How a Qualified Intermediary can Help Financial Planners Collect Fees in a 1031 Exchange

Many financial planners don't want to collect a commission for their client’s purchase of a tenant-in-common or Delaware Statutory Trust property, but a fee instead. The 1031 qualified intermediary can be helpful in facilitating the payment of typical and customary transactional expenses during a 1031 exchange, which could include your fee for consulting and advising your client on the purchase of the property.

How a Qualified Intermediary Can Help

To accomplish this, you simply need to send to the intermediary your fee agreement that says that you're entitled to $50,000 (for example) for advising your client on the purchase of this asset, and the client's signature on that agreement.

Then what the qualified intermediary can do is prepare a disbursement request to authorize the transfer of the $50,000 transactional expense to the financial advisor, which is typically wired in conjunction with the other wire for the purchase of the replacement property interest.

So at the time of the closing, the intermediary sends one wire to the financial planner to pay them for their fees in conducting and advising the client and the other wire goes to the DST sponsor to pay for the property.

Customary Expenses

Typical and customary expenses can be paid for by the intermediary and if it's authorized in writing we have no problem whatsoever in facilitating the payment of commissions and flat advisory fees for your valuable service in helping the client find and close on an appropriate fractional interest in a property.

• Start Your Exchange: If you have questions about collecting advisory fees in a 1031 transaction, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved

Can My Self-Directed IRA Purchase A Property that I Own?

In a self-directed IRA situation, people often ask: "Can my self-directed IRA purchase a property that I own or that a close family member owns?"

The Problem with Using IRA Money

The problem with using self-directed IRA money is that you're not supposed to get any personal benefit from the investment and if the investment is your personal home and your IRA is in effect buying your personal home you're definitely getting a direct and substantial benefit of having your IRA buy your home from you.

The same goes for close family members who are just basically extensions of yourself for tax purposes. If your daughter is getting a benefit in having sold the property to your self-directed IRA it's going to be the same as if you sold the property to the self-directed IRA because they are a related party.

Purchase Properties at an Arm's Length

If you want to keep your nose clean, don't get real cute with your self-directed IRA money. Purchase properties in an arm's length transaction from unrelated taxpayers that are not necessarily your family members or yourself.

• Start Your 1031 Exchange: If you have questions about IRAs and 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

Does an Assignment of a Sheriff’s Certificate Qualify for 1031?

Is an assignment of a sheriff’s certificate after a foreclosure an interest in real property that you can 1031 exchange into? That’s our topic for this article.

Foreclosures in Minnesota

When there is a foreclosure in Minnesota, the mortgagor often retains possession of the property and has an important right to redeem the mortgage and to basically pay off the lender. That redemption period can run for various different times. It may also be extended by other circumstances like the mortgagor filing bankruptcy.

So the question is if you buy the lender’s rights (i.e. the sheriff’s certificate of sale) have you bought an interest in real estate or is it more of a nebulous potential interest in real estate?

What Does Not Qualify

Under section 1031 what does not qualify is an interest in a note or other evidence of indebtedness. So a sheriff’s certificate that has not ripened is perhaps more akin to an interest in a note or evidence of indebtedness than it is an actual interest in real estate. This is because you don't have the right to possession, you can't depreciate the property, and it's not really your property until the mortgagor’s redemption rights have expired.

So an important thing to remember when you're trying to buy a deal, trying to get a good price on a foreclosed property is to look at what interest it is that you're purchasing and whether you have received an interest that qualifies for 1031. A mere sheriff’s certificate may not be sufficient unless the redemption period ripens and you actually are requiring a possessory interest in the property.

• Start Your Exchange: If you have questions about sheriff’s certificates in a 1031 exchange, 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 do a 1031 if my Property is Being Purchased Under Eminent Domain?

Sometimes we have clients call and say that their property is being purchased as part of an eminent domain or involuntary taking and they wonder if a 1031 exchange is an option in this scenario.

Section 1033

There is another code section that maybe applicable in these situations - code section 1033 of the Internal Revenue Code. Under that provision you can have a longer period of time (sometimes two to three years) to redeploy the cash. Furthermore you can actually hold your own proceeds, without needed a qualified intermediary.

When to Use a 1031 Exchange

But 1033 isn't always that simple. Sometimes there are some areas of gray. Perhaps you're voluntarily selling the property to the government agency and it's not really an involuntary taking, it's more of a negotiated voluntary sale that maybe would have resulted in the involuntary taking if the parties hadn’t come to a meeting of the minds.

In those situations where the potential taking never really amounted to an actual legal proceeding and it's more of a voluntary sale on your part - in those situations it's probably better to do a 1031 exchange.

However, if you actually have been served with a condemnation notice, this is a real legal proceeding, and it's not just the threat of condemnation it's an actual taking, in those situations you know you're clearly in the 1033 category.

1031 & 1033 Exchange Professionals

In either instance you can give us a call and we can help you understand the process and give you some pointers on what to do. For example, under 1033 it’s critical that you file an election on the tax return for the first year in which you receive any payments under that eminent domain taking.

• Start Your 1031 Exchange: If you have questions about section 1033, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved

1031 Exchange Tips for Real Estate Closing Agents

If you work as a closer for real estate transactions and you're notified that one of the parties to the transaction wants to do a 1031 exchange, it’s important for you to make note of that right away in the file and find out who are the people that are helping facilitate this exchange. Here are a few tips for closing agents who encounter 1031 exchanges.

Eleventh Hour Fire Drills

We often get calls from closers at the eleventh hour saying that nobody made arrangements for the 1031 exchange. Everybody involved thought it was someone else's job to do, and now we need to hurry up and get 1031 documents prepared for a closing that's imminent. We can do that, but it's a real fire drill.

Questions to Ask

The better arrangement is to contact the party that intends to do a 1031. Ask them the following questions:

• Is this your relinquished property that you're selling?

• Have you started your process with a qualified intermediary?

How a Qualified Intermediary can Help

If they haven't started with a qualified intermediary, have them contact CPEC 1031 right away. We can get a copy of the purchase agreement and title work from you; we can gather the specific details in particular that we need from the seller; and we can put together the 1031 and the closing instructions that you'll need to know how to prepare the settlement statement and what notices need to be given to the other parties. This allows all of the documentation to be dealt with up front well before the closing occurs so that we have a smooth signing ceremony.

• Start Your Exchange: If you have questions about closing documents related to a 1031 exchange, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved