Remember These Potential Pitfalls When Selling Rental Property

If you own a rental property and you’re thinking of selling, there are some important factors to keep in mind. In this article, we are going to talk about a few things to keep in mind when selling rental property.

Be Aware of Capital Gains Taxes

Selling a rental property is a lot different than selling your primary residence. Since the rental property is considered an investment property, you are responsible for paying capital gains taxes on the sale. Depending on the property itself, this can be a hefty bill that the seller has to foot – often 20% or more of the sales proceeds.

How to Avoid a Huge Tax Hit

If you are hesitant to sell because of this potential capital gains tax bill (who can blame you?), a 1031 exchange can help you defer your capital gains taxes when selling rental property. With a 1031 exchange, you would take your proceeds from the sale of the relinquished property and reinvest them into a new replacement property (another rental property, or any other investment property that qualifies). This helps you avoid a tax bill and keeps your money working in a continued investment.

CPEC1031, LLC

At CPEC1031, we have more than twenty years of experience helping clients through the 1031 exchange process. Our qualified intermediaries will walk you through each and every step in the process – from planning to closing – and answer all of your questions along the way. If you are selling a rental property in a 1031 exchange transaction, contact our professionals today. Our primary office is located in downtown Minneapolis, but we have satellite offices around the United States.

• 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

How to Deal with Earnest Funds & Closing Costs in a 1031 Exchange

Regarding earnest funds and closing costs, can you use 1031 exchange funds to pay for them? If you cut a check for earnest money, will the 1031 exchange funds credit you back? Many taxpayers have questions like this as they try to project out the down payment percentages with the lenders and also in preparation of writing offers. That’s our topic for this article.

Earnest Money & Transactional Costs

Yes, you can pay earnest money and transactional costs associated with the closing of the acquisition of the property out of exchange funds. If you advance earnest money out-of-pocket, we can have that deposit returned to you at the time of closing. If it’s non-refundable earnest money, though, which either leaves or bypasses the closing escrow, we would need the seller to be amenable to sending it back to the title company; we can’t reimburse you out of exchange funds during the exchange period.

Please note that costs related to obtaining loans – including good faith deposits and down payments – are generally treated as distinct from the costs of obtaining the property and should not be funded out of the exchange; doing so could trigger some recognition of gain.

• 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 Exchange a Residential Property in a Like-Kind Exchange Transaction?

Some of the most common questions we get about 1031 exchanges involve the question of residential property. Can you use a residential property as one of your 1031 properties? Does it make a difference if it is entirely used for personal use, rented out some of the time, or if it is just a rental property and not used at all for personal use?

In order to qualify for 1031 treatment, the Replacement Property should be held for investment or business purposes. If you immediately start using the Replacement Property for extensive personal use that may jeopardize the 1031 exchange.

From the IRS

Both the relinquished property you sell and the replacement property you buy must meet certain requirements.

Both properties must be held for use in a trade or business or for investment. Property used primarily for personal use, like a primary residence or a second home or vacation home, does not qualify for like-kind exchange treatment.

CPEC1031, LLC

If you have questions about the specifics of your 1031 exchange, reach out to CPEC1031 today. Our qualified intermediaries have over two decades of experience helping clients facilitate 1031 exchanges of real estate. Contact us at our downtown Minneapolis office today 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

1031 Exchange Tips for Conservation Easements

If you’re a farmer or land owner and you’re approached by a government entity to grant a permanent conservation easement in exchange for a huge amount of cash you may be scratching your head thinking “what am I going to do with this large amount of cash? I’m going to have to pay a lot of it out in taxes.”

1031 Permanent Conservation Easement

The interesting thing is that a permanent conservation easement is eligible as a 1031 relinquished property. Now the trick is that at the very beginning of these negotiations you want to tell the government entity that you’re doing a 1031 exchange and you want to make sure that the proceeds – the check that’s going to be issued – is not given to you, but instead is given to the qualified intermediary.

Whenever you’re working with a bureaucratic governmental entity it helps to start early and to say it often that you’re doing an exchange and that there’s going to be a little bit different payment method here. Often, if you try to raise this at the eleventh hour and change the plans it can be difficult to get the governmental entity to come into alignment with what you want to do for the exchange.

Start Early & Notify

So start early, notify them early, and let them know where you want your proceeds to be sent. The whole idea in a 1031 exchange is to insulate the seller from receiving the proceeds and to have those monies instead go to the qualified intermediary so they can be earmarked to purchase new replacement property that will qualify for your 1031 tax deferral.

• 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

Tips for Handling Items on the HUD Statement in a 1031 Exchange

Many taxpayers who are engaging in a like-kind exchange have questions about how certain items on the closing statement should be handled. In this article, we’re going to take a look at some of those common closing items and how they should be addressed from a 1031 exchange point of view.

Items on the HUD Statement

Here are a few items that generally appear on the HUD statement and how they should be handled in a 1031 exchange transaction:

• Earnest Money– The original earnest money funds should come from the exchange as part of the purchase price and be paid back.

• Broker’s Creditshould be returned at closing.

• Accrued Rental Incomeshould be returned at closing.

• Property Tax Credit should be paid back for a property tax escrow account or prepaid to the County.

A Note on Earnest Money

It is OK to return the earnest money, but it is important to take steps to make sure it can’t be misunderstood as exchange funds coming into the taxpayer’s hands (boot). The best way to do this is to show a debit line item on the settlement statement as “Return of Earnest Money Deposit.”

• 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