How to Define ‘Like-Kind’ in a 1031 Exchange

Like-kind is one of the most important rules you need to follow when conducting a 1031 exchange of real property. All property involved in your exchange needs to be like-kind. But like-kind can be a tricky thing to nail down in certain exchanges. In this article, we will explain the intricacies of “like-kind” in a 1031 exchange of real estate.

Real Estate Exchanges

When it comes to 1031 exchanges of real property, the IRS has defined “like-kind” very broadly. In general, most real estate is considered like-kind to most other real estate. It doesn’t matter where they are located (so long as they’re in the US), or their respective industries. You can exchange out of an apartment building and into a hotel building, for example.

When in doubt, it’s always a good idea to consult with a qualified intermediary about the details of your exchange and whether your property qualifies as like-kind or not.

Minneapolis 1031 Exchange Company

The qualified intermediaries at CPEC1031, LLC have decades of experience helping taxpayers in the Twin Cities, greater Minnesota, and across the country with their like-kind exchanges of real property. Contact us today at our downtown Minneapolis office to set up a time to chat with one of our skilled 1031 exchange accommodators.

• 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

Escrowing Funds for Post-Closing Repairs in a 1031 Exchange

In a 1031 exchange, can you escrow funds for post-closing repairs and improvements, or could that be considered boot? That is a good question. First and foremost, you may want to talk with your CPA or tax advisor about this.

1031 Exchange Basics

1031 exchanges are for like kind exchanges of real property for real property, and if you get any other property or cash as part of the exchange (non-like-kind property is called “boot”), then that property or cash may be taxable.

Ideally the repair would be paid for and completed by the seller before you close on the purchase of the replacement property, that way there is no need to hold an escrow for your benefit (to pay for post-closing repairs and improvements).

The risk of escrowing cash for your benefit to pay for post-closing repairs and improvements is that it may be considered taxable boot. The escrow may not be considered like-kind property.

Holdback Credits

Holdback credits do not work. An approach instinctively utilized by many realtors and escrow companies to handle minor repairs to Replacement Property is to have repairs performed at the Seller's or Accommodator's expense after the Replacement Property is conveyed to the Exchanger. This approach does not work because the Exchanger is not receiving like-kind property when the Exchanger receives post-closing repairs.

Treas Reg § 1.1031(k)-1(e)(4) specifically provides that "additional production occurring with respect to the replacement property after the property is received by the taxpayer will not be treated as the receipt of property of a like kind.

Please check with your tax advisor on this issue.

• 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 You Need to Know About Delaware Statutory Trusts & 1031 Exchanges

When people are doing 1031 exchanges they're very nervous about finding, designating, and receiving the replacement property within the timeframes allowed. Remember, you've only got 45 days to identify in writing what you want to receive and 180 days to complete the purchase. Both of those deadlines run concurrently from the day after the closing of the relinquished property.

What is a Delaware Statutory Trust?

Sponsors or syndicators of real estate investments have derived a new way to fashion real estate called a Delaware Statutory Trust. What they typically do is acquire a number of high-grade commercial properties in a little portfolio and have those titled under the name of the trustee.

The advantage is that when people buy into those trusts the beneficial interests in the trust are deemed to be an allocated interest in the underlined real estate. So if I contribute 15% of the purchase price I would be deemed to be an owner of 15% of the underlying real estate.

Tenant-in-Common Ownership

The Delaware Statutory Trust model really derived as an evolution from the old tenant-in-common ownership. Tenant-in-common syndicators would sell fractional interests in specific property and give each of the owners a deeded fractional interest. But the tenant-in-common model did not work very well because oftentimes tenant in common decision making requires unanimous consent of all of the owners which can be very unworkable when there's a difficult situation for the owners to deal with.

Furthermore under the old tenant-in-common arrangements, they were capped at 35 co-investors. Under the Delaware Statutory Trust model it's much more flexible and the administration or ownership is taken care of by one figurehead owner (the trustee of the trust).

From a lender's perspective it's much easier for a lender to get their arms around a Delaware Statutory Trust model because they only have one mortgagor to deal with rather than a plethora of co-owners in a tenant-in-common arrangement. Oftentimes the institutional lender will loan money to the Delaware Statutory Trust and the beneficial owners are not personally liable for the debt which makes these Investments even more attractive if you have to offset debt on your old relinquished property with new debt on the replacement property. If you have to take out at it might as well be dead that you're not personally liable for.

• 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

Back to Basics: What is a Deferred 1031 Exchange?

When we speak of a 1031 tax exchange - we are typically talking about a Deferred Exchange.

In a Deferred Exchange a taxpayer conveys (or sells) the old relinquished-property on day zero of the exchange timeline, and then has up to 180 days after that date (or the due date of the taxpayer's federal income tax return, including extensions, whichever occurs first) to receive the replacement property.

In legal terms, the conveyance must be part of an integrated, interdependent, mutual, and reciprocal-plan, intended to effectuate an exchange by the taxpayer of like-kind property pursuant to the 1031 rule.

To help you understand this process - observe this timeline which demonstrates that both the 45 day time-period and 180 day time-period run concurrently.

1031 Deferred Exchange Timeline

The replacement property must be received within the earlier of:

1. 180 days after the closing of the relinquished-property.

OR

1. The due-date for your tax return for the taxable year in which the transfer of the relinquished property occurs (including extensions).

Contact CPEC1031

A commercial real estate transaction can be complex and daunting for many. Having a trusted 1031 exchange company by your side throughout the process can help make things go a lot smoother. Give us a call to discuss the specific details of your commercial transaction. Our main office is located in the heart of downtown Minneapolis but we work with clients across the United States. No matter where your property is located, we can help you through the entire commercial real estate transaction.

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