Taking Advantage of Downturns in the Real Estate Market

Real estate values go up, and as you may recall from recent the Great Recession, they also go down.  Some commentators are speculating that the current good times will be coming to end, bringing opportunities for investors to buy some bargains.

What is a Downward Market?

A downward market is where real estate values are declining and opportunities are rising - opportunities to buy real estate at a cheap price. Remember, “price” is set by the market which can fluctuate based on emotions, while “value” is established by the cash flow in an economic analysis. So, it is possible to buy a property at a cheap price below its value (based upon the income it produces) and in the marketplace. If you find such an opportunity you want to seize on it immediately. 

Well, you say, I can’t buy it now because if I do a 1031 exchange, the typical structure is that I sell and close on my old relinquished property FIRST, and then SECONDLY, I buy my replacement property. If this great opportunity comes up, how can I take advantage of it and still avail myself of a 1031 exchange? Here's an example: a bank takes back a property, but they don’t want to have it on their books. They have to reserve for it, they have to pay for expenses related to the property; they just want to get rid of it. So they’ll sell it at a deep discount - a discount below its actual value just to get it off their books. If you want to acquire that property, you have to move fast before another investor moves in and takes it away from you.  A strong cash offer will ensure you are the successful bidder.

CPEC1031, LLC

If you’re looking for help with your next 1031 exchange, contact CPEC1031, LLC today. Our team of qualified intermediaries can help you through all aspects of your 1031 exchange. You can reach us at our primary office located in downtown Minneapolis.

• Start Your Exchange: If you have questions about taking advantage of downturns in the Minnesota real estate market, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved

Can I Purchase my 1031 Exchange Replacement Property on a Contract for Deed?

A lot of people wonder: "Can I purchase my replacement property on a Contract for Deed?" As financing gets more and more challenging, seller arranged financing looks more appealing. So, if we can find a seller that will convey their property to us on a Contract for Deed, will that property work as a 1031 replacement property?

How Can This Work for a 1031 Exchange if I do not have Full Legal Title?

This question might be lingering in the back of your mind. What happens when you are the vendee, but the vendor still holds legal title? Considering the fact that, as a purchaser under a Contract for Deed, you don’t receive the actual deed until you are done making all payments, does this qualify as a 1031 Exchange?

The Question: Who is the Owner for Federal Tax Purposes?

The answer is probably because a Contract for Deed vendee receives the benefits and burdens of ownership. And, you want to make sure that your Contract for Deed is drafted so that it gives you the benefits and burdens of ownership:

1. you bear the risk of loss of the property if destroyed;

2. you bear the obligation to pay the property taxes;

3. you have exclusive right of possession of the property.

All of these factors really weigh on the side of you being the equitable owner of the property and the equivalent of the owner of a fee interest in real estate for federal tax purposes.

Put the Exchange Funds Down as the Down-Stoke If You are the Owner

So, you can purchase your replacement property on a Contract for Deed. In theory, you would take all of your 1031 exchange funds (all of your net proceeds from your relinquished property) and plunk that down as your down-payment. Once your 1031 exchange is complete, you will continue making incremental installment payments going forward until the Contract for Deed is satisfied, at which time you would receive the deed for the property. However, in the interim, you are the equitable owner of the property, and that should be sufficient to complete your 1031 Exchange.

• Start Your 1031 Exchange: If you have questions about contract for deed issues relating to 1031 exchanges in Minneapolis, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved

Paying Down Debt on Property Exchangor Already Owns

Clients sometimes inquire if they can use the balance of their 1031 funds to pay down the mortgage or debt on replacement property that they have already closed on and purchased as part of their 1031.

Can you Pay Down Debt on Already Acquired Property?

This question usually comes up when people have identified multiple Replacement Properties because they planned to buy a few Replacement Properties, and they have now expended some (but not all) of their 1031 funds on the purchase of the first Replacement Property, only to discover that the remaining Replacement Property(ies) are not suitable or cannot be closed on within the 180 day exchange period.

This prompts the following question: can you go back and pay-down the debt on the already acquired Replacement Property in order to get all of your 1031 funds used-up as part of the 1031 exchange?

Many tax commentators and attorneys think this will not work, and the extra money applied to the debt pay-down will be treated as taxable boot by the IRS.  This is because the IRS takes the position that paying down debt on property that is already owned by a taxpayer is not an exchange...even if it is done within the 180 day exchange period.  The idea is that the exchange on the already acquired Replacement Property is completed and done. 

• Start Your Exchange: If you have questions about paying down debt on Minnesota property that you already own, reverse exchanges or planning for 1031 exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved