3 Quick Tips for Identifying Property in a 1031 Exchange

One of the most stressful parts of doing a 1031 exchange is knowing that you have this looming deadline that you have to designate in writing your replacement property within 45 days after the sale of your old relinquished property.

Be Mindful of Time

Knowing that, many smart and prudent investors will use all of their time leading up to the sale of the relinquished property to hone in and target the replacement properties. Sometimes they’ll even sign purchase agreements or option agreements locking up that replacement property before they’ve sold their old relinquished property. The idea is that they don’t want to be sweating that 45 day identification period.

Other investors are a little bit more cavalier and freewheeling. They may go right up until the eleventh hour on day 44 to figure out what they're going to identify. Sometimes taxpayers will list the three best candidates under the three property rule and pray that they can close on one of those three properties during the remainder of their hundred and thirty-five days in the exchange period.

3 Rules for Identifying Replacement Property

The trick with identifying is knowing that there are three different alternate rules for identifying replacement property.

1. The first rule is the three property rule that we talked about. It’s very simple. You identify three or fewer properties, doesn't matter how expensive they are.

2. An alternative rule is called the 200% rule. Under that rule you can identify any number of properties so long as the total aggregate value of all of those identified properties does not exceed 200% of the gross sales price of your relinquished property.

3. Finally, the last identification rule is called the 95% rule. It is very rarely used because it says you can identify a number of properties - more than three, more than 200% of your old property - but you actually end up receiving 95% of the value of those properties that you identified. So if I list 100 oil and gas wells, I have to purchase that entire portfolio. But if one of those oil wells runs dry and I decide not to purchase it, I still receive 95% of those properties that I identified.

• 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

Title Closers – Don’t Forget These Tips for Closing a 1031 Exchange

Title closers deal with settlement statements day in and day out, but there are additional precautions required when the closing involves a 1031 exchange. There are three essential items that title closers need to be cognizant of so the 1031 exchange goes off without a hitch – taxes, security deposits, and rent prorations. In this article, we’ll discuss how title closers should handle each of these items on the settlement statement to avoid any issues with a 1031 exchange. Our primary goal when the seller of a property is doing a 1031 exchange, is to roll all of the net-sales proceeds over into the 1031 escrow account so that they can be re-invested into like-kind replacement property. Not all transactional costs and fees should be paid for from the sale proceeds on the closing statement.

Taxes

The seller of the relinquished property needs to pay the real estate taxes owed for the time period that they owned the property during the year. When there’s no 1031 exchange involved, the seller typically pays these taxes out of their sale proceeds on the closing statement. But when the seller is conducting a 1031 exchange, we need to keep these payments separate from the sales proceeds. In an ideal world, the seller would pay their prorated real estate taxes in out-of-pocket cash at the closing. This can avoid a big headache later on in the exchange.

Security Deposits

If the closing involves a property that has been or is currently being rented out to tenants, we also have to be careful about security deposits. The seller of the property should be holding all security deposits for their tenants in a bank account separate from their operating account. If that’s the case, then the seller can simply take the money out of that separate account and pay the security deposits over to the buyer at the time of closing. However, if the seller has been keeping these deposits in their general operating account and the seller is feeling cash-poor, things get more complicated. If this is the case, it’s time to talk to a 1031 professional to determine the best way to proceed so you don’t jeopardize the exchange.  Ideally, the seller will come up with the money to transfer the security deposits over to the buyer out-of-pocket rather than dipping into the sales proceeds (which could diminish the value of the 1031 exchange).

Rent Prorations

At closing, the seller should also pay the buyer the portion of the rents they have collected for the month. Since the seller has likely already collected the rents for the month and deposited them into their operating account, it’s best to have the seller wire this money out of their operating account and pay it out of pocket at closing to the buyer.  This is the preferred way to handle rents, as opposed to dipping into the sales proceeds (which could diminish the value of the 1031 exchange).

The Big Picture

The big picture when closing a 1031 property is that you want to move all of the equity (the net proceeds) over to the qualified intermediary. If you’re ever in doubt, it’s always best practice to have the seller pay closing expenses out of pocket at closing.

• 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 Deal with Auctioned Property in a 1031 Exchange

In some 1031 exchanges, the taxpayer conducting the exchange may wish to sell the relinquished property at auction. This is possible, but there are several things to keep in mind when conducting exchanges at an auction. This article is all about 1031 exchanges involving auctioned property. We’ll explain all the basic details you need to be aware of when exchanging auctioned property.

Selling at Auction

The first thing you want to do at the auction is to notify the auctioneer that the property is being sold as part of a 1031 transaction. The auctioneer can then pass that information along to the bidders and inform them that whoever wins will need to sign an acknowledgment stating the seller has assigned their rights in the purchase agreement to the qualified intermediary. This is a relatively simple request, but it is essential that you have the cooperation of the person that wins the auction in order to complete a successful 1031 exchange.

Buying at Auction

If you are on the other side of the transaction (you’re purchasing replacement property at auction) there are some additional items to keep in mind. Again, you should communicate with the auctioneer your intention to purchase the property as part of a 1031 transaction. This will likely require you to include a 1031 cooperation clause in the purchase agreement to ensure the seller’s cooperation.

1031 Exchange Company in Minneapolis, MN

At CPEC1031, LLC, our qualified intermediaries have over two decades of experience facilitating real property exchanges for clients throughout the state of Minnesota. Our intermediaries make the 1031 exchange process easy for you by advising you and preparing all of your documents. If you are looking to save taxes on your next real estate sale, a qualified intermediary can help you. Contact our 1031 exchange professionals today to discuss the details of your exchange. Our primary office is located in downtown Minneapolis, but we work with clients throughout the country.

• 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 Define ‘Like-Kind’ in a 1031 Exchange

Like-kind is one of the most important rules you need to follow when conducting a 1031 exchange of real property. All property involved in your exchange needs to be like-kind. But like-kind can be a tricky thing to nail down in certain exchanges. In this article, we will explain the intricacies of “like-kind” in a 1031 exchange of real estate.

Real Estate Exchanges

When it comes to 1031 exchanges of real property, the IRS has defined “like-kind” very broadly. In general, most real estate is considered like-kind to most other real estate. It doesn’t matter where they are located (so long as they’re in the US), or their respective industries. You can exchange out of an apartment building and into a hotel building, for example.

When in doubt, it’s always a good idea to consult with a qualified intermediary about the details of your exchange and whether your property qualifies as like-kind or not.

Minneapolis 1031 Exchange Company

The qualified intermediaries at CPEC1031, LLC have decades of experience helping taxpayers in the Twin Cities, greater Minnesota, and across the country with their like-kind exchanges of real property. Contact us today at our downtown Minneapolis office to set up a time to chat with one of our skilled 1031 exchange accommodators.

• 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

Escrowing Funds for Post-Closing Repairs in a 1031 Exchange

In a 1031 exchange, can you escrow funds for post-closing repairs and improvements, or could that be considered boot? That is a good question. First and foremost, you may want to talk with your CPA or tax advisor about this.

1031 Exchange Basics

1031 exchanges are for like kind exchanges of real property for real property, and if you get any other property or cash as part of the exchange (non-like-kind property is called “boot”), then that property or cash may be taxable.

Ideally the repair would be paid for and completed by the seller before you close on the purchase of the replacement property, that way there is no need to hold an escrow for your benefit (to pay for post-closing repairs and improvements).

The risk of escrowing cash for your benefit to pay for post-closing repairs and improvements is that it may be considered taxable boot. The escrow may not be considered like-kind property.

Holdback Credits

Holdback credits do not work. An approach instinctively utilized by many realtors and escrow companies to handle minor repairs to Replacement Property is to have repairs performed at the Seller's or Accommodator's expense after the Replacement Property is conveyed to the Exchanger. This approach does not work because the Exchanger is not receiving like-kind property when the Exchanger receives post-closing repairs.

Treas Reg § 1.1031(k)-1(e)(4) specifically provides that "additional production occurring with respect to the replacement property after the property is received by the taxpayer will not be treated as the receipt of property of a like kind.

Please check with your tax advisor on this issue.

• 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