The Historical Significance of the Like-Kind Exchange

1031 exchanges have been around for nearly 100 years. In this article, we are going to offer a brief history lesson on the origins of the 1031 exchange.

How 1031 Exchanges Came to Be

The origins of the 1031 exchange date back to the early 1920s. Since 1921, there have been Internal Revenue Code provisions that allow taxpayers to swap property in tax-free transactions. 1031 exchanges have survived all major overhauls of the Internal Revenue Code (1939, 1954, 1986, and 2018) and are still alive and well to this day.

Starker & Non-Simultaneous Exchanges

But most modern 1031 exchanges are not simultaneous property swaps. Rather, the majority of 1031 exchanges are set up as “delayed” exchanges, in which a taxpayer sells their relinquished property and then acquires their replacement property at a later date. This type of exchange was solidified in the landmark case Starker v.United States, 602 F.2d 1341 (9th Cir. 1979), which was the first instance in which a taxpayer completed a delayed (or deferred) exchange.

1031 Exchanges Today

1031 exchanges are still commonly used as a way to defer taxes on the sale of real estate. They are great for investors, as well as the economy as a whole!

1031 Exchange Services

At CPEC1031, LLC, we have two decades of experience working with clients on their 1031 exchanges of real estate. We help our clients defer their capital gains taxes under section 1031 of the Internal Revenue Code. Our qualified intermediaries work directly with you throughout the process – preparing your documents, advising you on property decisions, and answering all of your questions along the way. Contact us today to learn more about our services or to set up a time to chat with one of our intermediaries about your 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

Why 1031 Exchanges Should be Preserved

As part of a multi-part infrastructure spending plan, President Biden has proposed capping Section 1031 like-kind exchanges by disallowing taxpayers from utilizing 1031 exchanges if their gains exceed $500,000.

Repealing the 1031 exchange provision would harm real estate investors of all sizes by forcing them to forego new investments or go into debt to finance their transactions. On top of that, it would also fail to raise significant revenue.

What are 1031 Exchanges?

1031 exchanges allow taxpayers to defer taxes on their capital gains if they reinvest those earnings in a new replacement property. Section 1031 has existed in the tax code for 100 years. Because investors don’t have to pay tax until they cash out, Section 1031 eliminates a potential barrier to investment, which promotes a more efficient allocation of capital resources.

1031 Exchanges are NOT a Tax Loophole

Critics of 1031 exchanges falsely claim that they are a loophole that allows taxpayers to avoid paying taxes. This is not true. The 1031 exchange provision defers rather than eliminates tax liability. A taxpayer that utilizes Section 1031 will eventually have to pay taxes on the asset when they cash out.

This tax deferral period is often shorter than many assume because taxpayers do not utilize 1031 exchanges indefinitely.

How do 1031 Exchanges Benefit the Economy?

There are significant benefits to the tax deferral offered by 1031 exchanges. Recent studies have found that 1031 exchanges provide taxpayers with liquidity that they can use to invest and create jobs. By providing additional liquidity, 1031 exchanges allow investors to avoid taking on debt and becoming over-leveraged. This also helps with the financing of new real estate projects, promoting a competitive and affordable housing market.

1031 exchanges are typically used for smaller real estate transactions. According to the National Association of Realtors, 1031 exchanges were used in roughly 12% of real estate sales. Almost 85% of these transactions were from smaller investors such as sole proprietorships or S corporations.

Repealing 1031 exchanges would increase holding periods as taxpayers would be encouraged to retain assets longer to avoid paying capital gains taxes.

• 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 Remember When Reinvesting 1031 Exchange Proceeds

If you are in the process of selling four real estate investment properties, would a 1031 exchange work if you reinvested a portion in storage units as a business? The short answer is, yes - real property ownership of US storage units can qualify for 1031 exchanges, if they are held for investment / business purposes.

Real Property Exchanges

All U.S. real properties (brick/mortar and land) are generally like-kind, regardless of whether the properties are improved or unimproved. However, real property in the United States and real property located outside of the United States are not like-kind.

3 Rules of Thumb

There are three general rules of thumb to quickly see if you will defer ALL of the recognition of gain.

1. Typically you will acquire replacement property that is “up or equal” in Value* (price); {*net of sales commissions and customary transactional expenses}

2. You will roll over all of your Equity (net proceeds) from the relinquished property into your replacement property.

3. And to the extent that you were relieved of liabilities and Debt, such as mortgages on your old relinquished property, the debt relief is offset by (1) new liabilities or mortgages taken on in conjunction with your purchase of the replacement property; OR (2) by investing additional cash in the replacement property equal to the amount of liabilities and debts that were discharged.

You can have a partial tax deferral if you miss these general benchmarks.

• 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 Much Time Does a Title Company Need to Complete a 1031 Exchange?

There are numerous parties involved in any given 1031 exchange – from the taxpayer conducting the exchange to the qualified intermediary, to the title company. In this article, we are going to talk about how much lead time you need to give your title company going into the transaction.

Give Your Title Company Time

In a 1031 exchange, where you only have 180 days to complete your transaction, it’s always a good idea to get ahead of the ball. That goes for your title company as well. You do not want to first contact your title company the day before your closing. Waiting until the last minute to change up your transaction is going to create a lot of headaches for everyone involved – including your title company. If you wait too long, there may not be enough time to prepare the necessary documentation for a 1031 exchange.

Reach out to your qualified intermediary well in advance of your relinquished property closing date. This will give them enough time to prepare all of your required documents, and work with the title company to ensure a smooth transaction. A crazy closing process is nobody’s idea of a good time. Give yourself and your title company plenty of lead time (as much as possible) when doing a 1031 exchange.

Exchange Like-Kind Real Estate

Deferring capital gains taxes on the sale of real estate is easy under section 1031 of the Internal Revenue Code. It’s even easier with the help of a skilled 1031 exchange intermediary. At CPEC1031, LLC, our intermediaries have been facilitating exchanges for taxpayers across the United States for more than two decades. Give us a call today to get started with your 1031 exchange (the earlier you start – the better!). Our primary office is located in downtown Minneapolis, but we work with clients all over the state and country.

• 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

Capping 1031 Exchanges will Result in Economic Stagnation, Not Recovery

The 1031 exchange is an essential tool needed to rebuild the American economy after the damages done by the COVID-19 pandemic – and it is at serious risk as part of the American Families Plan being considered in Washington.

Every community in the nation, including those here in the Twin Cities, have witnessed the closing of countless malls, shopping centers, hotels, office buildings, and restaurants due to the fallout from the pandemic. In order to regain economic strength, we will need to substantially reinvest in and repurpose these properties. 1031 exchanges are a perfect tool for accomplishing just that!

1031 Exchange History

For the past 100 years, 1031 exchanges have been a cornerstone of the U.S. commercial real estate market. Like-kind exchanges generate economic benefits which far exceed the amount of taxes deferred. The American Families Plan proposes to cap the amount of gains that can be deferred via 1031 exchange at $500,000. This is a counterproductive cap that would result in economic stagnation, not recovery.

Contrary to a common misconception, a 1031 exchange is a deferral, not an elimination of tax. According to a study done by professors David C. Ling (Univ. of Fla.) and Milena Petrova (Syracuse Univ.), 80% of the taxpayers who conduct a 1031 exchange do only one exchange and then dispose of the property in a taxable sale. A restrictive cap on commercial real estate reinvestment would send an already struggling market into a tailspin.

1031 Exchanges Create Jobs

1031 exchanges are also a powerful job creation tool. Ernst & Young estimated that the reinvestment through 1031 exchanges for the coming year will create more than 560,000 new jobs paying more than $27.5 billion in labor income, generate $14 billion in federal, state and local taxes and add $55 billion to the GDP.

For many in the middle class, including many Black, Latino, and Asian realtors and investors, 1031 exchanges serve as their retirement strategy. Many of these groups are, for the first time, beginning to realize the hope of creating intergenerational wealth and a comfortable retirement by investing in real estate. They should not have to face the threat of a cap on using 1031 exchanges to attain these goals.