Tips for Finding 1031 Replacement Property

Finding 1031 Replacement Property

If you're doing a 1031 exchange you may find that the 45-day identification period goes by way too fast. So today we're going to talk about some tips for locating or finding the 1031 replacement properties to identify during those first 45 days.

Other Trusted Advisors

If you’re a real estate investor you may not have the biggest window on the world of all of the potential replacement properties that may be available to satisfy your exchange. So other trusted advisors can be brought in to widen your window of potential replacement properties.

Financial Planner

A very good resource to talk to is a financial planner that specializes in products that satisfy 1031. These are typically either Delaware Statutory Trusts or tenancy-in-common investments. These are syndicated securities that can only be marketed to accredited investors.

Commercial Real Estate Broker

Another important resource that can widen your window of potential properties is a commercial real estate broker that has the designation CCIM or SIOR. These are real estate agents that have specialized experience in commercial real estate and can offer up possibilities you may not have been aware of.

The most important thing is to start the process early. Get out there looking even before you’ve sold your relinquished property to get a feel for what you may want to designate, understanding that the 45 day identification period goes by way too fast.

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

Defer the tax. Maximize your gain.

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved

What Can You Expect to Gain From a 1031 Exchange?

1031 Exchange Gains

The biggest and most important question taxpayers ask themselves before doing a 1031 exchange is "what can I expect to gain from this transaction?" That's our question for today's 1031 education article.

Defer Your Capital Gains

The primary benefit that you gain is that you are deferring indefinitely the capital gains and state income tax liabilities that you would ordinarily have if you were recognizing the gains on the sale of property.

1031 says that no gain or loss shall be recognized if you dispose of a property that's been held for a qualified purpose (investment or business purposes), and you acquire a like-kind property that’s also going to be held for investment purposes. The gain for you is that these profits are not taxable in the current year of disposition and may stay deferred indefinitely.

Avoid Unnecessary Taxes

So the big gain is that you don't have to pay taxes unnecessarily upon the sale of your relinquished property and you defer those gains and roll them into your new replacement property, which may never be sold. If it is disposed of, it may be disposed of after your passing, so that your heirs will have that property with a stepped up basis, effectively eliminating the tax perpetually.

  • 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.

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved

1031 Case Study: Doing a Partial Reverse Exchange

1031 Partial Reverse Exchange

A client recently came to us with the following 1031 exchange situation and question: We are currently in the middle of our 1031 identification period. If we buy something now and sell another property after that in the same area is it possible to put the revenues from that toward the mortgage of that same property, or do we need to buy another individual property? The property we want is more than we wish to spend, but if we sold our other holding it would be more doable.

Doing a 2nd Potential Exchange

As to the second potential exchange of another relinquished property, generally, the IRS would not view paying off debt on a property that you already own as being an ‘exchange’ because you have not received anything new that you do not already own.

If the timing works, you could split the replacement property into a part reverse exchange, and hold out a portion of the replacement property to complete another 1031. Read more about this possibility here. 

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

Defer the tax. Maximize your gain.

 

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved

The Importance of Keeping 1031 Exchange Funds Separate

1031 Exchange Funds

Consider the following 1031 exchange scenario: A taxpayer is considering a 1031 exchange out of farmland and into a residential rental property. The replacement property may be of greater value than the relinquished property. Can the rental percentage be prorated according to the amount of the relinquished property and the remainder be used for personal use?

Keeping 1031 Funds Separate

The funds from the sale of the relinquished property should be used exclusively for the purchase of qualifying like-kind property that is held for investment or business purposes.

It may be possible to by a two or three unit rental property and to bifurcate it for part 1031 and part personal use. However, it is important to use non-1031 funds to pay for the personal use portion.

Further Reading

For further reading on this topic, please follow the links below:

Start Your 1031 Exchange: If you have questions about 1031 exchanges of rental property, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

 

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved

Defer the tax. MAXIMIZE your gain.

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