Does a 1031 Exchange Eliminate Capital Gains Taxes?

But many people incorrectly believe that a 1031 exchange completely eliminates capital gains taxes on the sale of property. In this article, we are going to explain why that’s not the case, and what benefits a 1031 exchange can actually bring to a real estate transaction.

Tax Elimination vs. Tax Deferral

So do 1031 exchanges completely eliminate capital gains taxes when you sell a piece of property? The short answer is no – a 1031 exchange does not completely eliminate capital gains taxes from the sale of real or personal property. What a 1031 exchange does is defer those capital gains taxes.

When you sell a piece of real estate, typically you are responsible for paying capital gains taxes on the sales proceeds. A 1031 exchange allows you to avoid that potentially large capital gains tax bill by moving your net proceeds into a like-kind investment property.

While a 1031 exchange does not completely eliminate your capital gains taxes, you can effectively keep them at bay by continuing to exchange out of and into like-kind property. Ideally, you can continue deferring your taxes (and allowing your money to compound and build wealth over time) until you die.

Start Your 1031 Exchange

A like-kind exchange can present a lot of challenges and complications if you don’t know what you’re doing. Having a qualified intermediary on your team can be the difference between a successful and a failed exchange. At CPEC1031, our team of qualified intermediaries has been helping taxpayers with their like-kind exchanges for decades. We have the experience and the knowledge to help you through your exchange. Start your 1031 exchange today by reaching out to one of our qualified intermediaries.

• Start Your 1031 Exchange: If you have questions about tax deferral through 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

The 4 Most Important Rules to Follow for a Successful 1031 Exchange

There are many rules and guidelines that need to be followed to realize the tax saving benefits of a 1031 exchange. In this article, we are going to walk through the four most important rules you need to follow to ensure a successful 1031 exchange.

Like-Kind Property

All of the property involved in your 1031 exchange (your replacement property and your relinquished property) needs to be like-kind in nature. With real estate, like-kind covers most types of real estate – as long as it abides by the other rules on this list.

Qualifying Purpose

You need to have the right mindset or qualifying purpose with the property you are exchanging out of and into. Specifically, that means your property must be held for investment or business purposes. You cannot exchange property that you hold primarily for personal use, such as your primary residence.

180 Days

You have to complete your 1031 exchange within 180 days total, starting after you sell your relinquished property. You have the first 45 of those days to identify your replacement property. If you do not finish your exchange by the 180th day, your exchange will fail.

Equity, Value, Debt

Finally, you want to make sure you are exchanging into a property of equal or greater value, equity, and debt compared to your replacement property.

Minneapolis Like-Kind Exchange Company

The qualified intermediaries at CPEC1031 have decades of experience helping taxpayers throughout the Minneapolis / St. Paul metro area with their 1031 exchanges. We work one-on-one with each client to address their unique situation. Our 1031 exchange accommodators will answer all of your questions, advise you on 1031 rules and regulations, and prepare all of your documents for the closing. Contact us today to speak with a qualified intermediary who can help you get your exchange of like-kind property off the ground!

• Start Your 1031 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

1031 Exchanges: 200% Rule vs. 95% Rule

There are many ways you can go about doing a 1031 exchange, as well as many rules that govern the exchange of property under section 1031. In this article, we are going to discuss two of the most common options for exchanging property under section 1031 – the 200% exchange rule and the 95% exchange rule.

200% Rule

When using the 200% rule, you (as the exchangor) are allowed to identify as many replacement properties as you wish. But the total value of all replacement properties cannot exceed 200% of the relinquished property’s value.

95% Rule

The 95% rule is much less common than the 200% rule for exchanging 1031 property. If you’re using the 95% rule to defer gains, you are allowed to identify any amount of replacement properties so long as you receive at least 95% of the value of all your identified properties.

Choosing The Best Option

So what’s the best option for your 1031 exchange? That depends entirely on your situation. Every 1031 exchange is unique and should be treated as such. Are you exchanging real property or personal property? What types of replacement properties are you looking to exchange into? These are all questions that need to be carefully considered before deciding on a course of action.

Minnesota 1031 Exchange Company

At CPEC1031, our qualified intermediaries have decades of experience aiding taxpayers with their like-kind exchanges. Whether you’re exchanging real estate property, we can walk you through the process, prepare all the required documents, and answer all of your questions. Contact us today to speak with a Minnesota qualified intermediary about your exchange.

• Start Your Exchange: If you have questions about the 200% or 95% 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 “Constructive Receipt” in a 1031 Exchange?

There are many terms and definitions in the realm of 1031 exchanges that can be confusing to anyone outside the real estate or tax industry. In this article, we are going to explain what “constructive receipt” means in a 1031 exchange and offer some tips for avoiding it.

Constructive Receipt

In 1031 exchange terms, “constructive receipt” means that the person conducting the 1031 exchange has obtained control over the sales proceeds (either directly or indirectly). Why is this bad? Because it violates one of the fundamental rules of the 1031 exchange – that you must move all of your exchange proceeds into a replacement property.

When you effectively receive your sales proceeds you have just received income that is subject to capital gains taxes. This is exactly what you’re hoping to avoid when conducting a 1031 exchange.

The Role of the Qualified Intermediary

One of the many benefits of working with a qualified intermediary during your exchange is that they can insulate you from receiving any of the net proceeds from the sale of your relinquished property. They do this by holding the net proceeds for you during your exchange period and transferring them over to the replacement property at the time of closing.

Twin Cities 1031 Exchange Services

The Minnesota qualified intermediaries at CPEC1031 have been helping taxpayers with their 1031 exchanges for decades. If you’re looking to defer taxes on the sale of real property, contact us today for help with your exchange. Our intermediaries can prepare all the necessary documents for your exchange, and advise you on best practices every step of the way. Contact us today at our downtown Minneapolis office to get started with your exchange.

• Start Your Exchange: If you have questions about 1031 exchanges and constructive receipts, 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 Doing a 1031 Exchange with a Significant Other

When a taxpayer is doing a 1031 exchange, they may want to buy their new replacement property together with another person. Maybe they want to buy the replacement property with their significant other or partner, for example.

The Problem with Proceeds

The problem with this generous idea is that in order for the exchange to be respected, all of the proceeds from the relinquished property need to be earmarked and used exclusively for that taxpayer’s exchange.

If the proceeds from the relinquished property are utilized to buy someone else's interest in the replacement property, the IRS will say:

"These funds were earmarked to buy the taxpayer’s interest in the replacement property but instead were used by someone else who is not the exchangor’s interest in the property. We don't see that as being a continuation of investment by the taxpayer.”

So you may inadvertently cause the recognition of gain as to any proceeds that were sidetracked and used to basically ante up someone else's interest in the replacement property.

The Best Course of Action

The better course of action is to have the taxpayer that relinquished the property use their proceeds solely for their purchase of the replacement property. If someone else is coming in as a cold purchasor they should bring in their proportionate share of the down payment and contribute their cash out of their pocket so that they have a place at the table that they pay for out of their own funds.

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

Defer the tax. Maximize your gain.

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved