What to Know About Deed & Transfer Tax In a Reverse 1031 Exchange

In a reverse 1031 exchange, the qualified intermediary forms an entity that acts as a straw man to acquire the replacement property.

Exchange Accommodation Title-Holder

That straw man is called an Exchange Accommodation Title-Holder (EAT). This EAT typically holds title to the replacement property until the old relinquished property is disposed of and then the EAT (or straw man) deeds the property to the exchangor to complete their like-kind exchange.

The sad situation is that the Exchange Accommodation Title-Holders already paid deed tax once when it received the parked property from the seller and now is being subjected to transfer tax again when the replacement property is deeded to the exchangor.

State Differences

Some states are very aggressive in taxing the transfer of the parked replacement property to the exchangor in what’s called deed tax or transfer tax. Not all states are as aggressive as say Pennsylvania or Wisconsin in collecting deed tax from the intermediaries entity to the exchangor.

In Minnesota, the Minnesota Department of Revenue has been much more accommodating in limiting the transfer tax to the value of the exchange services provided by the exchange accommodation title holder. Other states are imposing the transfer tax on the entire value of the property being conveyed.

• 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

Restricting 1031 Exchanges Would Create a “Lock-In” Effect

There are many reasons why President Biden’s proposed restriction on 1031 exchanges should not be passed. In this article, we are going to explain a few of these reasons that 1031 exchanges should not be touched.

Commercial Real Estate is Hurting

Due to the pandemic and other factors, core segments of real estate (hotels, malls, entertainment venues) are currently beaten-down. Restricting 1031 exchanges would exacerbate the problems they are currently experiencing.

1031 Exchanges Incentivize Capital Investment

Taxpayers who engage in 1031 exchanges invest more capital into their replacement properties than non-tax motivated purchasers. They also have lower LTV rations, which decreases risk in the system. 1031 exchangors are also likely to have the ability to make a larger down payment on replacement property. This leaves them with more capital to invest in improvements and upgrades. More investment in building improvements leads to greater investment returns, higher rents and property values, and higher prices at disposition.

The “Lock-In” Effect

Restricting 1031 exchanges would create a “lock-in” effect, which would result in fewer transactions and declining prices. To avoid large tax bills, many taxpayers would choose to hold on to sub-optimal assets. This would exact a cost on the economy - properties would be more highly leveraged and investors would spend less on capital improvements.

Eliminating the lock-in effect by preserving 1031 exchanges allows taxpayers to preserve their investment capital and acquire larger properties, upgrade facilities and redeploy their capital into other areas. These activities create jobs and contribute to the local and state tax bases.

Follow these Tips to Secure Your Funds During a 1031 Exchange

So you’ve decided to do a 1031 exchange. You're going to sell your relinquished property, and your proceeds are going to get wired out into the interwebs. Who knows where your money is going and who knows how safe and secure your exchange funds are?

There's been a couple of cases where 1031 intermediaries have goofed up.

In one case that came out of Minnesota, a taxpayer’s monies were used by the intermediary to invest in Internet stocks. The internet stocks bubbled and the intermediary didn't have the cash to pay back for the purchase of the replacement property.

In a much larger case called Land America Exchange – a huge national 1031 exchange company had invested the funds allegedly in securities that became illiquid and when it came time for people to complete their exchanges they weren't able to access their funds to acquire the replacement properties.

This Begs the Question: How can I Know if my Money is Safe?

The best way to make sure that your money is safe is to never ever allow your funds to be co-mingled with anyone else’s funds. When you set up a 1031 exchange you need to make sure that you have a separate segregated bank escrow account. You need to know what that account number is and you need to know that that account is only going to be used for your funds.  It's not co-mingled with the operating account of the intermediary, and it’s not commingled with any other money.

If you have your money separately segregated you know exactly where it is during the entire process - that's great.

But wouldn’t it be great if you could lock down that money in a dual-signature account? The first signature required to release any funds would be the intermediary’s because they’re the holder of the account. But the second co-authorization could be the taxpayers for whom we’re doing the exchange.

So we want to get a co-written authorization from the taxpayer to make sure that it’s proper and appropriate to transfer out these funds to make sure they're returning them to the taxpayer of the exchange or for the purchase of the replacement property.

• 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 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