Can You do a 1031 Exchange with Replacement Real Property You Already Own?

The word “exchange” is an important part of the Internal Revenue Code section regarding 1031 exchanges. If you’re going to do a 1031 exchange, that generally means you have to acquire something new that you didn’t already own prior to starting the like-kind exchange.

Property Ownership

The easiest and safest way to conduct a 1031 exchange is to buy property that you do not already own from an unrelated third party. It’s not a good idea to take the sales proceeds from the disposition of your relinquished property and pay off debt on property that you already own. The IRS likely will not view that as an exchange under section 1031.

For many years the IRS took the position that building improvements on land that you already owned did not qualify for 1031 exchange treatment. There have since been a few private letter rulings that soften this position a little bit, but even so, this is a very tricky category of 1031 exchange. As such, if you find yourself in this position, it’s important to work with the best and the brightest – your qualified intermediary, accountant, attorney, banker, and more.

1031 Exchange Company in Minnesota

CPEC1031, LLC is a Minnesota-based 1031 exchange company providing like-kind exchange services to taxpayers throughout the United States. Our qualified intermediaries have over twenty years of experience working on exchanges of all shapes and sizes. We are fully equipped to help you through the details of your next 1031 exchange transaction. 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.

© 2022 Copyright Jeffrey R. Peterson All Rights Reserved

Can You 1031 Exchange from a REIT or DST Into Traditional Real Estate?

Many taxpayers have questions about 1031 exchanges involving DSTs or REITs. In this article, we are going to discuss when (if ever) you can 1031 exchange out of REITs or DSTs into traditional real estate.

DSTs and REITs

Some DSTs are designed to be like a mini-REIT – a portfolio of a handful of properties. That portfolio is going to have investment benchmarks. When the portfolio meets those benchmarks, the syndicator will sell the portfolio and all of the investors will have the opportunity to either cash out (and pay their taxes) or to do another 1031 exchange. That may happen a few years from now or a decade or more later. These types of products have a built-in “exit” that offer investors the opportunity to do another 1031 exchange down the line.

Other sponsors have DSTs that are designed after a period of time not to be sold, but to go up into a REIT. So the property that is in the DST is going to be absorbed under section 121, which is the contribution of property of a partnership (known as an UPREIT partnership). The plan is to absorb the property into the UPREIT so the investors then find themselves in the equivalent of a big, diversified REIT. This situation is kind of like the Hotel California – you can check out, but you can never leave (without triggering capital gains taxes).

Questions? Give Us a Call

If you’re considering whether to exchange into traditional real estate, REITs, or DSTs, please give us a call today to discuss. Our qualified intermediaries have been facilitating these types of transactions for more than twenty years and can help you through all the ins and outs of your situation. Contact us at our 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.

© 2022 Copyright Jeffrey R. Peterson All Rights Reserved

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