Reverse 1031 Exchange Options - Switching It Up

In a 1031 exchange, sometimes it's not advantageous to park your new property. Perhaps the financing is be too complicated to have an exchange accommodation titleholder acquire the new property. It may not be feasible to get it through the financing committee when banks are already very jittery and uneasy. In a declining market, the financing can be the lynchpin and we don't want to upset the apple cart with very sensitive lenders. Another reason you may not want to park the ownership of your new property in a holding company is, you may want to get your hands on it right away because there might be tax incentives that go with the property. Perhaps there are low-income tax credits or other credits related to the stimulus package that may encourage you to get into the property as soon as possible. You will want to take advantage of those tax incentives you don't want to waste them on some holding company that is holding the property as inventory.

How Do We Structure the Deal So You Can Get Into the New Property as Soon as Possible?

The way we do the deal is, we structure the transaction as a front leg reverse exchange. (This is also sometimes called an exchange first reverse exchange) That means, we have the exchange accommodation titleholder, (the LLC) take title to your old relinquished property. That gets the property out of your name; you basically sell it to the exchange company. That liberates you and frees you up. Now you are no longer tied to that (old) property and this allows you to immediately acquire the new replacement property. The exchange is done except one lingering detail; you still need to find a (real) buyer for the old relinquished property. The 1031 intermediary holding title through this LLC can only hold on to the property for 180 days (per Rev. Proc. 2000-37).

Rush to Sell Your old 1031 Exchange Property within 180 Days

What are you going to do? You will need to market the relinquished property and hopefully, a third party purchaser will acquire the property from the intermediary. The Intermediary doesn't have any money of its own, so it would have borrowed that money from you or from a bank with your guarantee. So, it behooves you to get the intermediary out of title and get the new purchaser in so you or your lender can get paid off and you can be free of the guarantee.

A White Knight to Your Rescue

The EAT (exchange accommodation titleholder), needs to get out of title but, what if you can't get a 3rd party purchaser and nobody will buy your old relinquished property?

The IRS has been rather liberal. In recent private letter rulings (PLR), where a related party, (i.e. your brother in law or some entity you have an interest in) comes in and buys the relinquished property and holds it for eventual sale. These recent private letter rulings are tolerant of a related party purchase from the EAT (exchange accommodation titleholder) and thus completing the reverse exchange in a nice tidy (180 day) transaction.

Excerpt from IRS Private Letter Ruling No. 2007-12013

Under the given facts and representations, Section 1031(f) will not apply to trigger recognition of any gain realized when (1) Taxpayer purchases like-kind Replacement Property from an unrelated third party via EAT, (2) Taxpayer sells Relinquished Property to Related Party for cash consideration received by a QI, and (3) Related Party disposes Relinquished Property within two years of the acquisition.

What Do You Need to Take Away From All of This

In a downward market you can't wait around. You need to seize opportunities when they arise! A reverse exchange is another tool to get the deal done tax deferred! It allows you to purchase a property by having your exchange accommodation titleholder acquire either the new property or alternatively, take title to your old relinquished property, thus freeing you up to immediately acquire this new replacement property. Reverse exchanges are excellent and powerful tools, but they are sophisticated creatures. You need to have your CPA, your tax attorney and all your other advisors on board to get these deals done correctly.

• 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

Allowable Closing Costs in a 1031 Exchange

One area where taxpayers can potentially slip up during the 1031 exchange process is closing costs. There are certain items that are allowable as closing costs and other items that are not. Knowing the difference is essential to the success of your like-kind exchange. In this article, we are going to discuss allowable closing costs in a 1031 exchange of real estate.

Allowable Closing Costs

In a 1031 exchange, not all closing costs can be paid with the exchange funds. The following is a list of all the allowable closing costs in a 1031 exchange:

• Broker’s commissions;

• Real estate agent commissions;

• Title transfer taxes;

• 1031 exchange facilitator fee;

• Owner’s policy title insurance fees;

• Escrow fees;

• Attorney’s fees; and

• Title recording fees

Non-Allowable Closing Costs

Here are a handful of closing costs that should NOT be paid using the 1031 exchange funds:

• Costs and fees associated with acquiring loans;

• Security deposits;

• Prorated rents;

• Insurance premiums;

• Property taxes;

• Fees associated with lender’s title insurance;

• Lender’s appraisal fees; and

• Lender’s inspection fees.

• Paying Tax with Exchange Funds or Outside Funds

It’s important to pay these costs in cash and not using the 1031 exchange funds, as doing so could threaten to derail your exchange

Tax Deferral with Like-Kind Exchanges

A like-kind exchange offers many benefits to the taxpayer – the biggest of which is capital gains tax deferral. As long as you move all of your exchange funds into a new replacement property, you can defer a hefty capital gains tax bill. This keeps your money working for you in a continued investment property. At CPEC1031, we offer like-kind exchange services to taxpayers throughout the United States. Give our like-kind exchange professionals a call today to structure 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.

© 2020 Copyright Jeffrey R. Peterson All Rights Reserved

I’m not a Big Real Estate Investor, Can I Still do a 1031 Exchange?

A lot of clients come to us wanting to do a 1031 exchange of real estate, but think they can’t because they are not big-time investors. In this article, we are going to talk about why 1031 exchanges are not only for big time investors.

Who can Do a 1031 Exchange?

Any United States taxpayer can avail themselves of the tax-deferral benefits of a 1031 exchange of real estate. You do not need to be a big shot investor to conduct a 1031 exchange and defer your capital gains taxes. All you need is to have a like-kind property that you hold for a qualifying purpose (for investment or business purposes). When you go to sell that property, instead of cashing out, you need to reinvest your sales proceeds into a bigger, better replacement property. The end result is that your money continues to work for you in a new investment property, and you get to avoid a big tax bill.

1031 exchanges can be conducted across state lines and between different segments of the real estate market. So even if you’re not a hot shot investor, you can still use section 1031 to your advantage the next time you are considering selling real property.

A 1031 Exchange can Help You

With a 1031 exchange of real estate, you can defer your capital gains taxes that would otherwise go to the government and keep that money working for you in a continued investment. A qualified intermediary can walk you through this process step by step and make sure you are hitting all required benchmarks along the way. Give us a call today to learn more about our services and how we can help you save money on your next real estate sale. Our office is located in downtown Minneapolis but we work with taxpayers throughout the United States.

• 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

3 Property Identification Options in a 1031 Exchange

The 1031 proceeds of the sale must be re-invested in a like-kind asset within 180 days of the sale. Restrictions are imposed on the number of properties which can be identified as potential Replacement Properties within the first 45 days after closing. More than one potential replacement property can be identified as long as you satisfy one of these ALTERNATIVE rules:

• The Three-Property Rule - Up to three properties regardless of their market values. All identified properties are not required to be purchased to satisfy the exchange; only the amount needed to satisfy the value requirement. [This is the most commonly used rule]

• The 200% Rule - Any number of properties as long as the aggregate fair market value of all replacement properties does not exceed 200% of the aggregate Fair Market Value (FMV) of all of the relinquished properties as of the initial transfer date. All identified properties are not required to be purchased to satisfy the exchange; only the amount needed to satisfy the value requirement.

• The 95% Exception - Any number of replacement properties if the fair market value of the properties actually received by the end of the exchange period is at least 95% of the aggregate FMV of all the potential replacement properties identified. In other words, 95% (or all) of the properties identified must be purchased or the entire exchange is invalid.

NOTE: The replacement property received must be substantially the same as property identified within the 45-day limit described above.

For more information, please check out this video.

• 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

What Your Qualified Intermediary Does Once the 1031 Exchange Process Begins

We’ve talked previously about the importance of involving a qualified intermediary early on in the 1031 exchange process and what you need to give them before starting your exchange. But what exactly does an intermediary do once your exchange has begun? In this article, we are going to explain what exactly your qualified intermediary does once the 1031 exchange process begins in earnest.

Document Preparation

Once your intermediary receives the sales and purchase agreements, and the title commitment, they go to work preparing your 1031 exchange documents. These documents will be tailor-made for your specific transaction. In order to prepare these documents, the qualified intermediary needs to figure out a number of details, including:

• How you hold title to the relinquished property

• The legal description of the property

• Any other parties involved in the transaction that need to be given written notice

Using this information, your intermediary will draw up your unique 1031 exchange documents and have them ready for closing.

As the exchange process progresses, your intermediary can also answer any questions you may have about the process, and help you identify the replacement property or properties that you wish to exchange into.

Set up Your 1031 Exchange & Start Deferring Taxes

CPEC1031 has over two decades of experience assisting taxpayers with 1031 exchanges of real estate. If you are considering the tax saving benefits of a 1031 exchange, let our intermediaries help you through the details of the exchange process. We will prepare your 1031 exchange documents, answer all of your questions and advise you on replacement property. Contact us today at our downtown Minneapolis office, or one of our other offices throughout the United States to speak with an intermediary about setting up your 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.

© 2020 Copyright Jeffrey R. Peterson All Rights Reserved