What to Do if Construction Isn’t Done by the 180 Day 1031 Exchange Deadline?

In a build-to-suit exchange you are racing the clock to construct like-kind improvements so that the value of the acquired land plus the value of the partially completed improvements exceed the value of your relinquished property. By the end of your 180 day exchange period, you want to have received the replacement property of equal or greater value than what you disposed of. But what if construction doesn't finish by the end of your 180 days?

Uncontrollable Variables

The problem with construction is that there a lot of variables that are outside of your control, such as:

• Supply Issues

• Work Issues

• Economic Issues

• Permitting

• Licensing

• Weather

All of these factors can hurt your ability to manufacture improvements within the exchange period.

Incomplete Construction

So the question arises: what if construction isn't fully finished? Or what if it isn't finished enough so that you've received a replacement property of equivalent value?

If you don't continue your investment into a property of equivalent or greater value within the hundred and eighty days, you may recognize some gains to the extent you've received a lesser valued property.

Partial Tax Deferral

But even that may still give you partial tax deferral. It's a factor of how low your basis was in the old property to determine how great your victory may be, even if it's just a partial victory.

If you're thinking about doing a build-to-suit we suggest you get planning early and have all of your contractors, permits, and plans in place perhaps even before you dispose of the relinquished property so that you can win the race against the 180 day clock.

• 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

1031 Exchanges of Rental Properties and Vacation Homes

In a 1031 exchange, no gain or loss shall be recognized on the exchange of real property held for productive use in a trade or business or for investment if such real property is exchanged solely for real property of like kind which is to be held either for productive use in a trade or business or for investment. But do vacation homes and rental properties satisfy those requirements?

Consider the Intent of the Owner

The relinquished property must be held for a qualifying purpose, e.g., investment / business. It has been said that one must have had the "intention" to hold the property for investment purposes at the time of the sale; and that it is the taxpayer's responsibility to demonstrate the requisite intent (to hold the property for productive use in a trade or business or for investment) at the time of the exchange. 

In Rev Rul 57-244, 1957-1 CB 247, the IRS held that a residential property could be changed to qualified exchange property if the taxpayer actually altered or transformed the use of the property. However, simply renting out a personal residence will not automatically qualify it for tax-deferred exchange treatment.

Here is an excerpt from a tax treaties that is somewhat on point but deals more with the holding of the new replacement property:

• The property received in the exchange must also be held for investment or in the taxpayer's trade or business. It is not clear how long such property must be held. The phrase "to be held for" in I.R.C. § 1031(a) implies a continuity of ownership. A subsequent disposition of the property received may be evidence that the property was not acquired for investment or use in the taxpayer's business.

What if the Property has Been Held a Very Short Time Before it is Exchanged? 

For example, if X received a distribution of a building from a partnership and immediately exchanges it, has X met the "held for" requirement?  See Bolker v. Commissioner, 760 F.2d 1039 (9th Cir. 1985), aff'g, 81 T.C. 782 (1983) (the court allowed a I.R.C. § 1031 exchange where the real estate transferred had just been received in connection with a liquidating distribution from a corporation); the court held that the requirement that the realty be held for investment was satisfied as it was not acquired in the liquidation with the intention of liquidating the realty or using it personally. 

What if the Taxpayer Wishes to Conduct an Exchange Involving a Vacation House? 

In Rev. Proc. 2008-1, C.B. 585, the IRS provides a safe harbor for whether a dwelling unit, including a vacation property, will be considered property held for productive use in a trade or business or for investment.

Please check with your CPA about the matter and if they would require additional rental history and tax reporting consistent with use as a rental property (rather than personal use).

• 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

Deferred Sales Trusts 101: What Beginners Should Know

A 1031 exchange is an excellent tool that allows you to defer the capital gains taxes when you sell real property. However, there are a lot of elements that can complicate any given 1031 exchange, and sometimes exchanges fail to meet the necessary requirements. This can be a devastating reality for taxpayers who were banking on tax deferral. Thankfully, there is an option that taxpayers can use in the event that their exchange fails – the deferred sales trust. In this article, we are going to focus on deferred sales trusts – what they are and how they can be a useful alternative to a 1031 exchange.

What is a Deferred Sales Trust?

A deferred sales trust is another way to defer your capital gains taxes on the sale of real estate (under section 453 of the Internal Revenue Code, rather than section 1031). In a 1031 exchange, you are required to roll your sales proceeds into replacement property, but in a deferred sales trust, you move those proceeds into other assets (bonds, REITs, mutual funds, etc.). This allows you to keep your money working for you over time, rather than having to pay capital gains taxes. It’s similar in to the 1031 exchange in that it allows for tax deferral, but the method is a bit different.

1031 Intermediary Services

CPEC1031, LLC works with clients across the country to facilitate 1031 exchanges of real estate. A 1031 exchange is a great way to defer your capital gains taxes when you sell real estate. As an added bonus, you get to keep your hard-earned money working for you in a continued real estate investment. 1031 exchanges can be utilized by any US taxpayer, which makes them extremely versatile! Contact us today at our downtown Minneapolis office to talk about your exchange with one of our qualified 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.

© 2021 Copyright Jeffrey R. Peterson All Rights Reserved

1031 Exchanges for Dummies: What Beginners Need to Know

A 1031 exchange is a beneficial tool that can result in huge tax savings on the sale of real property. But many taxpayers aren’t aware of the inner workings of a 1031 exchange. This article will act as a beginner’s guide to the world of 1031 exchanges.

Tax Deferral

A 1031 exchange let’s you defer your capital gains taxes on the sale of real estate. The catch is you have to reinvest all of your sales proceeds into a new replacement property that is equal to or greater than your relinquished property in terms of value, equity, and debt.

Holding Requirements

Before you can even think about doing a 1031 exchange, you need to make sure you are satisfying the holding requirements set out in section 1031 of the Internal Revenue Code. 1031 exchanges are restricted to real estate held for investment or business purposes. You cannot do a 1031 exchange of a property that you hold primarily for personal use.

Time Limits

Once you begin a 1031 exchange you only have a limited time to complete the process. After you sell your relinquished property, you have 180 days in total to finish your exchange. The first 45 of those days are your identification period in which you need to identify in writing the property you intend to exchange into.

Qualified Intermediaries You Can Trust

At CPEC1031, LLC, we offer qualified intermediary services to taxpayers all across the country. With more than twenty years of experience at our backs, we have the skills and expertise needed to facilitate your 1031 exchange. We can prepare all of your 1031 documents, answer all of your questions, and advise you every step of the way. Contact us today at our downtown Minneapolis office to learn more about our services and to set up a time to chat about the details of your 1031 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

Biden’s Plan to Axe 1031 Exchanges Would Cut Jobs & Economic Growth

This week, President Biden released the official details of his nearly $2 trillion American Families Plan. To pay for the proposal, the plan includes a $500,000 cap on 1031 exchanges. As we’ve discussed before, getting rid of (or greatly restricting) the 1031 exchange would be detrimental to the real estate industry as well as the overall economy.

Section 1031 Encourages Real Estate Investment

The general purpose of section 1031 is to encourage real estate investment. As such it is a powerful vehicle by which to stimulate the economy. 1031 exchanges are not an unfair tax “loophole” as some have claimed. This provision has been a part of the tax code for 100 years and benefits a wide range of taxpayers – not just the top 1%. Many middle class taxpayers benefit from 1031 exchanges of farmland, small apartment buildings, and more. Indeed, 1031 exchanges are for everybody!

1031 exchanges facilitate investment in communities as well and help create an inventory of affordable housing for working families. Research has shown that 1031 buyers invest more capital in their replacement properties compared to non-1031 exchange buyers.

Like-Kind Exchanges Create & Sustain Jobs

1031 exchanges also create and sustain jobs. Here is a brief list of professions that depend on the 1031 exchange: contractors, skilled and unskilled blue-collar workers, lenders, real estate brokers, Qualified Intermediaries, title insurers, escrow companies, surveyors, appraisers, architects, landscapers, building material suppliers and more.

A recent study found that 1031 exchanges are expected to generate 568,000 jobs in 2021. That equates to $27.5 billion in labor income and $55.3 billion of value added to the economy. The current economic benefits of the 1031 exchange are far greater than any potential benefits that would arise from eliminating section 1031.

• 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