Items to Pay Out of Pocket in a 1031 Exchange

There are some items that you generally do not want to pay using your 1031 exchange proceeds. These items will likely trigger some taxable gain. They may also have some offsetting deductions that will mitigate that taxable gain. Nevertheless, it’s important to keep these in mind when conducting your 1031 exchange:

• Prorated Rents

• Security Deposits

• Utility Payments

• Real Property Taxes

• Insurance

• HOA, Condo/Townhome/Coop Associations Dues

• Repair or Maintenance Expenses

• Loan Acquisition Fees

Repair & Maintenance Expenses

Let’s say that you own a duplex that’s in rough shape and you need to do some repairs on the property to prepare it for sale. Generally speaking, repair expenses are an operational expense, not a marketing expense. You may not be able to recoup on the settlement statement your outlays made to maintain the property. This gets even more tricky when you consider the difference between repair or maintenance expenses and capital improvement expenses (such as replacing an HVAC unit or adding a new roof). These are treated differently and it’s essential to talk about these items with your 1031 exchange team before you get to the closing table so you can avoid any potential issues.

CPEC1031, LLC – Here to Help You Through Your 1031 Exchange

The qualified intermediaries at CPEC1031, LLC are here to help you through all the nitty gritty details of your 1031 exchange. Our skilled professionals have over two decades worth of experience facilitating exchanges of like-kind real estate. Let us put our vast array of knowledge to work for you as you defer capital gains taxes on the sale of your qualifying real estate. Contact us today to set up a time to chat about your exchange at our downtown Minneapolis office.

• 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

The Importance of the Settlement Statement in a 1031 Exchange

In a 1031 exchange, the settlement statement should document all the details of your particular exchange. Have the parties sign it and ratify their approval and, most importantly, spell everything out so that it’s clear as day. Make the accountant’s job easy by itemizing in great detail. When possible, have the taxpayer bring in cash from their own pocket to cover operational expenses (such as prorated rents and security deposits).

That’s an ideal 1031 exchange scenario. But the reality is that some taxpayers conducting 1031 exchanges are cash poor. It’s easy for these taxpayers to have selective amnesia when they get their tax bill and realize that they are going to be taxed on the security deposits and other expenses that they pocketed. It’s important to understand that siphoning off your exchange funds to pay non-qualified expenses can trigger some gain.

A savvy CPA or tax attorney may recommend that you reinvest all of your equity and do a super clean 1031 exchange. Later, in a subsequent transaction, the taxpayer may refinance the replacement property to access their equity post-exchange. When you borrow money and you have a corresponding obligation to repay that loan, it’s not taxable income. So you can get your hands on the same amount of cash if you’re patient and you delay your gratification.

1031 Exchange Services in Minnesota & Beyond

CPEC1031, LLC offers 1031 exchange services throughout Minnesota, as well as the entire United States. If you are a US taxpayer looking to defer your capital gains taxes on the sale of investment real estate, a like-kind exchange may be the best course of action for you. Reach out to the qualified intermediaries at CPEC1031, LLC today at our offices in downtown Minneapolis to learn more about the like-kind exchange process and see how we can help you through the specifics of your next exchange of real estate.

• 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

What is the G(6) Limitation in 1031 Exchanges?

In a 1031 exchange, the intermediary is treated as qualified intermediary of the transaction if the exchange agreement contains the G(6) limitation. The G(6) limitation basically states that the taxpayer conducting the exchange can’t receive, pledge, borrow, or otherwise get the benefits of the 1031 exchange funds.

That exchange agreement is voided the moment that the G(6) limitation ceases to apply. You don’t want to have an agreement and then not follow it. That would be contrary to the requirement that you have to continue to keep a wall up that prevents the taxpayer from receiving any of the 1031 exchange funds. You must adhere to the terms of your original exchange agreement to make the exchange work.

1031 Exchange Accommodators

CPEC1031, LLC provides 1031 exchange accommodation services to clients throughout the United States. Want to learn more about saving money in capital gains taxes when selling investment real estate? Give our qualified intermediaries a call today! We have over twenty years of experience working in the like-kind exchange industry and can help you navigate the ins and outs of a 1031 exchange. Contact us today for more information about the 1031 exchange process, the benefits of section 1031, and how you can begin the process of deferring capital gains taxes on the sale of real 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

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