Why Like-Kind Exchanges of Real Estate are not a Tax Loophole

1031 exchanges are used by many taxpayers to defer their capital gains taxes when selling real property. But many people think of the 1031 exchange as some sort of tax loophole and that those who perform 1031 exchanges are somehow “gaming” the system. In this article, we will talk about whether or not like-kind exchanges of real estate should be considered tax loopholes.

Section 1031 of the IRC

The short answer is no – 1031 exchanges of real estate are not tax loopholes. Section 1031 has been a part of the Internal Revenue Code for many decades. It was established by Congress to encourage investment and stimulate growth in the economy. Instead of paying capital gains taxes when selling real estate, 1031 exchanges allow taxpayers to defer those taxes as long as they move their gains into new like-kind property.

A loophole implies that something is sneaky or underhanded in some way. That is not true of 1031 exchanges at all. 1031 exchanges are perfectly legal and above board. You could even say that like-kind exchanges are encouraged by the US government. They give taxpayers an incentive to continue investing in real estate and moving money around the market – thus stimulating growth.

1031 Real Estate Exchanges in MN

At CPEC1031, LLC, we work with clients in Minnesota and across the country. Our primary goal with each client is to help defer capital gains taxes on the sale of real estate via section 1031 of the Internal Revenue Code. With decades of experience, our 1031 intermediaries are well versed in the exchange process, and can answer any of your questions. Contact us today to discuss your situation and whether a 1031 exchange is right for you. Our primary office is located in Minneapolis, but we work with clients in all fifty states.

• 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.

© 2021 Copyright Jeffrey R. Peterson All Rights Reserved

How to Divide the 1031 Proceeds after the Sale of the Relinquished Property

Recently, a client came to us with the following 1031 exchange situation. The client wanted to purchase a property solely in their name. Here's where it gets complicated: the client wanted to divide the proceeds between two people after the sale. Is this possible to do this and still keep everything within the 1031 strike zone?

Determining How You're Vested in Title

That is a very good question. Everything depends on how the client is vested in title on the old relinquished property. In order to figure that out we can pull a copy of the last vesting deed to confirm how they are currently in title.

For example, do they own the old relinquished property in a trust, an entity (such as a partnership), or do they hold title as tenants-in-common? Once we know how they hold title, then we can look at all of the available options for taking title to the new replacement property.

If you have additional questions about this or other 1031 exchange questions, contact a qualified intermediary today. At CPEC1031, LLC, we have over two decades of experience facilitating exchanges of real estate. Contact us today at our downtown Minneapolis office for help with your next 1031 exchange!

• 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.

© 2021 Copyright Jeffrey R. Peterson All Rights Reserved

How to Keep Operational Expenses Off of the 1031 Exchange Closing Statement

Title closers often wonder what they can put on a settlement statement when a client is selling their old relinquished property in a 1031 exchange. Here are a couple of tips.

Don't Gum Up the Closing Statement

In any 1031 exchange, you want to take all of the proceeds or equity that the seller has in the relinquished property and move that to the new replacement property. So we don't want to gum up the closing statement on the relinquished property with a bunch of sale expenses that are peculiar and weird. For example, we wouldn't want to put items on the closing statement that debit the sales proceeds for unusual, non-customary expenses, nor do we want to include expenses that are really operational.

Taxes, Rent & Insurance Costs

So if you have a debit for tax prorations, rent prorations, insurance costs, or anything that is really an operational expense related to the property, it's prudent to have the taxpayer and the taxpayer’s CPA or tax advisor talk about those expenses before the settlement statement is finalized.

It may actually be prudent for the seller to bring money into the closing to pay the prorated taxes, to pay the prorated rents, to pay any security deposits that need to be transferred to the buyer, and also to pay any other operational expenses like insurance. By having this preliminary settlement statement prepared and circulated to the appropriate advisors you can assure yourself that the seller will get the best result at the closing with the least amount of drama and disruption.

• 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.

© 2021 Copyright Jeffrey R. Peterson All Rights Reserved

When Does a 1031 Exchange Get Taxed?

A lot of taxpayers conducting like-kind exchanges wonder how to report a 1031 exchange to the IRS. Another common tax-related question we get is “how is my exchange taxed if it straddles two years?” In this article, we are going to dive into that topic and talk about how to handle a 1031 exchange that crosses over into a new year.

Like-Kind Exchange Periods

The standard time period for a like-kind exchange is 180 days. That means you need to sell your relinquished property and acquire your replacement property within 180 days or your exchange will fail. However, there are a few rare exceptions to that rule. For example, if your federal tax filing deadline lands within your 180 day exchange period, the filing deadline is your new 1031 exchange deadline. This is because the IRS wants to see your relinquished property and your replacement property reported on the same tax return.

As always, preparation is the key ingredient here. If you begin planning your 1031 exchange early, and involve a qualified intermediary, you will have all of your bases covered and you won’t be scrambling at the last minute. You should also involve your CPA in the process to make sure things go smoothly.

1031 Exchange Tax Help

If you’re confused about how to report your 1031 exchange on your upcoming tax return, reach out to a qualified intermediary for help. At CPEC1031, LLC, our intermediaries have more than two decades of experience working on like-kind exchanges of all shapes and sizes. We can put that experience to work for you! Our intermediaries can help navigate you through the 1031 exchange process, making sure you meet all the deadlines and requirements along the way. Contact us today to learn more about our 1031 exchange services.

• 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.

© 2021 Copyright Jeffrey R. Peterson All Rights Reserved

Sign Up for our Free Webinar: 1031 Exchanges in a Seller’s Market

Join Jeff Peterson of CPEC1031 and Matt Thompson of US Bank for a discussion about the ins and outs of 1031 exchanges in a seller's market.

Details:

• What: 1031 Exchanges in a Seller’s Market

• When: February 18 at 9:00 AM CST

• Where: Online - click on the link below to learn more and RSVP!

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Event Speakers

Jeff Peterson

Jeffrey Peterson is the president of CPEC1031, LLC. He received both his B.A. and his J.D. from the University of Minnesota, and is a member of the Minnesota State Bar Association and the Tax Section of the American Bar Association. He is also an adjunct tax law professor at Mitchell Hamline College of Law and instructor for Kaplan Real Estate Education.

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Matt Thompson

Matt is a business banking market leader at US Bank. He works with business clients to help them with all of their banking and financial needs. He enjoys working with all types of business owners with a focus in manufacturing, real estate and practice finance.