How 1031 Exchanges Fail

Without the proper planning and precautions, 1031 exchanges can fail. In this article, we are going to talk about how 1031 exchanges fail and how to avoid a failed 1031 exchange.

Constructive Receipt

Perhaps the biggest reason that 1031 exchanges fail is that the taxpayer conducting the exchange receives boot during the exchange process. Boot can come in many forms.

If you take constructive receipt of any boot throughout the process, you can end up with a failed or partial exchange. To prevent this, make sure you take care to avoid receiving boot at all times during your exchange period.

Failure to Meet the Requirements

Your 1031 exchange can also fail if you do not meet the numerous requirements set out by the IRS. If your exchange does not complete within the allotted 180 day time period, your exchange will fail. If your property fails to meet the 1031 exchange requirements (like-kind, qualifying purpose), your exchange will fail. If you do not go up in value, equity, and debt on your replacement property, your exchange will fail. Be sure to check off all the appropriate boxes and work with your qualified intermediary to make sure your exchange meets all the necessary requirements.

Qualified Intermediaries in Minnesota

Looking for a qualified intermediary in Minnesota? You’ve come to the right place! At CPEC1031, our intermediaries have over twenty years of experience facilitating exchanges throughout Minnesota and the United States. We can help you identify replacement property, prepare your 1031 exchange documents, and more! Contact us today to learn more about our qualified intermediary services and get your exchange started! Our main office is located in the heart of downtown Minneapolis, but we work with taxpayers throughout the United States on their exchanges of real estate.

• 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.

© 2020 Copyright Jeffrey R. Peterson All Rights Reserved

3 FAQs About Deferred Sales Trusts

We’ve talked about Deferred Sales Trusts before and how they can be a viable alternative to 1031 exchanges. But there are a lot of questions surrounding DSTs. In this article, we are going to answer three frequently asked questions about deferred sales trusts.

Is a Deferred Sales Trust a Tax Loophole?

No, a deferred sales trust is not a loophole. Section 435 of the Internal Revenue Code (which defines DSTs) has been in the code for a long time, and many taxpayers sell property under installment arrangements. In short, DSTs are a completely legitimate tax strategy.

Will I Be Audited if I do a Deferred Sales Trust?

Audits are always a possibility, no matter who you are. However, contrary to popular belief, merely engaging in a 1031 exchange or deferred sales trust transaction does not make you a more likely target for an audit.

After Starting a DST, can I sell Additional Property?

Absolutely. After you have the deferred sales trust set up you can add additional properties. This can get a little complicated so make sure you are working with a qualified intermediary to make sure you have all of your details covered.

CPEC1031

At CPEC1031, LLC, we employ qualified intermediaries who specialize in 1031 exchanges of real property. With more than 20 years of experience, our team of intermediaries can walk you through every step of your exchange from beginning to end. Our primary office is located in downtown Minneapolis, but we work with clients throughout the state of Minnesota, the Greater Midwest, and across the United States. Contact us today to learn more about our 1031 exchange services and start deferring your capital gains taxes on the sale of real estate!

• 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.

© 2020 Copyright Jeffrey R. Peterson All Rights Reserved

Converting 1031 Replacement Property into a Principal Residence

Many people ask about the possibility of converting a 1031 replacement property into a principal residence. That’s our topic for this article.

If you later sell the hypothetical replacement property, now as your principal residence (IRC Section 121), you and your spouse may be able exclude up to $500K ($250 single), but the Section 121 principal residence exclusion applies only to the taxes on the appreciation in value, and will not exclude gains from the past deprecation (on the current property or the old property exchanged out of). So deprecation recapture will cause some tax inefficiency at the sale of the principal residence.  Also, you have to wait five (5) years before to take a principal residence exclusion on a property that you 1031 exchanged into.

26 USC 121(d)(10) Property Acquired in a Like-Kind Exchange

If a taxpayer acquires property in an exchange with respect to which gain is not recognized (in whole or in part) to the taxpayer under subsection (a) or (b) of section 1031, subsection (a) shall not apply to the sale or exchange of such property by such taxpayer (or by any person whose basis in such property is determined, in whole or in part, by reference to the basis in the hands of such taxpayer) during the 5-year period beginning with the date of such acquisition.

The amount of the exclusion that you get to take also depends on the ratio of time that you used the property of rental (non-qualified use for 1031) and the period of time that you used the property as your principal residence (qualified for 121).

26 USC 121(b)(5)(B) Gain Allocated to Periods of Nonqualified Use

For purposes of subparagraph (A), gain shall be allocated to periods of nonqualified use based on the ratio which—

(I) the aggregate periods of nonqualified use during the period such property was owned by the taxpayer, bears to

(ii) the period such property was owned by the taxpayer.

• 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.

© 2020 Copyright Jeffrey R. Peterson All Rights Reserved

How Long Do You Need to Hold Your 1031 Exchange Investment Property?

There are a variety of rules, regulations, and timelines that you need to follow when exchanging property in a 1031 transaction. One of the most common questions people have when it comes to 1031 exchanges is – “how long do I need to hold my property before I begin my 1031 exchange?” In this article, we are going to discuss how long you need to hold your 1031 exchange property for before conducting a like-kind exchange.

No Concrete Timing Rules

Although there are many timing rules associated with a 1031 exchange (such as the 180 / 45 days time frames), there are no concrete timeframes for how long you need to hold your 1031 exchange property before beginning your exchange. But we can infer some general best practices.

House Flippers Beware!

Exchanging flipped property in a 1031 exchange is a big red flag to the IRS. If it’s obvious that your 1031 exchange property was flipped property, the IRS is likely to deny your 1031 exchange – resulting in immediate taxable gain on the sale.

In general, it’s best to give yourself plenty of time before doing a 1031 on your property. The longer the better – but at least two years is a good starting point.

Defer Your Capital Gains Taxes!

At CPEC1031, our intermediaries have over twenty years of experience facilitating like-kind exchanges of real property for clients throughout Minnesota and across the country. Our intermediaries are well-versed in the exchange process and can prepare all of your documents, answer all of your questions, and advise you every step of the way. Contact our qualified intermediaries today at our downtown Minneapolis office to learn more about 1031 exchanges and how they can help you defer capital gains taxes on the sale of real estate!

• 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.

© 2020 Copyright Jeffrey R. Peterson All Rights Reserved

The 3 Most Important 1031 Exchange Rules

The 1031 exchange is governed by several rules that need to be met in order to be successful. In this article, we are going to lay out the three most important 1031 exchange rules that you need to remember when doing a like-kind exchange.

Your Property Needs to be Like-Kind

1031 exchanges are also known as like-kind exchanges. That’s because all property involved in your 1031 exchange needs to be like-kind.

You Need to Have the Right Intent with Your Property

You need to have the right mindset when it comes to your 1031 property. Only property that is held for investment or business use can be considered for 1031 treatment. You cannot use property held primarily for personal use. So your family home is not eligible, but an apartment complex that you manage is eligible.

You Need to Complete Your Exchange within your Time Deadlines

Timing is also an important factor in a 1031 exchange. You are not allowed to sell a property and then use it to exchange into a new property a year later. You only have 180 days total from the start of your exchange to the end. Furthermore, the first 45 of those 180 days are set aside as your identification period. During that time, you have to identify, in writing, your replacement properties.

IRC Section 1031

Our 1031 exchange intermediaries specialize in assisting clients with their like-kind exchanges under section 1031 of the Internal Revenue Code. CPEC1031 has been performing 1031 exchanges for more than twenty years. To learn more about the 1031 exchange process or to speak with one of our intermediaries about getting your exchange started, contact us today to set up an appointment. We work with clients across the country but our primary offices are located in downtown Minneapolis.

• 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.

© 2020 Copyright Jeffrey R. Peterson All Rights Reserved