How “Constructive Receipt” is Defined in a 1031 Exchange

Constructive receipt is an essential term to understand when engaging in a 1031 exchange of like-kind property. In this article, we are going to define constructive receipt and how it comes into play in a 1031 exchange transaction.

What Exactly is “Constructive Receipt”?

Constructive receipt is an important term to be aware of in a 1031 exchange. In particular, it is something you want to avoid at all costs if you want to defer 100% of your capital gains taxes.

1031 exchanges allow you to defer taxes on the sales proceeds of a real estate transaction. However, the catch is that you need to reinvest all of those net proceeds into a new replacement property in order to effectively defer the gains. This incentivizes investors to continue investing and has the added benefit of stimulating the economy. That being said, you are not allowed at any time during the 1031 exchange process to receive any of the sales proceeds. These need to remain in a segregated account until it comes time to reinvest them into your new property. Should you actually receive any of these proceeds during the process – that is known as “constructive receipt” and will trigger taxable boot.

CPEC1031

In any 1031 exchange you want to make sure you are working with a qualified intermediary you can trust. At CPEC1031, our intermediaries have two decades of experience working on 1031 exchanges. We know the process inside and out – and will put our expertise to work for your transaction. Our intermediaries can draft your 1031 documents and answer all of your questions about the process. Reach out to us today at our downtown Minneapolis office to set up a time to chat with one of our experienced 1031 exchange intermediaries.

• 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

Can You Do a 1031 Exchange Without a Qualified Intermediary?

1031 exchanges and qualified intermediaries go together like Peanut Butter and Jelly. But does that mean that you need to hire a qualified intermediary for your exchange? In this article, we are going to talk about whether it’s necessary to hire a qualified intermediary for your 1031 exchange of real property.

In Most Cases

The short answer to the question of whether or not you need a qualified intermediary for a 1031 exchange is – in most cases. Most 1031 exchanges follow the safe-harbor protocol that requires the use of an intermediary.

Your qualified intermediary is essential to the process because they (among other things) hold your exchange funds for you while you wait for the process to complete. This keeps you from receiving boot and recognizing any gain during the process.

In addition to that, it’s advantageous to hire an intermediary because they act as your guide through the 1031 exchange process. Like-kind exchanges can be complex and there are many common traps for the unwary. Having an intermediary by your side is the best way to ensure your exchange will be a success.

Rare Exceptions

There are a few rare 1031 exchange cases in which a qualified intermediary is not necessary, but these are very uncommon.

CPEC1031

A qualified intermediary is your best bet for completing a successful 1031 exchange transaction. At CPEC1031, our intermediaries can help you prepare your 1031 documents, answer your questions, and advise you on the appropriate replacement property. With more than twenty years of experience, we have the skills needed to ensure that your exchange completes without any issues. Contact us today at our downtown Minneapolis office to learn more about our services and set up an appointment with one of our 1031 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.

© 2020 Copyright Jeffrey R. Peterson All Rights Reserved

How to Maximize Your Gain with a 1031 Exchange

When you sell real estate, you have to pay capital gains taxes on the sales proceeds. Depending on the sale, these can add up quickly. A 1031 exchange offers an alternative route, allowing you to defer your capital gains taxes when you sell real estate, so long as you re-invest your net proceeds into a replacement property. In this article, we are going to talk about how you can maximize your gain with a 1031 exchange of real estate.

Avoid Boot at All Costs

Receiving any boot (non-like kind property) at any point during the exchange will trigger recognition of gain. In order to defer 100% of your capital gains tax on the sale, make sure you do everything in your power to avoid receiving boot.

Pass the Napkin Test

You also want to make sure that your 1031 exchange passes the “napkin” test. Essentially, you want to go up in value, equity, and debt on your replacement property in order to defer 100% of your gains. If you fail to do so, you may end up recognizing some gain on the sale, and not being able to defer all of your capital gains taxes.

Get Help with Your 1031 Exchange

If you are looking to defer your capital gains tax burden when selling real estate, an important first step is to contact a company that specializes in 1031 exchanges. CPEC1031 has two decades of experience facilitating 1031 exchange transactions for clients in Minnesota and across the country. Working with an intermediary from the beginning of your exchange can alleviate your fears and ensure a successful transaction. Contact CPEC1031 today to set up a time to chat with an experienced qualified intermediary about your like-kind exchange 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

Why 1031 Exchanges are Integral to the Health of the Economy

With the presidential election coming up in November, it’s time to take a look at the tax plans proposed by the candidates – particularly Joe Biden. The tax plan recently released by Joe Biden’s campaign unfortunately includes the complete removal of section 1031.

Here is a helpful breakdown of the tax plan in its entirety (with an excerpt about the 1031 exchange repeal below):

Eliminate real estate loopholes. Under current law, owners of appreciated real estate assets used in a trade or business can defer capital gains taxes when exchanging the asset for property of a “like kind.” The proposal would eliminate this tax benefit and treat such exchanges as taxable events.

As we’ve discussed before, removing section 1031 from the tax code is not the great money-saving idea that some politicians like to think it is. 1031 exchanges help to encourage growth and stimulate the economy. These exchanges are good for real estate investors large and small – not just the super-wealthy.

Downsides of Repealing Section 1031

Here are a few reasons why repealing 1031 exchanges is a bad idea:

• Protect 1031 like-kind exchanges to stimulate real property values and keep capital flowing in the economy.

• Illiquid real estate sales may be stifled if 1031 like-kind exchanges are terminated.

• 1031 has been around since 1921 because low unemployment is intrinsically tied to real estate growth.

• Real estate agents know that real estate sales and property values will suffer if 1031 is eliminated.

• Banks know that property owners won’t be able to refinance if real property values drop due to tax code changes; and then they won’t be able to invest as much in their properties to maintain and fix up properties; and the quality of real estate stock will suffer.

In 2015, the University of Florida conducted a study in which they estimated the U.S. Department of Treasury lost between $200 million and $3 billion in potential revenue as a result of section 1031. That being said, those figures assume that real estate developers would continue to sell properties (and take the resulting tax hit) in the absence of the incentives offered by the 1031 exchange. This is highly unlikely, and even the authors of the study admitted as much. The ripple effects of getting rid of section 1031 would have numerous negative impacts passed on to parties beyond the property owner.

For these reasons, it’s important that we work to keep 1031 exchanges alive for the overall health of the economy.

• 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

Register for Our 1031 Exchange Fundamentals Webinar

Register now for our Video Webcast, 1031 Exchange Fundamentals, taking place on Thursday, September 10, 2020.

I'm excited to be speaking on this upcoming event for NBI. Use my promo code FSP50N to get $50 off the standard tuition for each person you register for this course.

1031 Exchange Legal Bootcamp

Do you have the skills necessary to carry out a successful 1031 exchange? This insightful course will guide you through the detailed and strict process basics and legal principles, from the initial requirements and mechanics to reverse exchanges and tenant-in-common transactions. Don't miss this chance to help your clients take advantage of the tax benefits associated with these exchanges - register today!

• Discuss when a 1031 exchange should be considered.

• Understand the requirements for setting up a 1031 exchange.

• Learn how to properly file and report taxes associated with the exchange.

• Review problems and examples with 1031 exchanges.

• Identify issues with reverse exchanges.

• Examine partnership and tenant-in-common transactions.

This is a rebroadcast of the original webcast delivered by Paul J. Linstroth and Jeffrey R. Peterson on December 6, 2019. Faculty will be available to answer your questions after the program.

• 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