The 3 Most Common Types of Real Estate Exchanges

1031 exchanges come in several different types – all of which can be beneficial depending on your unique situation and ultimate goals. In this article, we are going to briefly explain three of the most common types of 1031 exchanges involving real estate.

Forward Exchanges

The forward exchange is the most common and “standard” type of 1031 exchange. This is typically what people picture when they think of 1031 exchanges. In a forward exchange, you sell a piece of relinquished property. Then, you identify replacement property in the 45 days thereafter. Finally, you close on your new replacement property and roll your net proceeds into that property on or before the 180th day following your relinquished property sale.

Reverse Exchanges

A reverse 1031 exchange accomplishes the same ultimate goal of a standard exchange (that of tax deferral) but with the order reversed. Instead of selling the relinquished property first, a reverse exchange starts with the acquisition of replacement property, and ends with the sale of the relinquished property. All time frames are the same. Reverse exchanges are useful in a hot seller’s market when you need to snatch up an ideal property before someone else does.

Build-to-Suit Exchanges

A build-to-suit exchange (also known as a construction improvement exchange) is a 1031 exchange in which the exchangor constructs improvements to their replacement property prior to the closing. This type of exchange is good for people who have found a replacement property that doesn’t quite fit their needs. With a construction exchange, you can make the necessary improvements to your replacement property and include those as a part of your exchange.

• Start Your Exchange: If you have questions about the different types of 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

Four Important Rules to Remember in a 1031 Exchange

1031 exchanges are excellent tools for deferring capital gains taxes on the sale of real property, but they come with a variety of rules and regulations. In this article, we are going to talk about four of the most important rules to remember when conducting a 1031 exchange of real property.

Rule 1 – Exchange Out of & Into Like-Kind Property

The like-kind property rule is perhaps the most important rule in any 1031 exchange. But what is “like-kind” property? When you’re dealing with real estate, like-kind has a very broad definition that includes basically all real estate (provided it’s held for the right purpose – more on that below).

Rule 2 – Hold Your Property for the Requisite Intent

Having the right intent or mindset is also important in a 1031 exchange. All of the property involved in the exchange needs to be held primarily for investment or business purposes, and not personal use. So your primary residence would be excluded from 1031 exchange treatment because of this rule.

Rule 3 – Finish Your Exchange within 180 Days

All 1031 exchanges (whether of personal property or real estate) need to be completed within 180 days after the sale of the relinquished property. The first 45 days of that time period are set aside for identification of the replacement properties into which you plan to exchange.

To figure out your 1031 deadlines, use our helpful calculator.

Rule 4 – Exchange Into Property of Equal or Greater Equity, Value, Debt

You also want to make sure that your replacement property is of equal or greater equity, value, and debt when compared to your relinquished property. This is also known as the “napkin test.”

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

Defer the tax. Maximize your gain.

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved

What is “One Property” Under the 1031 Three Property Rule?

As a general guideline in any 1031 exchange, you want to identify three or fewer properties to exchange into. But what determines "one property" under this rule? Are two contiguous parcels considered separate? Will two contiguous properties take up two slots under the three property rule?

Identifying 2 Contiguous Parcels

If you identify two parcels which are contiguous, does that count as one property or two? In other words, can you still determine two other properties as part of a 1031 exchange?

Answer

Two contiguous parcels will probably be considered to be one parcel for 1031 identification purposes, if sold by one seller under one PA and conveyed under one deed at the same closing.

• Start Your 1031 Exchange: If you have questions about contiguous parcels 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 a Married Couple Purchase their Replacement Property with a Family Member as Tenants-in-Common?

Sometimes a couple will be doing a 1031 exchange where the relinquished property was owned by them as husband and wife, but they want to purchase the new replacement property with another family member as co-owners or tenants-in-common. In this article, we'll explain some key requirements to keep in mind while doing such an exchange.

1. Size Matters

In order to defer all of the gains, the ownership interest in the replacement property received by our exchanging husband and wife must be or equal or greater value than the net value of the sold relinquished property. So if a co-owning relative takes too large of a percentage ownership portion of the replacement property, our exchangors may not receive sufficient value to defer all of their gains.

2. Follow the Money

All of the exchange funds from the sale of the husband and wife’s sold relinquished property must be used exclusively for the purchase of their ownership interest in the replacement property, and may not be used to purchase the co-owning relative’s ownership interest. Each co-owner should contribute and pay for their proportionate share of the new replacement property with their own money.

3. Be Careful ~ Partnership Interests are Excluded from 1031

Once you own the new property, you may be tempted to file a partnership tax return (Form 1065) for the co-ownership of the property (like a joint venture). However, that would be inconsistent with the requirements for a 1031 exchange. Avoiding classification as a partnership for federal income tax purposes will be important for our exchangors to preserve their 1031 exchange. Generally, one cannot exchange into a partnership interest, even if partnership’s only asset is the subject real estate [subject to a narrow exception for partnerships with a valid 761(a) election in place; and rare situations where receipt of 100% of a partnership, results in consolidating ownership in one taxpayer such that it is equivalent to an acquisition of a "disregarded entity"].

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

Defer the tax. Maximize your gain.

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved

Tips for New Real Estate Investors

Real estate investing can be a lucrative endeavor. But if you're new to the industry, real estate investing can be difficult to break into. In this article, we are going to offer up a few tips for those looking to get into real estate investing.

Read

First tip - read everything you can on real estate investing. 

I personally like all of Robert Kiyosaki’s Rich, Dad, Poor Dad series of financial advice books.

Napoleon Hill’s Think and Grow Rich is also excellent.

Anything by Carleton Sheets on real estate investing offers a lot of practical information.

Network

Networking is another essential element of success in real estate investing. I would network with Mike Jacka, founder of the Minnesota Real Estate Investors Association and check out some of the experts that they have speak.

Another good group is Minnesota Real Estate Exchangors.

MNCAR is a commercial real estate brokerage organization in Minnesota that has lots of seminars and good networking events.

Find a Mentor

The best advice of all – find a mentor that has been doing this a long time, and learn from the real people that do this all of the time.

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

Defer the tax. Maximize your gain.

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved