How to Deal with Basis in a 1031 Exchange

When you’re doing a 1031 exchange, your basis is transferred to the new replacement property. The first dollars off the table are boot. If you buy down in value on your replacement property, you’ll receive boot. If you take receipt of cash or any other non-like-kind property during the exchange process, that’s taxable boot. If you over-borrow and put too much debt on the replacement property (resulting in cash coming back to the buyer), that’s taxable boot.

Let’s imagine you do a 1031 exchange into a DST (Delaware Statutory Trust). The trustee of the DST exercises its option to suck the property up into a REIT via a 721 contribution. Now let’s say that you held that property for 4 or more years. At that point you would own a partnership interest in an UPREIT. When you’re redeeming a partnership interest you get to pick which part of the partnership interest you would like to redeem first. The first bit of interest you want to redeem is that which has basis. This allows you to partially recoup your basis on the property, thus mitigating your tax risk.

Defer Your Capital Gains Tax Burden

Find a qualified intermediary to help with your next 1031 exchange of like-kind real estate by contacting the team at CPEC1031, LLC. We have more than twenty years of experience in the 1031 exchange industry. We can put our experience to work on your next 1031 exchange and help ensure that you are able to defer 100% of your capital gains tax burden. Our intermediaries are here to help you through every step of the exchange process – from the sale of your relinquished property to the acquisition of your replacement 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.

© 2026 Copyright Jeffrey R. Peterson All Rights Reserved

1250 vs. 1245 Gain in a 1031 Exchange: What’s the Difference?

There are two types of gain in a 1031 exchange. If your relinquished property has improvements (such as a building), that building is depreciated over 39 years. But there are components of the building that are not critical to the structure (things like ornamental lights, non-structural walls, and more). These non-critical components can be segregated out for more rapid depreciation in a cost segregation study.

In a real estate transaction, you may have two kinds of gain:

1. 1250 Gain. The gain from the sale of the land (which has slow and steady depreciation).

2. 1245 Gain. Accelerated depreciation from the non-critical components that depreciate at a faster rate.

If you don’t exchange into a replacement property with an equivalent amount of 1245 components, you could have some recognition of gain. You can still do a 1031 exchange from improved property to unimproved property, but you have to consider your accelerated depreciation. Sometimes it’s better to buy a replacement property that contains a lot of 1245 components.

1031 Exchange Transactions Made Easy

Contact the team at CPEC1031, LLC today to learn more about the 1031 exchange process and see how we can help you save money in capital gains taxes when selling qualifying real estate. You can reach out to us at our Twin Cities office, which is located in the heart of downtown Minneapolis. Note that we work with taxpayers conducting 1031 exchanges throughout the state of Minnesota, as well as the United States at large. No matter where your property is located, our intermediaries can help you defer taxes in a 1031 transaction.

• 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.

© 2026 Copyright Jeffrey R. Peterson All Rights Reserved

Front Leg Reverse 1031 Exchange Options - Switching It Up

Sometimes in a 1031 exchange, it is not advantageous to park your new replacement property. Here are a few potential reasons.

How Do We Structure the Deal So You Can Get Into the New Property as Soon as Possible?

To get you into your new property as soon as possible, we structure the transaction as a front leg reverse exchange (this is also sometimes called an exchange first reverse exchange). That means, we have the exchange accommodation titleholder (the LLC) take title to your old relinquished property. That gets the property out of your name and frees you up. Now you are no longer tied to that (old) property and this allows you to immediately acquire the new replacement property.

After that, you still need to find a (real) buyer for the old relinquished property. The 1031 intermediary holding title through this LLC can only hold on to the property for 180 days (per Rev. Proc. 2000-37).

Rush to Sell Your old 1031 Exchange Property within 180 Days

You will need to market the relinquished property and hopefully a third party purchaser will acquire the property from the intermediary. The Intermediary doesn’t have any money of its own, so it would have borrowed that money from you or from a bank with your guarantee. So, it behooves you to get the intermediary out of title and get the new purchaser in so you or your lender can get paid off and you can be free of the guarantee.

Reverse Exchange Advantages

In a tight market you can’t wait around. You need to seize opportunities when they arise. A reverse exchange is another tool to get the deal done tax deferred. It allows you to purchase a property by having your exchange accommodation titleholder acquire either the new property or alternatively, take title to your old relinquished property, thus freeing you up to immediately acquire this new replacement property. Reverse exchanges are excellent and powerful tools, but they are sophisticated creatures. You need to have your CPA, your tax attorney and all your other advisors on board to get these deals done correctly.

• Start Your Exchange: If you have questions about reverse exchange options, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved

Video – An Explanation of the 1031 Exchange Identification Rules

If you want to do the easiest 1031 exchange identification rule (the 3 property rule), you identify three or fewer properties. You could identify the IDS Center, the Foshay Tower, and the Mall of America. It doesn’t matter that these three properties are extremely expensive. What matters is that they are three properties. There is no valuation cap when using the three property rule.

There’s an alternative rule that you can use called the 200% rule. With this rule you can identify more than three properties but you have a value cap. If you sell your relinquished property for a million dollars, using the 200% rule you double the value of your relinquished property to find your ceiling, which would be 2 million dollars in this example.

Lastly, there is the 95% rule. This rule is typically only used when identifying a big portfolio of properties. Under this rule, as long as you actually receive at least 95% of the value of your identified properties, your 1031 exchange is still valid.

Find a 1031 Intermediary to Help with Your Like-Kind Exchange

If you’re searching for a qualified intermediary you can trust to help with your 1031 exchange, look no further! CPEC1031, LLC has the skills and experience needed to ensure your like-kind exchange is a success. We have more than twenty years of experience facilitating exchanges under section 1031 of the Internal Revenue Code. We can help you through all the steps of your like-kind exchange of real estate. Contact us today at our downtown 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.

© 2026 Copyright Jeffrey R. Peterson All Rights Reserved

Front-Leg Reverse 1031 Exchange Example

There are ways to structure reverse 1031 exchanges that don’t complicate the replacement property and allow you instead to offload your relinquished property. That being said, cash is always king. In order to make this work from an accounting perspective, you need to have enough cash to loan to the intermediary’s LLC to cover what would be your net proceeds.

Imagine you have a property that’s worth $500K. You had a buyer lined up to do a 1031 exchange, but they flake at the last minute. What are your options?

You can have the qualified intermediary form an LLC that enters into an agreement with you to acquire your property subject to the existing mortgage. You loan the LLC $100K (because you have a $400K mortgage). That LLC then sends the $100K to the qualified intermediary as 1031 exchange funds and you sign a deed conveying title to the LLC. Essentially, you have financed the buyer to acquire your property subject to the existing debt that was already there. Also, the cash that you loaned to the entity goes to the qualified intermediary, who eventually sends that cash to the closing of your replacement property. On the settlement statement for the closing of your replacement property, it will show a credit of $100K of exchange funds for your 1031 exchange. You close on the replacement property as you ordinarily would in a forward exchange and everyone is happy.

At that point you have 180 days to find a legitimate purchaser for your unsold relinquished property. Let’s say another buyer comes along and offers to buy the property in less than 180 days. That buyer closes on the relinquished property and we deed the property to them. That buyer’s $500K goes to pay off the existing $400K mortgage on the property and the remainder of the funds go to you to reimburse you for the $100K that you previously advanced to the LLC.

1031 Exchanges Can Reduce Your Capital Gains Tax Burden

A 1031 exchange can significantly reduce your capital gains tax burden when selling qualifying real estate. Many savvy investors utilize this tax code provision and you can too! Reach out to the qualified intermediaries at CPEC1031, LLC today to see if your property qualifies. We are well-versed in all aspects of section 1031 (from forward to reverse exchanges and everything in between). Let us help you through the 1031 exchange process and start deferring your capital gains tax burden 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.

© 2026 Copyright Jeffrey R. Peterson All Rights Reserved