Have you Taken Accelerated Deprecation on Your Agricultural Building?

Like-kind exchanges (post 2017) are limited to only real property. You can have both I.R.C. §1245 real property components (inherently permanent structures and the structural components of inherently permanent structures) and I.R.C. §1250 real property components (e.g. raw land).

3 Categories of Property Components

Under the new regulations, three categories of property components may qualify as real property for Section 1031:

1. Property specifically listed as real property in the IRS regulations

2. Property classified as real property under state or local law

3. Property that satisfies an IRS facts-and-circumstances test

Sometimes there are agricultural structures that are designated as I.R.C. §1245 property (shorter depreciation life) such as irrigation systems, drainage tile, and other specialty improvements to farm real estate. If property with an I.R.C. §1245 depreciation recapture attribute is sold in an I.R.C. §1031 exchange, the I.R.C. §1245 depreciation recapture must be recognized to the extent that the new replacement property has insufficient I.R.C. §1245 property.

You can match up I.R.C. §1245 relinquished real property with new I.R.C. §1245 replacement real property, it just takes a little more planning and persistence in a 1031 exchange.

The IRS regulations broadly construe like-kind real property to include all business and investment real property in the United States, whether improved or unimproved. Reg. Section 1.1031(a)-3(a)(4).

The term inherently permanent structure means any “building.” The term “buildings” include the following distinct assets if permanently affixed: houses, apartments, hotels, motels, enclosed stadiums and arenas, enclosed shopping malls, factories and office buildings, warehouses, barns, enclosed garages, enclosed transportation stations and terminals, and stores. Also the list of “other inherently permanent structures” is extensive and broad and includes “grain storage bins and silos”.

• 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

What are the Most Commonly Utilized Identification Rules in a Reverse 1031 Exchange?

There are several ways of approaching property identification in a reverse exchange of real estate. In this article, we are going to discuss the two most commonly utilized identification rules in a reverse 1031 exchange.

Reverse Exchange Identification Rules

Here are the two most frequently used identification methods when dealing with a reverse 1031 exchange:

• Three Property Rule: List three or fewer relinquished properties.

•  200% Rule: List any number of properties but the total aggregate value of all the identified relinquished properties cannot exceed 200% of the value of the replacement property.

Either of these identification rules will work in a reverse 1031 exchange. It’s just important that you abide by one of them in order to ensure the success of your like-kind exchange.

CPEC1031, LLC

If you are looking to start a reverse exchange of real estate, you’ve come to the right place. At CPEC1031, LLC we have decades of experience working with clients on reverse exchanges. Let us put our experience to work on your next like-kind exchange. Contact us today at our Minneapolis office to learn more. We work with clients throughout the state of Minnesota and across 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.

© 2023 Copyright Jeffrey R. Peterson All Rights Reserved

Why Eliminating or Restricting the 1031 Exchange Would Not Raise Taxable Revenue

For decades, some have argued for the repeal of section 1031 of the Internal Revenue Code. According to those who advocate for its repeal, by eliminating the tax deferral of section 1031, the coffers of the government will be increased dramatically because all of these sales will now become immediately taxable. But would this tactic actually work to raise taxable revenue?

The Reality of the Situation

The reality of the situation is that rather than selling properties in taxable transactions, most people will hunker down and simply refuse to sell their property if they have the immediate disincentive of taxation looming.

If the 1031 exchange is eliminated, the volume of sales will not continue at the same pace. The reality is if you don’t have a vehicle (such as a 1031 exchange) to defer gains people will simply not sell. As a result, there will be less revenue, less velocity in the marketplace, and less capital flowing where it needs to go in the economy.

Preserving the 1031 Exchange

If tax reform is needed and simplification is sought let’s keep this old code section that’s been around since 1921 that works great to organically grow and stimulate the economy. Keep the 1031 exchange, which serves a vital function both in the tax code and in the economy.

•  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

2 FAQs About 1031 Exchanges in Minneapolis

We recently assisted a real estate broker with a 1031 exchange for their client who was selling a duplex in the Twin Cities. They intended to move the proceeds from the sale into a fourplex property in a 1031 exchange. Here are some pertinent questions relating to this particular 1031 exchange that may be applicable to other exchanges.

Commercial Plus Residential Space

Is there a problem with one of the properties having commercial rental space as well as residential? One place, in particular, has three apartments with 2800 sq ft of commercial space below.

The replacement property must be held for investment or business purposes and may be residential or commercial rentals (or a combination of both).

Rolling Proceeds into More than One Property

Is it possible to roll the sales proceeds from the relinquished property into more than one replacement property?

You are allowed to purchase multiple replacement properties (provided that they are designated / Identified in writing within 45 days of the closing of the 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

Partial 1031 Exchange Consequences

From an accounting point of view when you’re doing a 1031 exchange, if you want to defer every cent of tax in a 1031 exchange you need to kind of juggle three balls in the air at the same time – value, equity, and debt. In this article, we are going to talk about the consequences of dropping one of these balls and only qualifying for a partial 1031 exchange.

Value

First, you need to continue your investment into like-kind property that is equal or greater value than what you relinquished. If I sell a property for 1 million dollars and I only buy a replacement property for $10,000 the IRS is going to say “hey where is your continuation of investment? We only see this paltry $10,000 replacement property.”

So to the extent you buy down in value you’re going to recognize the gain dollar for dollar to the extent that you have a gain.

Equity

The next ball that we’re juggling is the equity. Whatever net proceeds you have from the sale of your relinquished property, that equity needs to be redeployed into the new replacement property. If you put some of that cash proceeds into your pocket instead of into the replacement property the IRS is going to tax you dollar for dollar to the extent that you put that cash in your pocket. So during the exchange process you don’t want to touch any cash, you want to reinvest all of the proceeds into the new property.

Debt Relief

The last ball we’re juggling is debt relief. To the extent that you pay off mortgages, deeds of trust, liens and debt associated with the relinquished property we need to offset that debt relief with new debt on the replacement property or cash. If you win the Powerball lottery on the way to your replacement property closing and you can pay cash for the replacement property that cash in out-of-pocket will also offset the debt relief.

• 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