How to do a 1031 Exchange as an LLC or Partnership

Consider the following 1031 scenario: A seller owns a single-family home with a friend of theirs in a partnership. Can one of the partners owning that single-family home do a 1031 exchange and buy another rental property? That's our topic for today's 1031 education article.

Who is the Taxpayer?

The question really comes down to "who is the taxpayer that has held title to that old single family home?"

• Is it an entity such as a partnership or LLC?

• Or is it the two individuals owning as tenants-in-common?

If they are in fact in a partnership or business entity, it may be necessary to reconfigure the ownership so that the old entity now owned solely by the surviving taxpayer that wants to do the exchange holds title to its portion of the property, and the other partner is redeemed out of the partnership and takes a tenant-in-common interest in a portion of the underlying property.

Planning Opportunities

These are planning opportunities and it's nice to get in front of the deal well before the sale of the relinquished property. For more information on this see, our whiteboard video related to this topic.

Start Your 1031 Exchange

Ready to start your 1031 exchange of real estate? You’ve come to the right place! At CPEC1031, LLC our qualified intermediaries have over two decades of experience working on all types of commercial transactions. Our professionals can guide you through every step of the 1031 exchange process and make sure that you are informed at all times. Contact us today at our Minneapolis office to learn more about 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

The Importance of Preparing Well for Your 1031 Exchange

It’s a good general rule of thumb to start prepping your 1031 exchange as early as possible. Unfortunately, many taxpayers don’t make the proper preparations and find themselves in a bind late in the process. In this article, we are going to discuss the importance of early preparation when conducting a 1031 exchange.

It’s Never Too Early to Contact a Qualified Intermediary

We hear from many taxpayers who want to do a 1031 exchange at the zero hour and are unable to avail themselves of the tax-saving benefits of a 1031 exchange because they’re too late.

The earlier you can start preparing for your 1031 exchange, the better off you’ll be. Contact your qualified intermediary before you even sell your relinquished property so you can work together and make sure everything goes according to plan. It’s never too early to call your qualified intermediary.

1031 Exchanges in the Twin Cities

1031 exchanges allow you to defer your capital gains taxes on the sale of real property under section 1031 of the IRC. If you are interested in deferring your gains and keeping your money working for you in a continued investment, a 1031 exchange might be right for you. Contact a qualified intermediary to discuss your options. At CPEC1031, our intermediaries have two decades of experience helping taxpayers with their 1031 exchanges. Reach out to us today at our downtown Minneapolis office to get started with 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

Explaining Technical Termination in 1031 Exchanges

If a property is owned in an LLC or partnership and some of the partners want to do a 1031 exchange, while others don't want to do a 1031 exchange a lot of times people want to have the parties that don't want to do a 1031 jettisoned out of the LLC or partnership so that they become tenant-in-common owners. Then we can have those folks who want to do a 1031 remain inside of the LLC or partnership and have them conduct the exchange under the banner or umbrella of that LLC or partnership. This sounds great in theory, but there are a few important factors to take into account.

Technical Termination

A big concern that people often have is if a large exodus of partners leave the LLC or partnership, that may trigger a technical termination of the entity and hit the reset button on the holding period for the 1031 exchange.

Drafting the Redemption Documents

When you draft the redemption documents to take these members out of the entity it’s important to articulate that their departure is part of a liquidating distribution that terminates their interest in the LLC or partnership. The technical termination rules exempt transfers that are liquidating distributions. So even if we have more than 50% of the partners leave the entity, because their departure is characterized as a liquidating distribution we don't have to concern ourselves with hitting the reset button and having a technical termination of the entity.

Contact a Qualified Intermediary

If you are considering a 1031 exchange for your next commercial transaction, look no further than CPEC1031, LLC. Our qualified intermediaries have decades of experience facilitating like-kind exchanges under section 1031 of the IRC. We can help you through the entire exchange process. Contact us today at our downtown Minneapolis office 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

Can You Swap Qualified Intermediaries After Starting a 1031 Exchange?

Is it possible to change my qualified intermediary (QI) after the 1031 exchange has been initiated, and funds have been transferred to the QI?

Err on the Side of Safety

To be on the safe-side, if you have already initiated your 1031 exchange and transferred funds, you should stick with the qualified intermediary that you started with.

According to § 1.1031(k)-1(g)(4) (iii), a qualified intermediary is a person who:

• Is not the taxpayer or a disqualified person (as defined in paragraph (k) of this section), and

• Enters into a written agreement with the taxpayer (the “exchange agreement”) and, as required by the exchange agreement, acquires the relinquished property from the taxpayer, transfers the relinquished property, acquires the replacement property, and transfers the replacement property to the taxpayer.

QI Requirements for a 1031 Exchange

As per this regulation, the qualified intermediary must have entered into an exchange agreement and been a conduit on both the Relinquished Property and Replacement Property.  Once the qualified intermediary has facilitated the exchange out of the Relinquished Property, then they are the only party that can satisfy the rule and fulfill the function of qualified intermediary.

CPEC1031, LLC

If you’re considering a 1031 exchange of real estate, it’s important to have a qualified intermediary by your side that can guide you through the process. At CPEC1031, LLC, we have been facilitating 1031 exchanges for over two decades. We have the skills and experience to help ensure your exchange is a success. Contact us today at our downtown Minneapolis office to learn more about the services we provide and get started 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

Can I do a Build-to-Suit 1031 Exchange on a Property I Already Own?

The idea behind the 1031 exchange is to encourage investment into properties that you don't already own. To that end, the IRS and Congress say to taxpayers “you can't construct improvements on property that you already own” because they don't view that as an “exchange.” So how do you tackle this potential 1031 exchange issue?

Third Party Seller

The first way to resolve this problem is to NOT construct the improvements on the land that you already own. Instead, go out and buy something from a third-party seller and construct improvements on that property through your intermediary (or exchange accommodation title-holder also referred to as an “EAT”).  This is the simplest and cleanest way to do a Build-to-Suit Exchange.

Private Letter Ruling

There is however, a favorable authority (a private letter ruling) where a REIT had purchased property through a somewhat dissimilar but related subsidiary and then wanted to exchange into improvements upon the land owned by its dissimilar but somewhat related subsidiary using a long-term ground lease with an exchange accommodation title-holder. They constructed the improvements on new estate or separate interest in the property. So there are ways to fashion a build-to-suit on land owned by a somewhat related and dissimilar entity, but we need to make sure that it's done properly and according to that authority (that private letter ruling), which is only really authoritative to the taxpayer that requested it. Nevertheless, this is illustrative of the IRS’ tax position.

• 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