The Importance of Keeping Accounts Separate in a 1031 Exchange

If you think about it, the seller of a relinquished property in a 1031 exchange really should be holding their security deposits in a separate escrow account. Upon closing, those security deposits should be transferred to the buyer. But a lot of time property owners don’t keep separate accounts and instead want to raid the proceeds from the sale of the relinquished property to pay the security deposits over to the buyer.

Remember we’re supposed to move all equity from the relinquished property to the replacement property, and raiding the kitty to pay the security deposits to the buyer could be a taxable event. The same goes for rent proration. If the seller has collected rents for the month, they should be taking the money out of their operating account for the portion of the month that the buyer will own the property.

Oftentimes it’s a good idea to work as much of these details out with the seller and the Qualified Intermediary (“QI”) and then have the seller’s CPA or accountant double-check the debits and reductions for transactional expense before closing.  The seller’s CPA or accountant will know their tax situation better than anyone and can weigh in on what should and should not appear on the closing statement.  That way if there is ever a question about it at tax time, their CPA or accountant will be aware of the details from closing.

Many people have questions about what closing costs are appropriate and having a good QI as a resource is really important.

• 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

Is it Too Late to Start a Like-Kind Exchange if your Closing is Tomorrow?

Is it too late to do a 1031 exchange if my closing is tomorrow? Sometimes we get calls from people that are at the closing table doing a sit-down closing and then it occurs to them that they should do a 1031 exchange and they say "stop the presses everyone we've got to put this on hold so I can call my qualified intermediary!"

Jumping into Action

When that happens, we quickly prepare the 1031 documents and email them to the closing table so that we can have the documents signed concurrent with the transaction.

Restrictions

We can't, however, paper a 1031 exchange on a transaction that has already funded and closed. So can we stop the presses and put the closing on hold to get the 1031 documents put in place? Yes we can. Is that very irregular? Does it cause a lot of consternation and difficulty for the other parties involved? It is inconvenient to put everything on hold but that doesn't really matter when your taxes are on the line and you’ve got to figure out a way to defer those taxes.

Do we get calls at the last minute? Yes. but it's much better if you can have the forethought to get your 1031 exchange arranged, set up well in advance of closing, and even pre-sign your 1031 documents well before you transfer the benefits and burdens of ownership to your buyer.

A Word of Warning

Once the benefits and burdens of ownership have shifted; and the conveyance has taken place, and the buyer’s money has been paid to the title company, it is probably too late. For that reason, it's always a good idea to get out ahead as much as possible and give yourself plenty of time to complete your 1031 exchange so you're not scrambling at the zero hour.

• 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

Remember These Critical Deadlines in a Like-Kind Exchange

There are two extremely important deadlines when you're doing a deferred exchange. The first is the 45-day identification period, which commences the day after the closing of the relinquished property.

When Does the Closing of the Relinquished Property Occur?

It’s when the benefits and burdens of ownership shift. When that deed crosses over to the buyer and the consideration or sales proceeds come across the table to the seller, that's when the benefits and burdens of ownership shift. That’s day zero for computing a 45-day identification period.

By midnight of the 45th day you need to have sent your identification in writing to the intermediary or to another party to the transaction that's not a disqualified person. Typically people send the identification to the intermediary but in theory you could send it to other people such as the seller of the replacement property unless they're related to you or otherwise disqualified.

180 Day Exchange Period

The other important deadline is the 180-day exchange period. You only have 180 days to receive your replacement property and again that clock runs concurrently from the day after closing of the relinquished property. There's a big curve ball though with regard to the hundred and eighty day deadline because the IRS is impatient. They don't want to wait until your subsequent tax return to see how this story unfolds. They say we’ll give you a hundred and eighty days to complete your exchange, but if the due date for the filing of your federal income tax return pops up within that hundred and eighty days, they shorten down the exchange period to the due date of the filing of your tax return.

Well if you start your exchange day in December and you have to file your tax return on April 15th you're not going to get your full 180 days. There's an easy fix though - you simply ask for an extension on your federal filing deadline and move your filing deadline out to October 15th. Now that extends the tax filing period but does not lengthen your exchange period. You still only have a maximum of 180 days. During that timeframe you've got to receive the benefits and burdens and ownership of your new 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

5 Tips to Prepare for Closing in a 1031 Exchange

The 1031 exchange process can be long and complex, but we're here to simplify things for you. In this article, we are going to talk about the 1031 exchange process - from preparation to the closing of the relinquished property.

Purchase/Sale Agreement for Relinquished Property

Complete your purchase/sale agreement as to your Relinquished Property (the property you are selling) just as you would with a regular sale. Show the name of the seller as yourself and add “and or assigns.” You should also add a cooperation clause to the purchase agreement, stating that you intend this transfer to be part of a 1031 Tax Deferred Exchange and require the buyer to cooperate. The cooperation clause serves to provide notice to your buyer that you intend to consummate a tax-deferred exchange, as required by the regulations.

Closing Company

Arrange for a title company or an attorney to close your transaction. Make sure you tell the closing agent that this transaction is going to be a 1031 exchange.

Exchange Company

Notify CPEC1031 of your pending sale and closing date. We provide a customer application form to organize all of the information about you as the taxpayer/exchanger, the property you are selling and the approximate date of closing. Fax the customer application form and the purchase/sale agreement to (612) 395-5475.

Closing on the Relinquished Property

CPEC will contact the closing agent and acquire any additional information needed to set up the 1031 Exchange for you. We will prepare the Exchange Documents and send two (2) sets of the documents directly to the closing agent. At closing, you will sign the Exchange Documents along with your other closing documents. The closing agent should give you one set of the documents for you to keep for your tax records and send one set to CPEC, together with a copy of the closing statement and deed transferring title to your Buyer.

Post Closing Activities

Once the closing is complete, the closing agent will wire transfer the proceeds into a separate, segregated and “two signature” FDIC insured exchange escrow account. Upon receipt of these funds and a set of the Exchange Documents, we will send you a letter showing the amount of proceeds we received in the wire, which amount should match the amount shown on the closing statement. This letter will also include the dates of the 45 and 180 day periods and a form to identify your Replacement Property (“timeframe letter”).

• 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

Considering 1031 Exchange Parking Arrangements

Prior to the Rev Proc 2037 that gave us a safe harbor for doing reverse exchanges, many intermediaries were facilitating reverse exchanges but they had no safe-harbor or parameters to know how long or how to structure a reverse exchange. They only had old case law and old tax precedents to rely on. So they were sometimes called common law reverse exchanges.

The beauty of that timeframe was that we weren't limited to 180 day parking arrangements. After Rev Proc 2037, the common form of doing a reverse exchange was to do them in the reverse safe harbor, which capped us at 180 days. But in Rev Proc 2037, it specifically says that they don't make any inference as to non-safe harbor reverses that were done prior to the rev proc, or even after.

So the door was left open that non safe harbor reverse exchanges that park a property for longer than 180 days are still a valid and proper way to do a reverse exchange. Though they are a little bit more complicated and they don't have the definiteness of a safe harbor, they’re still potentially valid.

Estate of Bartell

In a case called Estate of Bartell, the tax court finally rendered a decision after thinking about it for 10 years. This was a reverse exchange in which the holding period went beyond 180 days and there was an argument that the entity that was parking the replacement property which did not really have a whole lot of economic upside or downside - the argument the IRS had was that the title holder was just an agent of the taxpayer (a Patsy). They don't really have any risk of loss, they're just kind of accommodating this for the benefit of the taxpayer.

But the tax court said no, there's a written agreement here that says that the accommodator that's holding the property is doing so to facilitate a 1031 exchange. Even though they don't have a lot of skin in the game and they don't have a lot of economic upside they are doing it for the facilitation of the exchange and therefore we're going to respect the taxpayer’s arrangement and not collapse this down and invalidate the exchange.

Well the pendency of this case, which took 10 years to come out, created a lot of rancor and uncertainty as to whether non-safe harbor exchanges were legit.

The issuance of the decision gives us a breath of fresh air that these non-safe harbor exchanges can be OK. The IRS is may be appealing the decision and so we don’t have a final and complete disposition yet. Stand by for more news on the Estate of Bartell.

Rev. Proc. 2000-37

No inference. No inference is intended with respect to the federal income tax treatment of arrangements similar to those described in this revenue procedure that were entered into prior to the effective date of this revenue procedure. Further, the Service recognizes that "parking" transactions can be accomplished outside of the safe harbor provided in this revenue procedure.

• 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