue Procedure 2018-58 allows for these 1031 exchange deadlines to be extended in the event of a federally declared disaster, but only when the IRS releases guidelines authorizing this to go into effect. That has not happened yet as of the time of this writing, but taxpayers should keep their ear to the ground over the coming weeks and months to prepare for this possibility.

If a federally declared disaster is implemented and the IRS does issue guidelines on the topic, it’s a good idea to work closely with your qualified intermediary as there are additional qualifying requirements you must meet to extend your deadlines.

Jump Start Your 1031 Exchange Today

At CPEC1031, we work with clients across the country on 1031 exchanges of all shapes and sizes. Our qualified intermediaries have over two decades of experience facilitating like-kind exchanges and can help you prepare 1031 documents and advise you throughout the process. Contact us today to learn more about our full range of services and see if you are a good candidate for 1031 exchange. You can find us at our primary offices located in downtown Minneapolis.

• 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.

© 2020 Copyright Jeffrey R. Peterson All Rights Reserved

DST Property & the 95% Rule - What to Know

In regard to the 1031 exchange 95% rule, what specifics do you need to meet the identification requirements with a DST? Does the name of the DST fund and the name of the specific properties suffice? These are great questions that we’ll answer in this article.

Properties Inside a DST

The syndicator wholesaling the DST should be able to provide you with a detailed description of the property or properties inside the DST. I would suggest that you attach an exhibit to the Replacement Property Identification Form with the details:

• The distinctive name of the DST;

• The address or addresses of the property or properties inside the DST;

• The legal description of the property or properties inside the DST.

Generally, it is better to throw the kitchen sink at to unambiguously identify the replacement property. This is because the Treasury Regulation says:

Replacement property is identified only if it is unambiguously described in the written document or agreement. Real property generally is unambiguously described if it is described by a legal description, street address, or distinguishable name (e.g., the Mayfair Apartment Building).

• 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.

© 2020 Copyright Jeffrey R. Peterson All Rights Reserved

1031 Exchanges with Partnership Ownership Interest

If a party owns investment real estate in a partnership and the other parties buy out one member, can that member 1031 exchange those proceeds to another "like kind" property?

Generally, an interest in an entity such as a corporation, partnership or LLC cannot be exchanged.

Section 1031 allows for the tax deferred exchange of real property…but stocks, bonds, and interests in businesses (or more specifically business entities) which cannot be exchange under Section 1031.

Consider Tenancy-in-Common

Sometimes it is possible to change or reconfigure the ownership of the property to convert a partner/member into an owner of a tenant-in-common interest (or portion) in the underlying real property. For example a partner/member may be redeemed out of the entity in exchange for a deeded tenant-in-common interest in the underlying real property…so that they may be able to later sell/exchange out of their tenant-in-common interest in the underlying real property through a 1031 exchange.

Typically, one should hold their interest in the Relinquished Property for a substantial period of time to satisfy the “holding period” for qualification under Section 1031. 

The code Section states that:

No gain or loss shall be recognized on the exchange of real property held for productive use in a trade or business or for investment if such real property is exchanged solely for real property of like kind which is to be held either for productive use in a trade or business or for investment.

Oftentimes once a reconfiguration of ownership has been accomplished to convert a former partner/member into a tenant-in-common owner there is a new tenant-in-common agreement created among the co-owners of the real estate that states the mutual co-ownership of the property is not a joint venture or partnership arrangement.

• 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.

© 2020 Copyright Jeffrey R. Peterson All Rights Reserved

Tax Consequences of Investing Boot in an Opportunity Zone

What are the tax consequences of investing boot in an opportunity zone? Specifically, what happens if you do not meet the entire equity rollover portion and invest a portion or all of the boot in an asset located in an opportunity zone.

Working with a CPA

It depends on a complicated review of the numbers. Your CPA will need to compute the exact amount of gains recognized from (1) potential debt relief, (2) receipt of boot and (3) from potential buy-down in value; and then make sure that you invest enough cash into an OZ fund within the applicable time deadline for QOZ.

If you had high debt and low basis on the relinquished property then it may be necessary to add more cash in addition to the remaining exchange funds to the QOZ investment to cover the gain. This is referred to as MOB or mortgage over basis, and can make it more challenging to offset the debt using the qualified opportunity zone fund technique.

As always, I recommend that you discuss this possibility with your CPA and also your financial advisor.

Some qualified opportunity zone investments are regulated as Securities, and you must us write certain “accredited investor” standards in order to participate in them.

• 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.

© 2020 Copyright Jeffrey R. Peterson All Rights Reserved