Can You Gift Your 1031 Replacement Property to Someone Else?

After you have completed a 1031 exchange and have your new like-kind replacement property, you may want to give it away as a gift. This is a huge trap for the unwary, because many people think it is their property, and they should be able to do what ever they want with it.

Satisfying the 1031 Exchange Requirements

Well, if you want to satisfy the requirements of your 1031 exchange, then you should probably not do anything (including gifting) that is inconsistent with holding the new replacement property for investment or use in their trade or business.

The argument can and has been made successfully by the IRS that if you gift the property away shortly after completing a 1031 tax deferred exchange, then you did not have the requisite intent. Your immediate intention to give away property you received in an exchange could undermine your ability to prove your investment or business intent.

Treasury Regulations

Treasury Regulation 26 CFR 1.1002-1(b) and (c) indicates that the IRS can look at surrounding facts and circumstances such as post-exchange transfers of your replacement property as circumstantial evidence that you did not have the proper intent to hold for business or investment purposes.

• 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

When is a Failed 1031 Exchange Taxed if it Crosses Over into the Following Year?

In some cases, taxpayers who engage in a 1031 exchange will get back unused 1031 proceeds in the year following the sale of their relinquished property. This could happen at the end of their 180 day exchange period because they were not able to (or decided not to) purchase all of their identified replacement properties.

For example, a person may start their exchange in August of 2021 and later receive their unused 1031 funds in January of 2022. When this happens they may wonder when they are going to be taxed on the money - in 2021, the year that the sale occurred, or in 2022, when they actually received the money.

Treasury Regulations

The Treasury Regulations for Section 1031 allow people to elect to treat a tax deferred exchange as an installment sale to the extent that the person receives cash (known as “boot”) in a subsequent tax year. This can happen if the exchanger fails to acquire some or all of their replacement properties, leaving cash boot in the hands of the qualified intermediary until the year following the sale. The cash received from the qualified intermediary at the end of the exchange period may be treated as a payment in the year it is actually received by the person for purposes of the installment sale reporting rules rather than in the year the relinquished property was sold.

On the Other Hand...

Any liens, deeds of trust, mortgages or other debts that were paid off on the sale of the relinquished property are treated as a payment in the year of the sale (when they were discharged or assumed by the buyer). Nevertheless, the tax deferral allowed by the interplay between Section 1031 and the installment reporting rules under Section 453 can produce a really nice tax advantage where gain must be recognized as the result of a wholly or partially failed exchange resulting in some unused 1031 funds going back to 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

When to Get Your Attorney Involved in Your 1031 Exchange

People doing 1031 exchanges often ask “should I have my attorney involved in my 1031 exchange?” In this article, we are going to talk about the professionals you should have on your 1031 exchange team.

Involving Your Attorney

I always advise people that if they don't understand what they're doing, or they don't understand what they're reading, they need to assemble the whole crew of professional advisors so they have all the resources available to them.

One of those important resources is your attorney.

It’s important to have the attorney review the various purchase agreements, contracts, and exchange documentation that will be prepared part and parcel with your sale and closings of the relinquished property and replacement property.

Other Professionals to Have on Your 1031 Team

Also, it's very important to bring in your accountant or tax preparer who will eventually be reporting this transaction on form 8824 with your tax return for the year in which you sell the relinquished property.

In addition to the attorney and accountant there are other professionals that can help you navigate these waters such as a sophisticated commercial real estate broker, or financial planner.

All of these folks can provide you the full picture and depth of resources that you need to make the best decisions possible for your set of circumstances.

CPEC1031 in Minneapolis, MN

At CPEC1031, we value long-lasting client relationships. For decades, we have been providing title closing and 1031 exchange services to our clients throughout the state of Minnesota and across the country. Contact us today to learn more about the extent of our services and how we can help you with your next transaction. You can find us at our primary office located in downtown Minneapolis.

• 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

Sign Up for our Free Webinar: Eviction Moratorium & 1031 Exchange Update

Join Jeff Peterson of CPEC1031, Brian Niemczyk of Hellmuth & Johnson, and Matthew Thompson of USBank for a discussion about the recent update to Minnesota’s eviction moratorium and the fate of 1031 tax reform.

Details:

• What: Eviction Moratorium and 1031 Exchange Update

• When: Oct 19, 2021 09:00 AM - 10:00 AM CST

• Where: Online - click on the link below to learn more and RSVP!

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Speakers:

Jeff Peterson - CPEC1031, LLC

Jeffrey Peterson is the president of CPEC1031, LLC. He received both his B.A. and his J.D. from the University of Minnesota, and is a member of the Minnesota State Bar Association and the Tax Section of the American Bar Association. He is also an adjunct tax law professor at Mitchell Hamline College of Law and instructor for Kaplan Real Estate Education.

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Matthew Thompson (Host) - U.S. Bank

Senior Vice President Business Banking Market Leader in the Twin Cities. Matthew manages a team of over 80 bankers who serve business customers and commercial real estate owners.

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Brian N. Niemczyk - Hellmuth & Johnson

Brian practices primarily with the firm’s litigation group and focuses on commercial, landlord-tenant, real estate, and employment litigation. He also draws upon his litigation experience to counsel his clients on methods of avoiding litigation in the first place.

Why 1031 Exchange Rules Favor Investors for 6 Months

In a 1031 exchange, there are strict rules that govern the time periods by which you must abide in order to have a successful exchange. Specifically, you have 180 days total to complete your exchange. This goes for both forward and reverse exchanges.

Parking Your Replacement Property

Sometimes, taxpayers find the perfect replacement property before they’re able to sell their relinquished property. The good news is, you are able to purchase that relinquished property and park it with your intermediary’s Exchange Accommodation Titleholder, and take the next six months to market and get the highest and best price for your old property, and still benefit from a 1031 exchange. You can have your replacement property all teed up, ready and waiting for you, and then when you dispose of your old relinquished property.

The steps to wrap-up are:

• Relinquished property sells.

• Parked replacement property transferred to you.

• Exchange is over and tax is deferred

If You Don’t Make It You Still Have 1031 Exchange Options

Here is a 1031 Tip. If the stars do not come into alignment (within six months), and you cannot unload your old relinquished property so that you reverse exchange fails, it’s not the end of the world. You’ll end up owning both properties. You can still do a 1031 exchange on your old relinquished property (when and if it eventually sells). But you will have to exchange into something else that you don’t already own. At the end of the 180 days, your EAT is done holding it (parking is over); they will transfer it to you, so that it is your property now. You can’t exchange into something you already own, but (when your relinquished property eventually sells) it is still possible to exchange into something else (just not the property that you already own).

• 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