Can Water, Oil, Gas & Other Like Rights be Exchanged in a 1031?

Many people think of 1031 exchanges solely in the arena of fee-title where you own all of the bundle of rights. But in some instances taxpayers have more narrowly defined rights in the property such as just the water rights, mineral interests, or gravel rights. Here are some things you need to keep in mind when exchanging these types of like rights in a 1031.

Real Property Interests

These interests are typically considered real property interests in the state where the property is located. If that’s the case you can do a 1031 on that narrow property interest into other like-kind property (i.e. real estate).

The Advantage of 1031 Exchanging Like Rights

So 1031 exchanges can be a very advantageous way of disposing of oil rights, gas rights, etc. or other interests that are generally considered appurtenant to any estate in real property, but are sometimes severed or separately held estates in property.

• Start Your 1031 Exchange: If you have questions about exchanging oil, gas, or water, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2016 Copyright Jeffrey R. Peterson All Rights Reserved

What is a Master Lease?

Sometimes people buy a replacement property that’s subject to a master lease, which means there is a tenant in place that is obligated to pay the landowner a fixed amount of income every month. In this article, we are going to talk about the benefits of a master lease.

Benefits of a Master Lease

The master tenant typically has subtenants under them. The benefit to the owner is that the master tenant really bears the economic risk and responsibility for managing the property and paying a fixed amount of rent each month regardless of the economic ups and downs in the rental market.

Master Leases & 1031 Exchanges

A master lease is often used as a method to make the property less management intensive for the owner and to shift the risk of economic ups and downs onto the tenant.

From a 1031 point of view, many people that have been involved in management intensive properties (like farming or apartment complexes) are seeking replacement properties that are less management intensive and have a more predictable cash flow so that they can have a steady stream of income in their retirement years without all the hassle and responsibilities of day-today management. Instead, those management duties and economic uncertainties are shifted over to the master tenant and off of the owner.

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

Defer the tax. Maximize your gain.

© 2016 Copyright Jeffrey R. Peterson All Rights Reserved

Whiteboard Video - Can a Non-US Citizen do a 1031 Exchange?

In this whiteboard video, we talk about 1031 exchanges involving foreign taxpayers.

• Start Your 1031 Exchange: If you have questions about 1031 exchanges and foreign taxpayers, feel free to call me at 612-643-1031.

Defer the tax. MAXIMIZE your gain. 

© 2016 Copyright Jeffrey R. Peterson All Rights Reserved

721 Contributions & 1031 Exchanges

Sometimes a property seller is interested in contributing a portion of his or her real estate into the project as equity, but also wants to take some cash out for a 1031 exchange. Here's a strategy to accomplish that.

721 Tax-Free Contributions

One way to structure the sale agreement is to have the taxpayer (seller) enter into two agreements with the buyer — typically an LLC taxed as a partnership.

• First, the taxpayer agrees to sell to the LLC an undivided X percent of the property for cash that will be assigned to a qualified intermediary for a 1031 tax-deferred exchange.

• Second, the taxpayer agrees to contribute the remainder of his or her interest in the property to the same LLC in a 721 tax-fee contribution in exchange of a partnership interest (LLC membership interest).

By splitting the transfers in two and doing the 1031 sale first, the taxpayer is able to get the most tax efficient treatment on both transfers.

Potential Complications

There are some potential complications if the LLC distributes cash to the members after the contribution, so you need to be careful when taking-out construction financing. Here are some issues to consider:

• What amount of debt — if any — encumbers the property at this time?

• What is the seller’s current adjusted basis in the property? (check for “MOB” mortgage over basis)

• What is the cash price allocated for the sale portion of the transaction?

• What is the value or amount of the LLC/partnership interest being given in exchange for the contribution or the remainder of the property?

Having a qualified intermediary on your side to tackle these issues can ensure the most tax-efficient strategy possible.

• Start Your 1031 Exchange: If you have questions about the 1031 exchanges combined with 721 contributions, feel free to call me at 612-643-1031.

Defer the tax. MAXIMIZE your gain. 

© 2016 Copyright Jeffrey R. Peterson All Rights Reserved

Can I Do a 1031 Exchange Between Different States or Countries?

Section 1031 is in the Internal Revenue Code so it’s applicable to all the states in the union. You can buy your replacement property in any part of the United States. So you can sell a relinquished property in Florida and buy a replacement property in Minnesota. Many people that are in high tax states (such as California and Minnesota) are intrigued by the concept of exchanging their property into low tax states like Florida and Texas.

It’s really advantageous to be able to move your equity to the most advantageous investment which may be in a completely different state. However, you can’t exchange outside the US because foreign property is not considered like kind to US property.

Can I Do a 1031 Exchange if I’m not a US Citizen?

The short answer is yes. If you own property in the United States, you are subject to the taxation in the jurisdiction where the property is located. The United States will want to collect taxes on the sale of your US property. If you’re a US taxpayer, you can do a 1031 exchange to defer that gain indefinitely.

The idea behind section 1031 is that you have to buy a like-kind investment that’s in the US – foreign property is not considered like kind to US property.

But foreign taxpayers can still avail themselves of the benefits of a 1031 exchange (for their US tax liability) just like any US citizen would.

• Start Your Exchange: If you have questions about exchanging property between different states or countries, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2016 Copyright Jeffrey R. Peterson All Rights Reserved