What You Can Pay with 1031 Exchange Funds

Here is a list of the items that are probably OK to pay using 1031 exchange funds as long as they relate to the specific exchange transaction:

• Broker Commissions

• Finder and Referral Fees

• Title Insurance Premiums (for owner’s title insurance specifically)

• Closing Agent Fees

• Tax Advisor and Financial Planner Fees

• Recording and Filing Fees

• State Deed Tax and Transfer Charges

• Attorney Fees Related to the Specific 1031 Exchange Transaction

It’s important to remember that these expenses are only OK to pay using 1031 funds insofar as they are related to the 1031 exchange itself. For example, fees from your attorney for working specifically on the 1031 exchange would be appropriate, but any additional attorney fees (for estate planning, for example) would not be appropriate.

You can also choose to pay all of these transactional fees out of pocket and keep your 1031 exchange funds completely separate. That would be the safest, most conservative course of action.

Deferring Taxable Gain with a 1031 Exchange

Defer your taxable gain when you sell investment real estate by conducting a 1031 exchange! Interested in learning more about the 1031 exchange process and whether your property is a good fit? Contact the qualified intermediaries at CPEC1031, LLC today. We have been helping taxpayers with their 1031 exchanges of real estate for more than twenty years. Our experience in the 1031 exchange industry makes us well suited to assist you with your next real estate exchange. Reach out to us today to set up a time to chat about your 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.

© 2024 Copyright Jeffrey R. Peterson All Rights Reserved

Options for Covering Non-Qualified Expenses in a 1031 Exchange

In a 1031 exchange, you may find that you have some boot items on the settlement statement that you clearly don’t want to pay for out of the 1031 proceeds. In this situation, the first thing you want to look at is whether you have some of your own money in the transaction that you can apply toward these items. For example, if there was an earnest money deposit that you paid for the replacement property, you could earmark a portion or all of that deposit to pay for the boot items.

Additionally, you may be getting some credits from the other side. Maybe the seller has agreed to give you a concession of some kind. You could apply that credit from the other side to pay for boot items.

Lastly, you can choose to pay for these boot items with outside money. Send in your 1031 exchange funds from the intermediary to pay for the exchange, and then send in non-1031 exchange funds out of your own pocket to pay for the boot items.

However you approach this, it’s important to inform the closing agent so they can properly notate the settlement statement.

Like-Kind Exchanges of Real Property

Like-kind exchanges of real property offer tax-saving benefits that are available to all US taxpayers. When you sell a property in a 1031 exchange, you reinvest all of your net proceeds from the sale into a new replacement property. This allows you to continue your investment while deferring your capital gains taxes from the sale of the relinquished property. Contact the intermediaries at CPEC1031, LLC to learn more about how you can save money with a 1031 exchange. Our team has more than twenty years of experience facilitating exchanges under section 1031 of the IRC.

• 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

1031 Exchange Fictions

The current 1031 exchange treasury regulations that were issued in 1991 are designed so that the taxpayer is not considered to be in receipt of the sales proceeds. The fiction is that the intermediary insulates the taxpayer from receiving anything but like-kind property (assuming the exchange is done correctly). The intermediary holds the money, but that holding of the money has to be pursuant to a written exchange agreement signed by the taxpayer and the intermediary. That exchange agreement has to contain limitations (sometimes referred to as the G(6) limitations), which are the modern iteration of the idea that you can’t get your hands on the 1031 exchange funds while they’re being held by the intermediary.

Direct Deeding

Another 1031 exchange fiction is the “direct deeding” fiction. Back in the old days (pre-1991), if the qualified intermediary was the seller of the relinquished property, you may have deeded your relinquished property to your intermediary acting as your escrow agent and the escrow agent would have sold the relinquished property directly to the buyer by deed. That extra deeding was unnecessary and burdensome, so in the 1991 regulations they came out with the idea of direct deeding wherein there would simply be a deed from the taxpayer conveying the relinquished property to the buyer, but there will have been an assignment to the intermediary of the seller’s rights in the relinquished property sale. That assignment wasn’t considered effective unless there was written notice given to the other parties involved.

So when we say we want to correctly identify the names of the parties on the settlement statement, that’s all in an effort to fully comply with the treasury regulations.

CPEC1031, LLC – Qualified Intermediaries

When you’re doing a 1031 exchange, you want to have a like-kind exchange professional by your side to guide your decision making. CPEC1031, LLC focuses solely on 1031 exchanges of investment real estate. Our qualified intermediaries are ready to help you through all the specific details of your next 1031 exchange of real estate. Contact our team today to learn more about the like-kind exchange process, its benefits, and to see if your property qualifies for like-kind exchange 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.

© 2024 Copyright Jeffrey R. Peterson All Rights Reserved

How to Handle Boot Received During a 1031 Exchange

A 1031 exchange is not a zero sum game. Not everybody wants to do a 100% tax-deferred 1031 exchange. If you want to take some taxable proceeds (boot) during your 1031 exchange, the best time to do that is before the rest of your net proceeds are sent to the intermediary.

In this scenario, you would amend the exchange documents and the closing instructions. Then on the settlement statement, you have the settlement agent (the title company or escrow officer) send the boot to the taxpayer before the rest of the net proceeds are sent to the qualified intermediary. Once the intermediary gets the proceeds, you can’t put your hand in the cookie jar without disrupting your 1031 exchange. The time to receive the boot (if you want to) is when the settlement statement is still in control of the proceeds. Take the boot at the beginning of the closing process if you know what you want.

Alternatively, if you’re not sure how much boot you want to take, you could wait until the exchange period has ended and get your unutilized surplus exchange funds back from the intermediary as taxable boot.

A 1031 Exchange is a Powerful Tool

A 1031 exchange is one of many tools available to taxpayers who want to put themselves in the most tax-advantageous position possible. When you sell your real property in a 1031 exchange you are deferring your capital gains taxes and compounding your wealth over time in a continued investment. As an added bonus, it’s a great way to stimulate the economy and move money into different segments of the real estate market. Learn more about the tax-saving benefits of the 1031 exchange by contacting the qualified intermediaries at CPEC1031, LLC today!

• 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

Be Careful What You Choose as Your 1031 Exchange Replacement Property

In a 1031 exchange, you need to be careful when picking replacement property, as it must be considered to be real property.

There are other securitized real estate investments that are considered to be an interest in real property. These are often called a Delaware Statutory Trust or “DST.”

Delaware Statutory Trust Rev. Rul. 2004-8618 (the DST guidance) addresses whether a DST will be treated as an investment trust or business entity for federal income tax purposes.

If the DST is treated as an investment trust, interests in the DST will be treated as interests in the property owned by the DST for purposes of section 1031, and therefore beneficial owners can exchange their relinquished property for interests in the DST.

See: 2004-2 C.B. 191

As you may now know the IRS generally won’t allow one to exchange from real property into a partnership or even certain de facto partnership disguised as a tenants-in-common arrangement.

The newest Treasury Regulation that defines what real property is states that:

(5) Intangible assets—(i) In general. Intangible assets that are real property for purposes of section 1031 and this section include the following items: Fee ownership; co-ownership; a leasehold; an option to acquire real property; an easement; stock in a cooperative housing corporation; shares in a mutual ditch, reservoir, or irrigation company described in section 501(c)(12)(A) of the Code if, at the time of the exchange, such shares have been recognized by the highest court of the State in which the company was organized, or by a State statute, as constituting or representing real property or an interest in real property; and land development rights. Similar interests are real property for purposes of section 1031 and this section if the intangible asset derives its value from real property or an interest in real property and is inseparable from that real property or interest in real property. The following intangible assets are not real property for purposes of section 1031 and this section, regardless of the classification of such property under State or local law—

(A) Stock not described in paragraph (a)(5)(i) of this section, bonds, or notes;

(B) Other securities or evidences of indebtedness or interest;

(C) Interests in a partnership (other than an interest in a partnership that has in effect a valid election under section 761(a) to be excluded from the application of all of subchapter K);

(D) Certificates of trust or beneficial interests; and

(E) Choses in action.

• 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