What is a Third-Party Administrator in a 1031 Exchange?

The treasury regulations have various safe harbors for 1031 exchanges. One of these is the qualified intermediary (or QI) safe harbor. The qualified intermediary acts as a neutral third party administrator unbeholden to the taxpayer to facilitate or administer The 1031 exchange.

What a Third-Party Administrator Does

The third-party administrator typically prepares the 1031 documents, provides instructions to the settlement agent, and most importantly holds the proceeds from the relinquished property so that the taxpayer or exchangor does not have any actual or constructive receipt of the net proceeds or 1031 funds.

Who Can be Your 1031 Third-Party Administrator?

The regulations in the Internal Revenue Code prohibit the administrator from being anyone that has in the last two years been an agent or employee of the taxpayer. So your attorney, your account, and your employees are all disqualified from acting as your administrator. Also, related parties such as your mother, or your son, or other relatives are excluded or prohibited from acting as your 1031 third-party administrator. The idea is that the qualified intermediary should be unbeholden, unrelated, and acting independently of the taxpayer or exchangor doing the exchange.

• Start Your 1031 Exchange: If you have questions about the role of the third-party administrator 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

What's the First Step in the 1031 Exchange Process?

Many taxpayers who are interested in a like-kind exchange don't know how to get the process rolling. In this article, we outline the first steps you need to take to get your 1031 exchange started.

Consulting Your Qualified Intermediary

Talking to your qualified intermediary, exchanging information, and letting the qualified intermediary know about your situation is the first critical step in any 1031 exchange.

Here are some questions your qualified intermediary might ask during your initial conversation:

• How do you own the relinquished property?

• Is it vested in your own name, in a trust, or a in business entity?

• Do you have a spouse in title with you?

• What's the value of your relinquished property?

• How much debt do you have encumbering the property?

• What do you expect is your net amount of proceeds or walking away money going to be?

• What is your basis? How much do you have into this relinquished property?

• When is your transaction closing? Is the closing eminent or is it a long ways out?

There are so many questions and unique circumstances to discuss with your qualified intermediary at this first initial call that you want to get started early.

Replacement Property

Another very important discussion point is what you want to buy for your replacement property. Do you want to have a management free, relatively low-risk investment? Or are you looking to accelerate your depreciation by leveraging up and buying a much more expensive perhaps more management intensive property?

Early discussions with your professional advisers and qualified intermediary are critical to setting the stage for a successful 1031. The first step is to pick up the phone and start the process with your qualified intermediary.

• Start Your Exchange: If you have questions about the first steps in the exchange process, 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 Competing for Replacement Property

What if you're punching above your weight class on the purchase of your replacement property in a 1031 exchange? In other words, what if you're acquiring a replacement property that's much bigger than you can afford on your own. Can you bring in partners to help purchase the property?

Partnership Interest

If you're doing a 1031 exchange you want to avoid acquiring the replacement property in a partnership because partnership interests are excluded from 1031 treatment. But that doesn't mean that you can't bring in other co-owners or purchasers with you that will acquire the property as tenants-in-common.

Tenancy-in-Common

One of the facets of a tenancy-in-common is that each purchaser will receive a proportionate share of the property in portion to the amount of cash that they contribute. So if you need $10 million as the down payment on a replacement property and you're able to put up $5 million of that down payment, you'd be eligible and should be allocated an undivided 50% tenant in common interest in the property. If any other co-purchasers want to come in with you and help with the down payment, they too would receive a portion of the common interest allocated to them based on how much of the down payment they pony up.

• Start Your Exchange: If you have questions about replacement property in a like-kind 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 1031 Exchange Property in the Virgin Islands & Other US Territories?

How would you like to sell your 1031 relinquished property in the United States and buy your replacement property in Ecuador, Belize, or Poland? Well, unfortunately the Internal Revenue Code says that foreign property is not like-kind to US property, so you can't exchange into these foreign countries. 1031 exchanges need to be for property within the United States.

1031 Exchanges in US Territories

However, what about the US territories, like the US Virgin Islands? There is scant authority in this area, but one private letter ruling authorized the exchange of US property into the US Virgin Islands (a territory of the United States) if the replacement property was to be income producing. This seems to be a higher threshold than the mere held for investment or business purposes requirement that's typically applied in 1031 exchange.

So it may be possible to conduct a like-kind exchange for property in the Virgin Islands or other US territories, but the requirements are much more strict, and certainly require the help of a qualified intermediary.

• Start Your 1031 Exchange: If you have questions about exchanging into the Virgin Islands or any of the other US territories give us a call, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved

Potential Ramifications if Congress Repeals the 1031 Exchange

When it comes to tax reform there are a lot of questions. What will the ramifications of a potential elimination of the 1031 exchange be?

Tax Reform

One thing I can tell you is if we have tax reform we're still going to have taxes, we just may not have a mechanism to defer those taxes through the wonderful vehicle of section 1031.

Some taxpayers are worried that if they start at 1031 exchange and then Congress changes the game on them midstream before they receive the replacement property that they could somehow be stuck in limbo with the provisions of 1031 being terminated before they've completed their exchange. That would, in effect, require them to recognize the gain on their now failed exchange because the provisions have ended.

Contact Your Legislator

Often times Congress will sunset a provision at a certain date in the future. The problem is if you haven't completed your exchange by that date you may be out of the benefits of a 1031 exchange. All of these questions highlight the importance of contacting your legislators and letting them know that eliminating 1031 will cause chaos and stagnation that we as taxpayers do not want to have happen. We want economic certainty and prosperity, and preserving 1031 is the best way to do that.

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

Defer the tax. Maximize your gain.

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved