A Brief Explanation of the 1031 Exchange Period

In a 1031 exchange, you have 180 days to complete your exchange. In this article, we are going to discuss the various details associated with the 1031 exchange period.

180 Day Exchange Period

The replacements must be received within the earlier of:

• 180 days after the closing of the relinquished property; or

• the due date for your tax return for the taxable year in which the transfer of the relinquished property occurs, including extensions*.

The 180-Day Exchange Time Period May Not Be 180 Days Long

The replacement property must be received within the earlier of:

• 180 days after the closing of the relinquished property; or

• the due date for your tax return for the taxable year in which the transfer of the relinquished property occurs, including extensions.

Day 0 Day 180 Day 1 180 Day Exchange Period The replacement property must be received within the earlier of:

• 180 days after the closing of the relinquished property; or

• the due date for your tax return for the taxable year in which the transfer of the relinquished property occurs, including extensions.

Federal Return Date

April 15 may not be the taxpayer’s federal tax return filing due date. S corporations and C corporations are due March 15.

1031 Exchange Company

At CPEC1031, we are well-equipped to handle all of the details of your next commercial transaction. Our qualified intermediaries can take care of all the details of your transaction so you don’t have to worry about them. Reach out to our team today for help with your next commercial transaction. You can reach us at our downtown Minneapolis office to set up a time to chat.

• 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 Benefit Real Estate Investors Big and Small

Many people assume that 1031 exchanges can only be used by big fancy real estate investors. But the fact is that any United States taxpayer can utilize section 1031 of the Internal Revenue Code to save taxes when selling real property. In this article, we are going to talk about how 1031 exchanges can be utilized by everyone to defer capital gains taxes on the sale of real estate.

Tax Deferral for All

When you sell a piece of real property, you are liable for the capital gains taxes on the sale. Depending on the property, these taxes can add up quickly and be a huge hindrance for the taxpayer conducting the sale. Sometimes the capital gains tax bill gets so large that it deters the taxpayer from selling the property entirely. That’s not good for the taxpayer and it’s not good for the economy as a whole.

This is exactly why the 1031 exchange was created – to incentivize property owners to continue investing and to spur economic growth. And it’s not just for big wig investors. Even taxpayers that own relatively small properties can utilize the 1031 exchange – so long as they meet the necessary requirements.

1031 Exchanges in Minneapolis, MN

If you are considering a 1031 exchange on a property in Minnesota, contact the qualified intermediaries at CPEC1031, LLC today. Our 1031 exchange specialists have over two decades of experience facilitating exchanges of real property in Minnesota and across the country. We can help you through every level of your exchange – from the sale of your relinquished property, to the acquisition of your replacement property. Don’t hesitate to contact us today at our downtown Minneapolis office to set up a time to meet with our team.

• 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 Guide for Title Closers Completing the Purchase of a 1031 Exchange Replacement Property

What do closers need to know about the replacement property closing statement and what closing costs are permitted on that statement?

Remember the Big Picture

Remember, our big picture here is that we're trying to reinvest all of the exchanger’s equity into the property. So if there's going to be a mortgage or deed of trust on the replacement property we may have to constrain the lender to tell them "don't loan this buyer more money than they actually need to make this purchase happen."

Even though the exchanger may qualify for a larger loan, we need to rein that lender in and not let them over-loan the purchase of this property such that at the bottom of the closing statement it shows cash to the buyer in the amount of x. We want that closing statement to zero-out at the bottom so that our buyer won't get any cash back at the time of closing.

Transactional Expenses

The next item to remember is that certain transactional expenses should not be paid for out of the exchange funds. In particular, any costs related to that new mortgage or deed of trust should typically be paid for by the exchanger out-of-pocket. Alternatively, the exchanger may ask the lender to give them a no-cost loan such that there are no origination fees or charges for the loan but that the exchanger pays a higher interest rate in return for the no cost loan.

Another technique that taxpayers sometimes use is to ask the seller for a concession to say “seller, will you pay up to $5,000 of my closing cost and prepaid expenses at the time of closing?” That way they're able to move some of these non-qualified transactions onto the seller side.

If there will be any reserve accounts established (for example to pay property taxes or insurance premiums), those reserves should be funded with monies other than the 1031 funds, so that all of the 1031 funds are applied exclusively for the purchase of the like-kind replacement property. A reserve account full for cash may be deemed ‘boot’ by the IRS, so oftentimes buyers will fund the reserves out-of-pocket.

• 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

Register Now for the REJournals 14th Annual Capital Markets Summit

This Friday, May 14, Jeff Peterson will be presenting at the REJournal 14th Annual Capital Markets Summit.

Event Details

• When: Friday, May 14, 2021

• Where: Golden Valley Country Club, 7001 Golden Valley RD, Golden Valley, MN 55427

• Cost: $99 IN PERSON, $99 VIRTUAL VIEWING with CE, $39 VIRTUAL VIEWING without CE

• This course has been approved by the Minnesota Commissioner of Commerce for 4 hours of real estate continuing education

About the Presentation

Due to the damaging effects of the pandemic, some segments of real estate, such as hotels, entertainment, retail malls, and offices are beaten down. Changing the 1031 exchange, as outlined in President Biden’s plan, would worsen the problems they’re already dealing with.

The administration's desire to invest in America’s infrastructure is great. However, a key component of infrastructure is being missed in this effort. The buildings that make up our housing stock, offices, shops, and warehouses are a part of that infrastructure. These structures need as much ongoing capital commitment to them as roads, bridges, and other parts of infrastructure. The best way to encourage improvements is to have appropriate tax polices that encourage investment in the real estate economy.

The existing 1031 exchange rules are wholly consistent with these themes. It encourages both investment and more importantly reinvestment in real estate. Therefore, it is extremely inconsistent to limit 1031 exchanges while creating other infrastructure investment incentives programs and spending.

• 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

Getting Rid of 1031 Exchanges Would Negatively Impact Smaller CRE Owners

Many people assume that President Biden’s recently proposed “American Families Plan” that significantly reduces 1031 exchanges would only impact the top 1%. But the reality is that this plan would negatively impact smaller commercial real estate investors as well, by limiting their ability to roll over profits tax-free into a similar new real estate investment. The result could include a lot of unintended consequences, such as less appreciation for commercial real estate, less liquid markets and less price transparency.

“This could curb investors’ willingness to purchase new properties, lead to higher leverage on properties purchased in an effort to maximize returns or decrease investors’ desire to invest in and improve the assets they currently own,” BofA CMBS strategists Alan Todd, Mao Ding and Graham Voss wrote in their April 30 securitization note.

1031 Exchanges are Used by Investors Big & Small

1031 exchanges are used by smaller investors who buy modest properties that fly beneath the radar of larger commercial real estate firms. These like-kind exchanges allow investors to defer capital gains taxes when selling real properties by reinvesting the proceeds into new, like-kind replacement property.

“The president would also end the special real estate tax break that allows real estate investors to defer taxation when they exchange property for gains greater than $500,000,” BofA says. “An empirical analysis of exchanges reveals real property like-kind exchanges are associated with increased capital investment in the replacement property, reduced loan-to-value ratios (that reduces system-wide risk), and shorter holding periods.”

U.S. Department of Treasury Office of Tax Analysis estimated $37.56 billion in tax revenue will be foregone between 2020 and 2029 due to like-kind exchanges.

 If smaller commercial real estate investors no longer buy these assets because of the limit on 1031 exchanges, the impact could be far-reaching and negative for the greater 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.

© 2021 Copyright Jeffrey R. Peterson All Rights Reserved