Why Related Party Transactions were Created to Prevent Basis Shifting

Related party transactions were designed to stop abuses that were happening in the realm of 1031. In this article, we are going to talk about why related party transactions were created to prevent basis shifting.

An Example

Imagine you own two subsidiaries. One subsidiary is a $40 million property that was bought 30 years ago and has low basis (owned in entity A). Recently, you bought another $40 million property in entity B. In the past you could just do an inter-company transfer – a swap between these two wholly owned subsidiaries and move the basis between the two properties. This is known as basis shifting. The IRS wanted to stop the practice of basis shifting so they created rules that state that when you do a related party transaction, you and your related property cannot transfer properties for at least two years. There also cannot be an intent to avoid the imposition of the tax.

What’s the difference between legitimately wanting to defer tax and illegitimately trying to avoid the imposition of the tax? That’s hard to quantify. To combat this, the IRS requires that those who do related party transactions must provide a written narrative on form 8824 stating why your related party transaction is not an abuse of the rules.

CPEC1031, LLC in Minneapolis, MN

At CPEC1031, LLC our team of professionals is well-equipped to handle all the aspects of your like-kind exchange of real estate. We have more than two decades of experience facilitating real property exchanges all over the United States. Contact us today at our Minneapolis offices to set up a time to chat with one of our qualified intermediaries, learn about the process, and see how a like-kind exchange can help you defer capital gains taxes when selling qualifying investment 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.

© 2024 Copyright Jeffrey R. Peterson All Rights Reserved

When to Consider a Post Like-Kind Exchange Refinance

What if you’ve completed a construction 1031 exchange of your new office building and deferred 100% of your gains, but you don’t have enough capital to furnish the property. What are your options post-exchange?

One option would be to go to your banker and ask them to set up a post-exchange refinance and borrow money against your equity in the property. This would be a separate and distinct transaction from the 1031 exchange. Can you have your cake and eat it too in this type of situation? The answer is yes, but you may have to delay your gratification. The time to have this discussion is not before you’ve purchased the property, but after. When you borrow money against your replacement property that’s not gross income. You have a separate obligation to repay that loan so you can get your hands on that equity.

A very successful strategy that many real estate investors use is to put a line of credit on all of their rental properties after they acquire them in separate, subsequent transactions. There are a lot of unforeseeable circumstances that could bite a real estate investor (the pandemic being a good recent example). When you have a line of credit for business purposes you can tap into that equity if you need it.

Defer Capital Gains Taxes with 1031 Exchanges

1031 exchanges were built into the Internal Revenue Code as a way to incentivize investors to continue their investments, thus stimulating the economy. When done correctly, a 1031 exchange allows you to defer up to 100% of your capital gains taxes when selling qualifying property. This can be an attractive offer for many investors who are wary of a hefty tax bill. If you are considering a 1031 exchange of your property, contact a qualified intermediary at CPEC1031 to talk about your options. Our team has over twenty years of experience working with clients on all types of 1031 exchanges.

• 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.

© 2024 Copyright Jeffrey R. Peterson All Rights Reserved

Why You Should Let Your Qualified Intermediary Handle Your Sales Proceeds in a 1031 Exchange

In this article, we are going to talk about why you should let your qualified intermediary take care of your sales proceeds in a 1031 exchange of real estate.

Avoiding Boot

The primary reason you want to allow your qualified intermediary handle your sales proceeds in a 1031 exchange is to avoid boot. During the course of a 1031 exchange, if you at any point receive cash proceeds (known as boot) from the sale of your relinquished property, you will likely be taxed on these proceeds, simply because you received them.

The better course of action is to allow your qualified intermediary to take possession of and safeguard your sales proceeds from the relinquished property sale in a separate, segregated escrow account. Then, when it comes time to reinvest your proceeds into your new replacement property, your intermediary will move the funds from the escrow account into the new property. When done correctly, you (the exchangor) will never receive any of the funds and you will be able to defer 100% of your capital gains tax burden.

1031 Exchanges of Real Estate

1031 exchanges of real estate offer a tax-saving opportunity for investors who want to keep their money compounding and building wealth over time in a continued investment property. If you are ready to get the ball rolling on your like-kind exchange, your first step is to contact a qualified intermediary who specializes in 1031 exchanges of real estate. They can help guide you through the exchange process and ensure your property is a good fit. CPEC1031, LLC is here to meet all of your 1031 exchange needs. With over two decades of experience in the 1031 exchange industry, we have the knowledge and the skills needed to work through all the details of 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.

© 2023 Copyright Jeffrey R. Peterson All Rights Reserved

Video - 1031 Exchanges Involving Contracts for Deed & Seller-Backed Financing

If you sell your property under a contract for deed with a percentage down and the balance paid in a balloon in five years, can you do a 1031 exchange?

First of all, a disclaimer: every contract is written differently. In general, when you enter into a contract for deed you’re effectively conveying equitable title to the buyer. You’re giving them possession of the property. Typically, the vendee on a contract has to pay the property taxes, insurance, and more. They’re the owner for tax purposes. Think about who takes the depreciation deductions on the property that was purchased on a contract for deed. The vendee does (generally speaking) because they have the rights to utilize the property.

When you’re a vendor on a contract for deed you’re selling the property with an installment sale. You’re retaining the bare legal title as an enforcement mechanism to compel the vendee to make their required payments. You’re retaining the bare legal title, but you’ve effectively given the vendee equitable title for tax purposes.

So you’ve basically sold the farm when you entered into the contract for deed. Five years from now when you get paid off on the balloon payment you probably cannot do a 1031 exchange when you’re giving the legal title to the buyer.

How do you work around the fact that you’ve conveyed equitable title in this situation? The first option is to not do seller-backed financing because it complicates 1031 exchanges. That’s not a satisfying answer for many, particularly when interest rates are rising.

Here’s another option: let’s say you’re selling a duplex for $500,000, the buyer is giving you $100,000 down at closing and you’re financing $400,000 for five years. One way to fix this problem is to have the vendee bring their $100,000 in and have the vendor bring in $400,000 out of their own pocket. If you bring in your own cash to loan to the buyer, that means amount of funds in the exchange account will be the same as you’d normally get if there wasn’t seller-backed financing. Having the exchangor finance the buyer out of pocket is a great way to fix the problem, but it requires some liquidity.

In the Uptown area there’s a real estate broker that acts as a sort of problem solver for sellers. If you want a clean break from your property – you don’t want to do seller-backed financing and you don’t want to bring capital to the deal, this broker interposes himself and agrees to buy the property with cash and then sells it to the vendee on a contract for deed. This might be another option.

• 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

The Details of a Build-to-Suit Like-Kind Exchange

Let’s say that you own a retail business in Minneapolis and the local municipal regulations have changed around you, and the location just isn’t right for you any longer. However, you’ve got a lot of appreciation in the property. Maybe you’d be better off repositioning your property into an outer lying suburb. In a build-to-suit exchange, you sell the relinquished property, place the money with the intermediary, and then the intermediary (acting through an exchange accommodation titleholder) purchases the replacement land. You are not only identifying the replacement land, you’re also identifying the real property improvements to be constructed. The intermediary insulates you from receiving that land prematurely. During the remainder of your 180 days you arrange for the construction of new property improvements to build your new facility.

This may be the best way to take your business to the next level, but you don’t want to get slapped on the wrist with taxes in the midst of that transition.

The 180 Day Exchange Period

In a 1031 exchange, your exchange period is 180 days. Is 180 days enough time to complete such an exchange? You need to receive a replacement property of equal or greater value, equity, and debt. If you sell your Minneapolis location for $1 million and the new land in the suburbs costs $500,000 then your bogey for constructing improvements is $500,000. You don’t need to have the construction fully completed. You just need to have enough construction completed so that the land and buildings are worth $1 million or more.

The Benefits of Section 1031

There are many rules and regulations that you need to satisfy in order to ensure your 1031 exchange is a success and you defer 100% of your capital gains taxes. A qualified intermediary can help inform you of these guidelines so you can set your exchange up for success. The team of intermediaries at CPEC1031, LLC has been working on like-kind exchanges of real property for over twenty years. We understand the ins and outs of the like-kind exchange process and can help bring your exchange across the finish line. Reach out to us today at our downtown Minneapolis office to learn more about the benefits of section 1031 and 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.

© 2023 Copyright Jeffrey R. Peterson All Rights Reserved