1031 Exchanges Involving the Death of a Buyer or Seller

Let's assume that we've got an elderly taxpayer. They sell their relinquished property and unfortunately they die in the midst of the 1031 exchange. They may have had a replacement property teed up to purchase. The personal representative of the decedent's estate is going to have to make a decision. Do we continue on with the 1031 exchange and buy the teed up replacement property? Or do we just pull up the tent and take our money back on day 181?

Stepped-Up Basis

It may be most advantageous for the heirs to have the intermediary acquire the replacement property. The reason is that under Section 1014 when you receive property as an inheritance you don't receive it with the decedent’s old basis. You instead receive the property with a stepped-up basis. Upon receipt of that replacement property, you get the fair market value of that property as your basis - not the old basis of the relinquished property.

If the 1031 exchange were not completed by the personal representative of the decedent's estate, then on the decedent's final tax return, all income and gains recognized up to the date of death would have to be reported…including the income from the failed exchange.

Consider Your Estate Plan

Many people conducting exchanges particularly when they're older and elderly need to perhaps contemplate in their estate planning documents and give direction to the personal representative to complete the exchange if they, unfortunately, pass away during the middle of the 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.

© 2021 Copyright Jeffrey R. Peterson All Rights Reserved

The Tipping Point when it comes to Partial 1031 Exchanges

Many taxpayers don't want to continue into a replacement property of equal greater value and they're happy to do just a partial 1031 exchange. There’s a tipping point at which if you buy down too much in value you don't get much or any tax deferral. So it's important to work with your professional advisors - your CPA, your accountant, your financial planner - to find out where that tipping point is. It can be sort of dependent on how much remaining adjusted basis you have in the old relinquished property.

A Nifty Trick

A nifty trick that sometimes taxpayers will use, especially if they want to put some cash in their pocket is that they will complete the exchange into a new bigger better more expensive replacement property, they’ll reinvest all of their equity, they’ll offset the debt they had on the old property with new debt on the replacement property. Then in a subsequent, post-closing transaction, they’ll go back to the bank and refinance the replacement property to pull out some equity later in a subsequent transaction. By borrowing the money and having this offsetting liability that's not treated as income under the United States tax code. That is a debt that you have to pay back and therefore it's not considered income.

Twin Cities 1031 Exchange Company

At CPEC1031, LLC, we have been performing 1031 exchanges of real estate for over two decades. Our qualified intermediaries offer support to clients throughout Minnesota and across the country. Contact us today to learn more about the extent of our services and to set up a time to chat with our intermediaries. You can find us at our primary offices 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.

© 2021 Copyright Jeffrey R. Peterson All Rights Reserved

How to Make Your 1031 Exchange Down Payment

What happens when you need to make a down payment on the purchase of your replacement property if you've already closed on the sale and your qualified intermediary is sitting on a big pile of your exchange funds? Essentially, you've got two options at your disposal.

Purchase Agreement

One option is to have a purchase agreement entered into with the seller of your replacement property and then specify that within 2 business days your qualified intermediary will wire transfer in the down payment or earnest money deposit for that purchase.

By giving yourself a couple of days you will have time to take that purchase agreement, give it to the intermediary, and have them prepare the necessary 1031 assignment documents and wire disbursement request forms. That allows the intermediary to step into your shoes as the buyer and provide notice to the seller of your assignment of the purchase agreement (to the qualified intermediary). Once that's done the intermediary can advance your earnest money deposit or for that matter the entire purchase price if you want them to and that money can be used to acquire your replacement property.

Earnest Money

Alternatively, if it's too much rigmarole to get you qualified intermediary to wire the money and you're out there making deals fast & furious, the other way to do it is to have you write your own earnest money check (out of your own pocket) and give it to the seller with your offer. That might make your offer more attractive or enticing and you can always get your deposit back by stating in the purchase agreement my deposit is just a deposit I don't want it to be applied towards the purchase price and at closing you can give me back my earnest money deposit because I'm coming in with a truckload of 1031 funds that I would apply towards the purchase price instead.

• 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

Explaining The Principal Residence Exclusion as it Relates to 1031 Exchanges

Many people that are selling a duplex, triplex, or property that they've lived in as their principal residence will be able to avail themselves of two important tax code provisions.

What is the Principal Residence Exclusion?

The first is the principal residence exclusion, which allows you to take up to $500,000 tax free if you're married filing a joint tax return, or $250K if you're single, and exclude that portion of the gain that relates to your relinquished property.

So on the sale of a duplex, half of the relinquished property that the owner occupied, that portion of the proceeds would be eligible for the exclusion. The other half of the duplex may be eligible for section 1031 where we can defer the gain.

Keep the Allocation Consistent

Now the portion of the proceeds that relates to the rental side, the gains are only deferred. The important thing to remember is that however you've treated that duplex or triplex in the past, in allocating the business and depreciation and portion of the property that you treat it as a rental, you want to stick with the same allocation when you go to sell the property. So whatever allocation you made in the past should be consistent with your split of the proceeds when you sell this duplex or triplex.

1031 Exchange Resources

For more information on 1031 exchanges of real estate, don’t hesitate to reach out to the qualified intermediaries at CPEC1031. We have decades of experience facilitating exchanges of all shapes and sizes and can help you defer capital gains on your next transaction.

• 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

What to Do if You Want to Stop Your 1031 Exchange After You Start the Process?

When you're doing a 1031 or even contemplating doing a 1031 exchange, the name of the game is to keep all of your options on the table as long as possible. When you're selling a relinquished property and you know you've got a looming tax bill, you may not know what you want to buy for a replacement property but you do know it's worth your while to try to defer those gains.

Identification of Property

So you'll set up your 1031 exchange and hope and pray that you can identify a replacement property or properties that you want to purchase. So you may identify one, two, or three properties in hopes that you can acquire those properties. But if it turns out that you can't or do not want to buy those identified properties, then you're going to ask yourself – “well if I’m not going to buy these exchange properties, can't I just get my money out of the exchange account, fold up my tent and go home?”

The answer is if you’ve paid a qualified intermediary to provide you a service and that service is to insulate you from receiving your exchange funds, can you just pack up your tent and go home? Or do the treasury regulations require the intermediary to continue to hold the funds until you receive the properties you designate, or the 180th day.

Qualified Intermediary

Your qualified intermediary really should hold your funds until the end of the exchange period. That way they legitimize their role in the transaction as a neutral third party that’s simply acting as a vessel to facilitate the exchange, and to the extent that you had received any replacement property that your exchange is valid as to those replacement properties.

The two times that you can tank your exchange are at midnight of the 45th day. If you choose not to do a 1031 exchange simply don't identify any replacement properties and the exchange will fail for lack of an identification. Alternatively, wait until the end of the 180 days and get back your unused surplus exchange funds after the 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.

© 2021 Copyright Jeffrey R. Peterson All Rights Reserved