Do You Need to Reinvest More than Just Your Sales Proceeds in a 1031 Exchange?

When people are doing a 1031 exchange they typically want to defer every cent of tax, but they may have their blinders on as far as what they have to do to defer all of those gains. Sometimes they’ll say “look I'm willing to redeploy only my net proceeds into a replacement property - is that sufficient to satisfy a 1031 exchange?”

Continuation of Investment

In a successful 1031 exchange, you need to have a continuation of investment and you have to reinvest your net proceeds from the old property. But you also have to make sure that you're redeploying into a replacement property or properties of equivalent or greater value.

So if I sell a property for 10 million dollars and only redeploy into a $5 million replacement property, the surly IRS agent is going to be wondering where your continuation of investment is.

3 Rules of Thumb

Generally speaking you have to buy replacement properties of equal or greater value. Next we need to redeploy all of our net proceeds into that replacement property. Finally, we need to offset any debt relief by taking our new debt, or paying cash out of pocket. It’s not as simple as just reinvesting your cash proceeds, you have to jump through some hoops to get this valuable tax deferral.

1031 Exchange Help in Minnesota

If you’re looking for help with your 1031 exchange, you’ve come to the right place! At CPEC1031, LLC, we have over two decades of experience facilitating exchanges of all shapes and sizes for our clients. We can walk you through the entire exchange process from beginning to end and ensure that you are fully prepared for the closing table. Contact us today at our offices in downtown Minneapolis to learn more.

• 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

3 Things to Know About 1031 Exchanges Involving Sale Leasebacks

Many taxpayers own a business and they also own the real estate and building in which they run their business.  Over time, this real estate may appreciate significantly, while the debt on the property is reduced from years of paying down the mortgage.  This can represent a large, concentrated piece of a taxpayer’s net worth. These taxpayers may come to realize that they have too many eggs in one basket, and have too much risk exposure if that one property falls in value.

Diversify & Position Yourself for Retirement

As the taxpayer gets up in years and is looking to retire, they may want to diversify their wealth (and lessen their risk exposure) by selling the real estate, but still have their business continue to stay in the property as a tenant on a long-term fixed lease.  The advantage for the taxpayer is that they can 1031 exchange their hard-earned equity into a more safe and diverse portfolio of like-kind properties in different geographic localities and in different business segments such as:

• Retail

• Multi-family

• Industrial

The advantage for their buyer is that the buyer gets a good property with a steady reliable tenant already in place on a long-term fixed lease that both parties can rely on.

1031 the Real Estate…Then Sell the Business

If the taxpayer is also considering selling their business, the buyer of the business would not have to purchase the real estate, and could get into the business with a lower down payment, because they would not have to qualify for a loan on the real estate. The buyer of the business would also have the certainty of being able to assume the long-term fixed lease and continue to run the business where it has been located.

Cash is King for 1031 Exchanges of Real Estate

Generally if you are selling real estate, you want to receive cash on the barrelhead so you can reinvest ALL of your equity through a 1031 exchange into your new replacement properties. So selling to a strong unrelated cash buyer is often more desirable than trying to sell both the real estate and the business to one buyer, who may already be stretching their finances just to purchase the business.

Getting Top Dollar By Splitting the Sales

In order to get the top price on the sale of a business, it is not uncommon to have seller-back financing with the seller getting their proceeds over a long period of time.  That’s fine of the sale of the business; however, because of the requirements for 1031 exchanges, seller-back financing of the real estate is a much less attractive option for a taxpayer looking to defer all of the gains from the real estate. It’s often better to split the sale of the business from the sale of the underlying real estate in order to maximize both the financial returns and tax efficiency for the seller.

• 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 do if a Party Won’t Sign your 1031 Exchange Purchase Agreement

Sometimes the other parties to a purchase and sale agreement refuse to cooperate with your 1031 exchange, and will not sign the standard 1031 acknowledgement that they have received written notice regarding your nominal assignment of rights to your qualified intermediary. What is there to do in this situation?

Steps to Take

Here are the steps to take if you find yourself in this situation:

• Provide the other parties written notice bay fax, e-mail, in-person delivery (or the method specified in the purchase contract for providing notices).

• Save the proof that it was sent (on or before the end of the day of closing).

The treasury regulations say you must give them written notice of the assignment. While it is prudent to get back a signed acknowledgement (to have proof that you complied in giving the requisite notice), you don’t have to get back signed proof, and you can complete the exchange with a fax confirmation, e-mail receipt or other documentation.

1031 Exchange Pro Tip

Another, tip is to let the uncooperative party know that the deeds are still running the same way (from the seller to the buyer) and that the “assignment” is just for 1031 tax purposes, but the deal is still with the original parties.

Qualified Intermediaries in Minnesota

The qualified intermediaries at CPEC1031, LLC have over twenty years of experience facilitating like-kind exchanges of real property throughout the country. We can handle all of your 1031 exchange documents, answer all of your questions, and help you find replacement property. Contact us today at our downtown Minneapolis office to learn more about our wide range of services and see how we can help you with 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

2 Important Things to Know About 1031 Exchanges of Principal Residences

Oftentimes taxpayers ask me:

“I don't qualify for the personal residence exclusion because I haven't lived in the property for two of the preceding five years, but I still want to defer the gains. Can I do a 1031 exchange with my principal residence?”

The 1031 Exchange Qualified Purpose Rule

The answer is no. In order to qualify for 1031 you must have held the property for investment or business purposes. The fact that you've lived in the property and are residing in the property is antithetical to holding it for investment or business purposes. If people don't qualify for the principal residence exclusion and they want the tax deferral they may want to structure their transaction so that they rent the property out for a few years to rehabilitate it as a business or investment property and then it can qualify for 1031.

CPEC1031

If you have any other questions relating to 1031 exchanges, don’t hesitate to reach out to our qualified intermediaries for assistance. CPEC1031, LLC has been facilitating 1031 exchanges of real estate for more than two decades. Our intermediaries can walk you through the entire exchange process and make sure you’ve got all your bases covered. Contact us today at our downtown Minneapolis office to learn more about our services and how we can help!

• 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

3 Key Pieces of Information You Need to Begin a 1031 Exchange

When you’re starting a 1031 exchange the qualified intermediary needs to jump into the transaction and get to know all the key details really quickly. This might be a transaction that you've been negotiating and working on for months or even years, and a qualified intermediary needs to become familiar with these details quickly.

So, here's what the qualified intermediary needs to get their arms around all of these details and begin the 1031 exchange.

Information on the Seller

First we're going to need information on the seller. The seller’s address, contact information, and EIN (federal employer identification number) or social security number as the case may be. So we need to know who the seller is and their pertinent information.

Purchase Agreement and Sale Contract

Next we need to get a full copy of the purchase agreement or sale contract for the sale of the relinquished property and any amendments or addendum to that agreement so that we know who the parties are and what the property is.

In addition to that we need to be able to determine exactly how the seller is vested in title and what the legal description of the property is. How do we find that out? Oftentimes the buyer will have the title company prepare a title commitment or an attorney's opinion of title or other title report that the intermediary can you use to verify the legal description and the vesting of how the seller is entitled. It’s important to know who's entitled because that party or parties that are listed are those that need to do the exchange.

Married Taxpayers

If a taxpayer is married their spouse may or may not be on title. If the taxpayer is elderly they may have the property in a trust or they may own it in their own individual name, or they may have placed it into some kind of business entity.

All of these details need to be determined quickly and accurately by the intermediary so that we can prepare the 1031 documents for circulation and review to the taxpayer’s attorney, accountant, and any other professionals involved in the transaction to make sure that the exchange documents correlate with the details and specifications of the transaction.

• 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