Converting 1031 Replacement Property into a Principal Residence

Many people ask about the possibility of converting a 1031 replacement property into a principal residence. That’s our topic for this article.

If you later sell the hypothetical replacement property, now as your principal residence (IRC Section 121), you and your spouse may be able exclude up to $500K ($250 single), but the Section 121 principal residence exclusion applies only to the taxes on the appreciation in value, and will not exclude gains from the past deprecation (on the current property or the old property exchanged out of). So deprecation recapture will cause some tax inefficiency at the sale of the principal residence.  Also, you have to wait five (5) years before to take a principal residence exclusion on a property that you 1031 exchanged into.

26 USC 121(d)(10) Property Acquired in a Like-Kind Exchange

If a taxpayer acquires property in an exchange with respect to which gain is not recognized (in whole or in part) to the taxpayer under subsection (a) or (b) of section 1031, subsection (a) shall not apply to the sale or exchange of such property by such taxpayer (or by any person whose basis in such property is determined, in whole or in part, by reference to the basis in the hands of such taxpayer) during the 5-year period beginning with the date of such acquisition.

The amount of the exclusion that you get to take also depends on the ratio of time that you used the property of rental (non-qualified use for 1031) and the period of time that you used the property as your principal residence (qualified for 121).

26 USC 121(b)(5)(B) Gain Allocated to Periods of Nonqualified Use

For purposes of subparagraph (A), gain shall be allocated to periods of nonqualified use based on the ratio which—

(I) the aggregate periods of nonqualified use during the period such property was owned by the taxpayer, bears to

(ii) the period such property was owned by the taxpayer.

• 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 Long Do You Need to Hold Your 1031 Exchange Investment Property?

There are a variety of rules, regulations, and timelines that you need to follow when exchanging property in a 1031 transaction. One of the most common questions people have when it comes to 1031 exchanges is – “how long do I need to hold my property before I begin my 1031 exchange?” In this article, we are going to discuss how long you need to hold your 1031 exchange property for before conducting a like-kind exchange.

No Concrete Timing Rules

Although there are many timing rules associated with a 1031 exchange (such as the 180 / 45 days time frames), there are no concrete timeframes for how long you need to hold your 1031 exchange property before beginning your exchange. But we can infer some general best practices.

House Flippers Beware!

Exchanging flipped property in a 1031 exchange is a big red flag to the IRS. If it’s obvious that your 1031 exchange property was flipped property, the IRS is likely to deny your 1031 exchange – resulting in immediate taxable gain on the sale.

In general, it’s best to give yourself plenty of time before doing a 1031 on your property. The longer the better – but at least two years is a good starting point.

Defer Your Capital Gains Taxes!

At CPEC1031, our intermediaries have over twenty years of experience facilitating like-kind exchanges of real property for clients throughout Minnesota and across the country. Our intermediaries are well-versed in the exchange process and can prepare all of your documents, answer all of your questions, and advise you every step of the way. Contact our qualified intermediaries today at our downtown Minneapolis office to learn more about 1031 exchanges and how they can help you defer capital gains taxes on the sale of real estate!

• 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 Does it Cost to do a 1031 Exchange?

One of the first things many taxpayers want to know when considering a 1031 exchange is how much it’s going to cost. In this article, we are going to talk a little bit about how much it costs to do a 1031 exchange of real estate.

Costs of a 1031 Exchange

It’s difficult to say how much a 1031 exchange costs because there are so many unique factors that go into any given exchange that can alter the cost.

A typical forward exchange of one piece of real property for another might cost between $850 and $1500. Again, it is tough to give a generalized figure due to the level of specialization that can come with some exchanges. If you are curious about costs, the best thing to do is contact a qualified intermediary and explain your situation. With that information, the QI can give you a more concrete estimate.

Don’t Make Price Your Sole Criteria

It’s important to not put your entire focus on the cost of your 1031 exchange. Many taxpayers just want to find the cheapest qualified intermediary they can. However, this is NOT a good idea. Qualified intermediaries are typically not regulated or licensed by state authorities. As a result, you have to do your own due diligence and find a reputable intermediary for your exchange.

Get Started with a 1031 Exchange

CPEC1031 provides qualified intermediary services to taxpayers in Minnesota and all over the country. Section 1031 of the IRC allows any US taxpayer to engage in an exchange of like-kind property – and defer capital gains taxes in the process. A qualified intermediary is your guide through this process. We can draw up all your documents for the exchange, and answer all of your questions along the way. Contact our intermediaries today to learn more about the services we provide and how we can help you defer taxes on your next real estate sale.

• 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

Remember to 1031 Exchange into Property of Greater Value

Property value is an important element to consider in a 1031 exchange of real estate. In this article, we’re going to talk about why it’s important to exchange into replacement properties that are equal to or greater than your relinquished property in value.

Rules Regarding Value

When conducting a 1031 exchange of real estate, there are many important rules to keep in mind. There are rules governing timing, the type of property that’s allowed, and more. One of the most often overlooked rules (but nonetheless important) is the rule governing property value. You need to make sure that your replacement property is greater in value compared to your replacement property. The same goes for debt and equity. This is known as the “napkin test” – and it’s a great preliminary test for determining your eligibility for a 1031 exchange of real estate.

Minnesota Real Estate Exchanges

1031 exchanges offer a fantastic alternative to paying capital gains taxes on the sale of real property. When used correctly, a like-kind exchange can help you defer these taxes and keep your money working for you in a continued investment – compounding wealth over time. At CPEC1031, our qualified intermediaries have twenty years of experience facilitating exchanges of real estate. Give us a call today at our downtown Minneapolis office to speak with one of our qualified intermediaries about your exchange and get started with the process!

• 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

Why It’s Essential to Keep Detailed Records in a 1031 Exchange

Detailed record-keeping is an essential aspect of any real estate transaction – particularly a 1031 exchange of real estate. In this article, we are going to discuss why it’s important to keep detailed records when doing a 1031 exchange of real property.

Make Things Easy for Yourself & Your Intermediary

There is a lot of paperwork involved in any given 1031 exchange – and a lot of information you need to provide to your qualified intermediary. Make things easy on yourself and your intermediary by keeping accurate records and having the required information readily available.

Protect Yourself in the Event of an Audit

Audits can happen to anyone, and you want to be as prepared as possible in the event that one happens to you. 1031 exchanges are among the most scrutinized elements in any tax audit. Why is that? Because exchanges are widely used and often improperly done. You have to abide by strict rules in order for your property to qualify for 1031 exchange treatment. Keeping full and accurate records of all the properties involved in your 1031 exchange will make it easy for you to prove that you abided by all the rules and that your exchange is legitimate.

1031 Exchanges Done Right

At CPEC1031, we have twenty years of experience working with investors all over the United States on their 1031 real estate exchanges. We guide you through each and every step in the 1031 exchange process – from beginning to end. Our qualified intermediaries will prepare all of your 1031 exchange documentation, advise you throughout the process, and answer all of your questions as they arise. Contact us today to learn more about the benefits of the 1031 exchange and how to get started with your like-kind 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