The State of the Commercial Real Estate Marketplace

It’s a somewhat strange time in the commercial real estate marketplace. In some sectors, it’s blazing hot, while in others, it’s stagnant. In this article, we are going to talk about the state of the real estate marketplace and offer some tips for conducting 1031 exchanges.

Velocity & Fragility

Though we sometimes work on 1031 exchanges for big corporations, most of the 1031 exchanges we facilitate are for small mom and pop owners. That’s where we’re seeing the greatest velocity in the marketplace.

On the flip side of the coin, there are also some soft spots in the marketplace since the pandemic began. Entertainment venues, restaurants, hotels – etc. From a 1031 exchange perspective, we may not see a return to “normalcy” for these properties for another couple of years.

But even in hot sectors of the market, taxpayers can face some tough real estate situations. We worked with a client recently who was selling a property in Colorado and wanted to exchange into a like-kind property in Florida. The good news is that the market in Colorado is a hot seller’s market. The bad news is that the market in Florida is even hotter. So while this client had no problem selling their relinquished property, they had a difficult time finding a replacement property within the 1031 exchange timeframes.

1031 Exchange Time Limits

The day you sell your relinquished property is day zero for computing your 45 day identification period and your 180 day exchange period. Those rules were created not with investors’ success in mind. Rather, they were created to limit the number of people completing 1031 exchanges. For that reason, you really need to work with someone who understands the rules of the road before starting the process.

• 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.

© 2022 Copyright Jeffrey R. Peterson All Rights Reserved

What Are Your Options If You Can’t Find a 1031 Replacement Property?

Any given 1031 exchange must be completed within 180 days of its initiation. This can pose problems for taxpayers, especially in a hot seller’s market. In this article, we are going to offer some tips and tricks for taxpayers who can’t find a suitable replacement property during their 1031 exchange.

2 Realms of Real Property

There are two realms in which you can search for your replacement property, which has to be real estate in the United States held for investment or business purposes.

1. The big realm is traditional brick and mortar real estate.

2. The other realm is the securitized realm, in which companies have products that are marketed and regulated as securities but nevertheless also constitute real estate for federal tax purposes.

Benefits of the Securitized Realm

This securitized realm is a great place to go when you can’t find suitable replacement property in traditional real estate. The added benefit of the securitized realm is that it’s much less management intensive compared to traditional real estate.

Right now, because the market is so hot, property owners in many cities are looking down the barrel at higher taxes, greater regulation, and more potential difficulties. Because of those potential headaches, many owners are deciding to sell their property at the top of the market and exchange into a Delaware Statutory Trust, for example, that offers management-free alternatives

Minnesota Qualified Intermediaries

At CPEC1031, LLC our team of qualified intermediaries has over two decades of experience working on 1031 exchanges of all kinds. We can help you understand your options in a hot seller’s market. Reach out to us today to learn more about our 1031 exchange services and see how we can help with your next 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.

© 2022 Copyright Jeffrey R. Peterson All Rights Reserved

Post-Exchange Refinancing

Many people have questions about refinancing their replacement property after their exchange is over. Here we will answer some FAQs about refinancing after a 1031 exchange and offer some tips and best practices.

Refinancing after a 1031 Exchange

First off, refinancing one’s old relinquished property in anticipation of an exchange should be differentiated from post-exchange refinancing, done in a separate transaction after the exchange is completed. I think that the stronger more defensible position is for a post-exchange refinance (done in a separate transaction after the last replacement property has been received by the taxpayer to complete their exchange).  I do not endorse refinancing one’s relinquished property, especially if a sale/exchange of the property is looming or anticipated to occur in the near future.

There is precious little authority available on this topic. However, these topics are discussed in section 4:14 of Tax Free Exchanges Under §1031, which states that: 

“current case law favors the position that the taxpayer can obtain tax-free cash from an increase in debt on the taxpayer’s property prior to or after closing of an exchange.”

Additionally, the American Bar Association Section of Taxation has prepared Comments Concerning Open Issues in Section 1031 Like-Kind Exchanges.  On point is Answer 2b set forth below:

[The italicized text below represents what I think is the current thinking among knowledgeable tax commentators.]

A-2b. POST-EXCHANGE REFINANCINGS.

Post-exchange refinancing should be of less concern from a tax perspective than pre-exchange refinancing. Here the integration of the refinancing with the acquisition of replacement property should not matter. Even where a new loan is obtained at the time or immediately following a taxpayer's acquisition of replacement property in an exchange, receipt of cash by the taxpayer should not be treated as boot.

There is, however, virtually no authority addressing this issue. The key to the distinction between pre- and post-exchange refinancing is that the taxpayer will remain responsible for repaying a post-exchange replacement property refinancing following completion of the exchange whereas the taxpayer by definition will be relieved from the liability for a pre-exchange relinquished property refinancing upon transfer of the relinquished property.

A fundamental reason why borrowing money does not create income is that the money has to be repaid and therefore does not constitute a net increase in wealth. This is clearly the case in a post-exchange refinancing and there is no analytic reason to characterize such financings as being in lieu of fictitious payments by the seller of replacement property. Thus, we encourage the publication of a revenue ruling which indicates that money received in a post-exchange refinancing will not constitute "boot" in an exchange.

• Start Your 1031 Exchange: If you have questions about post exchange refinancing, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2022Copyright Jeffrey R. Peterson All Rights Reserved

1031 Exchange Technical Question: Combining Property Owned by Spouses

In any 1031 exchange you must exchange like-kind relinquished property for like-kind replacement property in order to avail yourself of the capital gains tax savings. That may seem simple on the surface, but it gets much more complicated in certain scenarios. Here’s a technical 1031 exchange question we’ve been hearing a lot recently:

In a 1031 exchange, can you combine property owned by two spouses with property owned by an LLC to make one single purchase?

Combining Properties

The short answer is yes. In a 1031 exchange, you can combine 1031 proceeds from relinquished properties owned by two spouses and also from relinquished properties owned by a business entity (that may be owned by one or more of the spouses).

The ownership of the new replacement property could be taken as tenants-in-common with the ratio of ownership allocated between the co-purchases (spouses and business entity) based upon the amount of exchange funds each contributes towards the purchase of the replacement property.

For example, if the spouses individually contributed $1M of exchange funds, and the business entity contributed $3M of exchange funds for the purchase of the replacement property, then the ratio of ownership would be 25% spouses, and 75% business entity. The deed would show this ownership division with the two co-purchasers receiving title to an undivided tenant-in-common interest in the replacement property.

The deed might read:  Grantor hereby conveys the property to John and Mary Doe, husband and wife as to an undivided 25% tenant-in-common interest; and Doe Enterprises Holding Company, LLC as to an undivided 75% tenant-in-common interest.

CPEC1031, LLC

If you have further questions about 1031 exchanging property involving multiple owners, don’t hesitate to reach out to CPEC1031. Our qualified intermediaries have over two decades of experience facilitating exchanges of all shapes and sizes. Contact us today to learn more about how we can help 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.

© 2022 Copyright Jeffrey R. Peterson All Rights Reserved

Can you 1031 Exchange from Oil & Gas into Land or other Real Estate?

In a typical 1031 exchange, you can exchange real estate for other real estate. But many taxpayers wonder if you can also exchange oil and gas rights.

Not all oil and gas programs qualify for 1031 exchange. So you have to be very cautious because not every deal that is set up as an oil and gas deal will work. This is particularly true for partnership deals, because if you own a partnership interest it doesn’t qualify for 1031 exchange.

Trading Deductions

Consider this situation: Let’s say you fully depreciate your single-family rental property. There’s nothing left but the basis in the underlying land. Then you take your profits in a 1031 exchange and parlay it into an oil and gas program that doesn’t allow depreciation, but allows a different kind of deduction called a depletion deduction for the theoretical depletion of the oil and gas reserves in the land that is the subject of the program.

In this situation you can trade one kind of deduction (the depreciation deduction) for a different kind of deduction (the depletion deduction). That could create some tax efficiency that would offset or mitigate the tax on your income. This is a creative way to pivot from a traditional real estate investment into an oil and gas program.

• 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.

© 2022 Copyright Jeffrey R. Peterson All Rights Reserved