Investing in Real Estate over Stocks

If you’re looking to invest your money, two of the first places you will likely look are the stock market and the real estate market. Each option has its own unique benefits and drawbacks. In this article, we are going to explain a few reasons why investing in real estate instead of stocks can be beneficial and how a 1031 exchange can take your real estate investment to the next level.

Capital Gains Tax Burden

The biggest benefit to investing in real estate over stocks is that you may be able to avoid your capital gains tax liability when you sell.

Selling stocks typically results in capital gains taxes. Depending on the sale, this can add up to a sizeable tax burden for the seller.

Selling real estate in a typical transaction will also result in a capital gains tax bill, but these taxes can be deferred with a 1031 exchange. All you need to do is make sure that your sales proceeds are reinvested into like-kind real estate (and meet several other 1031 requirements) and you will be able to defer your capital gains taxes.

Qualified Intermediary Services

Working with a qualified intermediary is one of the best ways to ensure a successful 1031 exchange. Like-kind exchanges are complex transactions, and it’s good to have a professional who understands the process backwards and forwards. An intermediary can answer all of your questions, prepare all of your documents, and advise you on the specifics of your exchange. Reach out to us today to speak with our qualified intermediaries about your 1031 exchange. Our offices are located in downtown Minneapolis but we work with clients throughout Minnesota and across the country.

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

Defer the tax. Maximize your gain.

© 2018 Copyright Jeffrey R. Peterson All Rights Reserved

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

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

Tips for Dealing with 1031 Property Received in a Divorce Settlement

When a spouse purchases property in a 1031 exchange, they have a lower basis (than a normal cost basis) in the property to the extent that they have deferred gains and rolled over into the new replacement property. This may be called a substituted basis or reduced basis due to the taxes that were deferred in the exchange.

Depreciation Deductions

If, in addition to starting with a lowered basis, the spouse then took depreciation deductions for the wear, tear, and exhaustion of the property, then the remaining basis would have been further reduced each year incrementally as these depreciation deductions were taken.

Section 1041

Years later, if the spouse gets divorced and transfers the replacement property to their ex-wife/husband (former spouse) as part of a divorce property settlement, then the former spouse will take the property with a straight carry-over basis under IRC Section 1041 (transfers of property between spouses or incident to divorce), so they get the property with a super low basis, being whatever remaining basis the transferor had left in the property. Section 1041 makes transfers between spouses tax-neutral, in that the receiving spouse just takes the transferred property subject to the other spouses basis.

Section 121 Exclusion

If the former spouse moves into the property and makes it their principle residence, they may be able to take a partial exclusion under IRC Section 121 once they have owned and lived in the property for two years; however, the amount of the exclusion allowed is a fraction based upon the ratio of the time the property was used as a rental and the amount of time it was used as a principle residence. Further, IRC Section 121 is inapplicable to deprecation recapture. So, the former spouse will only get to use a fraction of the principle residence as it relates to the appreciation (or natural increase in value over time), but will not be able to exclude any gains attributable to the past depreciation that was taken by either or both spouses.

Unrecaptured Depreciation

Unrecaptured depreciation may be taxed at a maximum rate of 25% on most US real property. While normal long term capital gains are taxed at a maximum rate of only 20%.

In summary, if you receive property in a divorce property settlement that was originally purchased to complete a 1031 like-kind exchange…you may be receiving the property with an unexpectedly low basis and additional potential tax complications. These tax complication may be compounded by the limitations imposed in Section 121 for the principle residence exclusion that carve-out from the exclusion the deprecation recapture

PROTIP:  Let the entrepreneurial spouse keep the old low basis property, and have the other spouse receive cash!  Cash is king.

• Start Your Exchange: If you have questions about tax implications of property in a divorce, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved

The Role of the Real Estate Agent in a 1031 Exchange

Real estate agents and brokers get no respect.

Who is the engine that drives the real estate transaction? Who is the warrior that goes out to prospect and dig up these deals in the dirt and then puts them together?

It's the real estate agent or broker.

Potential Obstacles

Real estate agents work hard to put these deals together, and then everyone comes in and creates obstacles:

• The environmental company raises objections about potential contaminants in the soil

• The title company raises objections about flaws or difficulties in the title

• The bank comes in with their level of requirements

• The lawyers get involved in parsing the verbiage in the contracts

The poor real estate agent or broker has to persevere, taking their client from start to finish. And they don't get paid unless the transaction closes, so they're basically working for free during this entire process.

A Tip of the Hat

I tip my hat to the real estate broker or agent who perseveres, puts the deal together and then at the end of the transaction, gets little or no credit.

• Start Your 1031 Exchange: If you have questions about the role of real estate agents or brokers 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