A Few Important Things to Know About Bank Financing in a 1031 Exchange

Many taxpayers conducting a 1031 exchange have questions about bank financing in a 1031 exchange transaction. Here are a few tips and things to know when it comes to bank loans and 1031 exchanges.

Bank Loan Agreement

The banks’s loan agreement may require the exchangor (through the intermediary) to exhaust the 1031 funds for the purchase of the replacement property and for the first construction draws before the banks loan funds will be disbursed. The bank cannot take a security interest in the 1031 funds held by the intermediary.

The taxpayer conducting the exchange may co-sign or provide a personal guarantee of the bank’s loan.

The ‘due on sale clause’ in the loan may need to be modified to allow for the transfer of the replacement property to the exchangor during the 180 day exchange period.

Depending on the number of exchangors, the 1031 exchange may be completed by:

1. deeding the replacement property from the LLC to the exchangors (with a corresponding mortgage assignment/assumption); or

2. by the intermediary assigning 100% of the membership interest in the LLC to the exchangor (which may negate the need for a formal mortgage assignment/assumption).

Items to Request

In a 1031 exchange with bank financing, you should request the following items:

• Prior Exchange Documents. Copy of the signed relinquished property 1031 documents from the sale with confirmation of the amount of funds held by the intermediary (we need to confirm who and how the old relinquished property was vested in title). The 1031 identification of replacement property should include a description of the new land plus the to-be-built improvements.

• Fresh LLC to hold title to the Replacement Property. Copy of the LLC articles, certificate of organization, operating agreement and authorizing resolution appointing the officers (this LLC will likely be 100% owned by the intermediary);

• Title Commitment for the new Replacement Property.

The loan documents may need to be modified to limit the liability of the intermediary.

• 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.

© 2021 Copyright Jeffrey R. Peterson All Rights Reserved

Consider 1031 Exchanges in Your Estate Planning

Many people that are getting up there in years are concerned about their estate planning as part of their 1031 exchange. Many people will own their old relinquished property in their own individual names but would prefer to take title to the replacement property as Trustees of their own revocable trust.

Taking Title to the Replacement Property

From the IRS’s perspective, when you take title to the replacement property as Trustee of your own revocable trust the IRS really doesn't make any distinction between John Doe individually and John Doe as Trustee of his own trust.

However, irrevocable trusts are a different and distinct animal and will not be viewed by the IRS as the same taxpayer, so we need to be very cautious as we do our estate planning as part of the 1031 exchange to make sure that we have the circuit completed. That the owner of the relinquished property either individually or as Trustee of the revocable trust receives title to the replacement property.

Continue to Hold the Property for Investment Purposes

Thereafter, the taxpayer that completes the exchange needs to continue to hold their replacement property for investment or business purposes for a long and substantial period of time, which means that as soon as you complete the exchange it would not be prudent to start giving away interest in the replacement property because giving away the property would be antithetical or opposite of holding the property for the qualified purpose of investment or business purposes.

• 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.

© 2021 Copyright Jeffrey R. Peterson All Rights Reserved

A Brief History of the Reverse 1031 Exchange

1031 exchanges come in several different forms. There are real estate exchanges, build-to-suit exchanges, and more. In this article, we are going to offer a brief overview of the reverse 1031 exchange and how it can be used as a vehicle for tax deferral when selling real estate.

The Reverse Like-Kind Exchange

A reverse 1031 exchange is a like-kind exchange in which the taxpayer acquires their replacement property first, before selling their relinquished property. This is essentially the reverse of the standard order or operations. Reverse exchanges are often utilized in competitive real estate markets, where you might need to lock down a property before someone else does.

Reverse Exchange Guidelines

There are many guidelines that you have to be aware of when doing a reverse like-kind exchange. Here are a few of the most important rules:

• 180 Day Time Period. In any 1031 exchange you only have 180 days total to complete your exchange. If your exchange is not complete within this time period, it will fail.

• Like-Kind Requirement. All property involved in the exchange must be like-kind.

• Held For Requirement. You must also hold your property for business or investment purposes. You cannot 1031 exchange property held primarily for your own personal use.

• Value, Equity, Debt. Your replacement property has to be equal to or greater than your relinquished property in terms of value, equity, and debt.

Minnesota 1031 Exchange Professionals

At CPEC1031, we work with investors and taxpayers across the country on all sorts of real estate transactions. If you are interested in learning more about the tax benefits of a 1031 exchange, contact us today!

• 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.

© 2021 Copyright Jeffrey R. Peterson All Rights Reserved

Sign Up for our Free Webinar: Estate Planning Benefits of 1031 Exchanges

Join Jeff Peterson of CPEC1031, Brian Weisberg of Siegel Brill and Corey Edmunds of Boeckermann Grafstrom & Mayer for a discussion about how to incorporate 1031 exchanges into the estate planning process.

Details:

• What: Estate Planning Benefits of 1031 Exchanges

• When: March 18 at 11:00 AM CST

• Where: Online - click on the link below to learn more and RSVP! 

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Event Speakers:

Jeff Peterson

Jeffrey Peterson is the president of CPEC1031, LLC. He received both his B.A. and his J.D. from the University of Minnesota, and is a member of the Minnesota State Bar Association and the Tax Section of the American Bar Association. He is also an adjunct tax law professor at Mitchell Hamline College of Law and instructor for Kaplan Real Estate Education. 

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Thomas Rishovd - Moderator

Tom has been in the financial services industry for 20+ years. In this time, he developed a practice that focuses on developing solutions for families, individuals and business owners. He built his practice on a foundation of high integrity, prudent guidance and thorough attention to client needs.

Tom received a B.B.A. in Economics and Business Administration from the University of North Dakota. He continue to expand his knowledge and investment management capabilities through an ongoing series of courses in Asset Management, Analysis, Performance Management, Estate Planning Strategies and other related areas. He is a CFP® - CERTIFIED FINANCIAL PLANNER™ practitioner.

Tom is married to Maggie, they have four children (19,18,15,11). He is a Certified Flight Instructor and a licensed commercial pilot. In his free time, he enjoys flying, boating, snowmobiling and spending time with his family. 

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Corey Edmunds

Corey W. Edmunds is a Principal of Boeckermann Grafstrom & Mayer. With 30 years of public accounting experience, Corey specializes in providing income tax and accounting services to closely-held businesses and their owners. He serves a wide range of clients, including contractors and construction; franchise operations; manufacturers and distributors; professional services firms; real estate developers; restaurants and hospitality businesses; and transportation and logistics companies.

Leveraging his years of experience serving a diverse range of industries, Corey is skilled in handling complex tax situations. He provides a range of business and executive tax planning and compliance services, including consolidated group tax filings; IRS and state tax problem resolution; multi-state taxation; and international taxation. Corey also assists clients with business advisory and strategic planning services, including entity selection; real estate acquisitions and dispositions; corporate restructuring and succession planning; and succession planning and owner exit strategies. Continually bringing fresh insight and solutions to address clients’ needs and challenges, Corey thrives on helping clients work-through difficult and complex tax situations. 

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Brian Weisberg

Many of Brian's clients are owners of closely held businesses. In addition to providing general legal and business advice on day to day issues, Brian has developed specific skills to help closely held business owners with the following: resolving complicated succession and wealth transfer planning, adopting internal governance procedures and compensation plans that reduce disputes among the owners, and designing successful exit strategies when some or all of the owners elect to leave the business. Many of Brian's clients are multi-generational, family-owned companies, oftentimes including active and inactive owners. He is aware and respectful of the family dynamic when imparting business or individual advice.

Brian brings a unique perspective to being a family business lawyer. He is a third- generation lawyer; his grandfather and father both practiced law. In some instances all three generations of lawyers in Brian's family have represented the same business client, providing guidance through multiple successions and transitions.

Drawing on his tax and business law background, Brian is able to structure solutions for his clients that achieve their objective in a practical and tax-efficient manner, helping clients avoid wasted time and money. Brian is able to get to the heart of the problem quickly and to provide straight talk on business and personal decisions when the situation requires it.

Working closely with his clients' other advisors, Brian can also leverage the Real Estate, Closely Held Businesses and Litigation and Dispute Resolution practices at Siegel Brill where he has practiced since 1989.

The 3 Ts of Property Ownership

Any commercial property owner will tell you that owning property is a lot of work. In this article, we are going to dive into the 3 Ts of property ownership and discuss why 1031 exchanging into less management intensive properties makes sense.

The 3 Tenets of Property Ownership

1. Tenants – Hard to deal with, unreasonable, unrealistic and unreliable (don’t pay on time, cause problems, demanding, etc.)

2. Trash – Costs of ownership with taxes, sanitation, insurance go up every year

3. Toilets – plumbing and deferred maintenance in old buildings is costly, ongoing and aggravating

Consider DST Management Free Investments

If these 3 Ts are causing you undue stress, consider the management free nature of a DST investment. What are the advantages of DST management free investments? Here are a few benefits:

• Minimal Investment Requirement

• Larger Growth Potential

• Diversification

• Management Free Ownership

• A Clearly Defined Exit Strategy

If you have any questions about the benefits of DST ownership or 1031 exchanges in general, don’t hesitate to reach out to CPEC1031! Our qualified intermediaries have decades of experience facilitating like-kind exchanges of all shapes and sizes. You can find us at our primary office located in downtown Minneapolis, or at one of our satellite offices across 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.

© 2021 Copyright Jeffrey R. Peterson All Rights Reserved