Can I File my Taxes Before Finishing my 1031 Exchange?

With tax season upon us, many taxpayers have questions about how and when to report a 1031 exchange on their return. This article answers some common questions about 1031 exchange tax reporting.

When to Report the Sale & Acquisition

If you sell a piece of property in a particular tax year, you probably don’t report that sale and the subsequent purchase of your replacement property until April 15th of the next year.

Well congress and the IRS have said that when a 1031 exchange crosses over into the new tax year you have 180 days normally to complete the exchange, but the 180th day is shortened down to the due date of the filing of your federal income tax return. The reason that they shorten the 180 day exchange period is that they don’t want to have to wait until the next year to see how this story unfolds with the acquisition of the replacement property.

Getting the Full Use of Your Exchange Period

So most taxpayers that file on April 15th but haven’t yet completed their 180 day exchange period will file for an automatic extension of the April 15th filing deadline, and move it out to October. The reason that they do that is they want to get the full use of their hundred and eighty days so they can acquire the replacement property. That way when they filed a tax return the whole story will be shown on form 8824. They’ll see the sale of the property first and then the acquisition of the replacement. You don’t want to send in your tax return before you’ve completed the circuit on the disposition and acquisition of your properties.

• 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.

© 2023 Copyright Jeffrey R. Peterson All Rights Reserved

How to Hold Title to the Replacement Property in a Reverse 1031 Exchange?

In a back leg reverse 1031 exchange, how must title to the replacement property be held? This is a common question when it comes to reverse exchanges.

Exchange Accommodation Title Holder

A back leg reverse exchange is where the qualified intermediary forms an LLC called an exchange accommodation title holder (E.A.T.). That LLC purchases the replacement property rather than having the taxpayer receive it.

The reason that we’re parking the replacement property with the exchange accommodation title holder is we want to put it on ice – hold it in a parking arrangement until the relinquished property can be disposed of.

The Purchase Agreement

But before the closing of the replacement property the exchanger typically enters into that purchase agreement. It may say “Joe Blo and/or his assigns.”

We want Joe to remain the purchaser right up until the moment before the closing is completed so that Joe can enter into amendments, and work through the due diligence period and inspections. Then, if and only if Joe decides to purchase the replacement property as part of a reverse exchange, Joe will then at the last moment assign that purchase agreement to the exchange accommodation title holder, who will take title to the replacement property and hold it for up to 100 days while Joe goes about trying to dispose of and liquidate the old relinquished 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.

© 2023 Copyright Jeffrey R. Peterson All Rights Reserved

How to Deal with Enhanced Development Rights in a 1031 Exchange

Sometimes people are contacted by a government entity or organization and they’re asked to convey enhanced development rights. These are restrictions imposed on the relinquished property in a 1031 exchange that burden the property and run with the land, sometimes perpetually. This article will explain some of the fundamentals of enhanced development rights as they relate to 1031 exchanges.

The 1031 Question

The first question many people have is:

• I’m going to get this big bill this big amount of cash for the sale of these enhanced development rights – can I do a 1031 exchange on it?

And the answer is yes. In a private letter ruling issued by the IRS, taxpayers have been given the green light to exchange or dispose of development rights and acquire fee title* and replacement properties. Another kind of relinquished property that may be given up are conservation easements that may be perpetual or for durations of 30 years or more. Those are very similar to the restrictions imposed through enhanced development rights. They have to be a significant and substantial (perhaps perpetual) transfer of rights in the property so much so that they are considered the equivalent of the title for federal tax purposes.

*Fee title (also sometimes called “fee simple”) is an estate or interest type of ownership giving the owner the highest possible or best interest in the land (subject only to the absolute sovereignty of the government).

• 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.

© 2023 Copyright Jeffrey R. Peterson All Rights Reserved

A Few Common Questions Closers Have About 1031 Exchanges

Sometimes title closers have questions about the 1031 documents and what their responsibilities are to get the closing done correctly so they don’t mess up the 1031 exchange.

One of the most important things that the treasury regulations require is that the exchange or the party doing the exchange must sign their rights in the purchase agreement to their qualified intermediary.

Well that’s great, but under the old English common law, an assignment was not considered effective until all of the other parties to the purchase agreement had been given written notice and the IRS adopted the same requirement in the treasury regulations.

So at the time of closing that notice of assignment that the exchangor has assigned their rights in the purchase agreement to the intermediary – that notice must be given to the other parties. So for the relinquished property the notice would go to the buyer as well as any assignees of the buyer.

Further, if there are co-sellers (other parties conveying the relinquished property that are parties to that purchase agreement), they too should be given written notice. Now how do we prove that we gave all these people written notice? We ask them to sign an acknowledgement stating we have received this notice in writing.

So that’s part of the closing documents qualified intermediaries send to the seller to make sure that all of the proper parties are given the requisite notice.

• 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.

© 2023 Copyright Jeffrey R. Peterson All Rights Reserved

How to Find a Replacement Property Before Selling Your Relinquished Property

Savvy investors like to think ahead when they’re doing a 1031 exchange. Ideally, you want to gain the advantage of locking up a replacement property before selling the old relinquished property. Here’s a common question people ask in this situation:

“Is it permissible for me to sign a purchase agreement or an option agreement to contractually find a seller to sell me a replacement property even before I close on my old relinquished property? Will that somehow foul up my 1031 exchange?”

Locking Up a Replacement Property

The answer is you can lock up a replacement property, you just can’t close on it before you’ve first disposed of the old relinquished property. So signing a purchase agreement, or an option agreement are proven practices. You just don’t want to inadvertently acquire them before you sell the old relinquished property.

Reverse 1031 Exchange

That being said, if you have to close on the replacement property first (before selling your relinquished property) there’s a solution for that too.

• 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.

© 2023 Copyright Jeffrey R. Peterson All Rights Reserved