A Creative Alternative for Failing Reverse 1031 Exchanges

Reverse 1031 exchanges are a great option for taxpayers who wish to acquire replacement property before selling their relinquished property. But what happens if, for whatever reason, your reverse exchange is in jeopardy? In this article, we are going to offer up a creative alternative option for a failing reverse 1031 exchange.

A Creative Alternative

A creative option for a failing reverse exchange can be found in IRS Private Letter Ruling 200712103.

Assume that you are parking your new replacement property with the Exchange Accommodation Title Holder. In the event that an actual third-party purchaser can’t be found to purchase your relinquished property (the old property) within the 180 days, it may be possible to “manufacture” a “White Knight” buyer that is dissimilar to the taxpayer doing the 1031 exchange. In this arrangement, you could have a “white knight” purchase the old relinquished property from you to get it off your books within the 180 day reverse exchange period. The white knight will then act as temporary owner of the relinquished property until such time that the property is later sold to a third-party purchaser.

To be treated as the owner for tax purposes, the White Knight will need to have sufficient incidents of ownership of the relinquished property, so it will be conveyed the property by deed or contract for deed. In PLR 200712103, the Internal Revenue Service ruled that a taxpayer doing a safe-harbor reverse exchange (under Rev. Proc. 2000-37) could sell its relinquished property to a "related party" (but dissimilar taxpayer) and that this related party could also subsequently market and sell the relinquished property without having to hold the property for two (2) years. 

A Note on Private Letter Rulings

Private letter rulings are a written statements issued to specific taxpayers that interprets and applies tax laws to those taxpayer’s represented sets of facts. A PLR is issued in response to written requests submitted by taxpayers. A PLR may not be relied on as precedent by other taxpayers or by IRS personnel, but may give insights into how other taxpayers are dealing with similar situations.

• 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

Recent Trends in the Commercial Real Estate Economy

The commercial real estate economy can shift quickly and it can be difficult to stay on top of recent trends. In this article, we are going to discuss some trends that we see in the real estate economy as they relate to 1031 exchanges.

Property Management Fatigue

I have a lot of clients that have highly appreciated duplexes and single-family rental properties, and the owners are getting tired of managing these properties.

They don’t want to deal with tenants, trash, toilets, and collecting rent. As a result, they’re wanting to sell their properties and transition into other investments (whether it's triple-net-lease, single-tenant, or some other type) and try their hand at some other aspect of commercial real estate.

Regulation & Rent Control

We're also seeing some fear in the Minneapolis-St. Paul metro area that rent control and more regulation of landlords will make the business of renting even more difficult.

The landlords in Minneapolis and Saint Paul have dealt with increased property taxes and regulatory restrictions for quite a while and now many of them are done staying in that space. These investors are looking at this as a great opportunity to sell at the top of the market and reposition into other segments that are less management-intensive, such as medical office

We’ve seen an increase in marketplace velocity in 2021 and it’s mostly small investors driving this increase. It’s mom and pop stores and landlords who own small single-family rental duplexes, four-plexes, farmers, or other business owners that are taking advantage of this high-value, low interest environment to transition into other real estate Investments.

• 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

Delaware Statutory Trust – the Perfect Vehicle for Syndicating Real Estate

There are a few options available to taxpayers for syndicating real estate, but for many reasons, the Delaware Statutory Trust is king. In this article, we are going to discuss Delaware Statutory Trusts and why they provide the perfect vehicle for syndicating real estate.

What is a Delaware Statutory Trust?

A Delaware Statutory Trust is an entity into which syndicators put real estate. So at the top of the ownership, there's a trustee of the Delaware Statutory Trust and when investors come in and buy the beneficial interest in a Delaware Statutory Trust, those investors are deemed to have a proportionate share of the underlying real estate for tax purposes.

The Perfect Vehicle for Syndicating Real Estate

The Delaware Statutory Trust is the perfect vehicle for syndicating real estate because it qualifies for 1031 exchange. The brokerage houses that in the past said “sell your stuff, give me the money and I'll make up the difference with rapid and efficient investment” now can say “sell the property, give me the money and I'll reinvest it into a 1031 investment and manage that money for you like we manage the rest of your non-1031 investments.”

Moving Into Less Management Intensive Property

Right now, we’re seeing a strong trend to move from management intensive property into less management intensive property. People see an opportunity to sell their management intensive properties and transition to a place where they can perhaps travel and relax and not have to worry about the unexpected ownership crises that always crop up with management intensive real estate. Delaware Statutory Trusts provide a perfect vehicle for doing just that.

• 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

What Options Are There for 1031 Exchanges When Inventory is Tight?

Real estate inventory is very scarce right now, which has caused a lot of frustration among investors engaging in 1031 exchanges. This scarcity has caused many people to try and get creative with their replacement properties. However, you need to be very careful in how you approach this as the IRS has very strict rules on what does and does not qualify for 1031 treatment.

Buyer Beware

Here’s an example of a potential “solution” to the scarcity problem that does NOT work for 1031 exchange purposes.

Let’s say you are looking to sell your investment property in a 1031 exchange transaction and you want to buy a gorgeous single-family home as your replacement property. Then you want to move into that new single-family home and rent out your old home.

Here’s the issue with that – your 1031 replacement property has to be used for investment or business purposes. If you move into that home, that will likely be considered personal use by the IRS.

Some may try and argue that in this scenario you’re just substituting the old home as the new rental property, but I don't think the IRS is going to look at it that way.

This is just one example of a creative “solution” to a 1031 problem that will likely not work out in the taxpayer’s favor. It’s important to be very mindful that when you're doing an exchange, you want to bring your accountant, your tax preparer, your tax attorney, and your qualified intermediary to ensure that your exchange is going to be successful.

Like-Kind

The like-kind provision in section 1031 is very broad. Most real estate in the United States can be considered like-kind to most other real estate in the United States. So an unimproved farm is considered like kind with the IDS Center in downtown Minneapolis. They're both real estate. The character of the farm and the character of the IDS Center are both real estate so you can do an exchange of real estate that may not be similar but you can still exchange within the United States real property for real property.

That it gives investors a lot of options for potential replacement properties when considering a 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

Who Should you Identify Your Property To in a 1031 Exchange?

Typically, taxpayers conducting 1031 exchanges will send their completed and signed 1031 replacement property identification form to their qualified intermediary. That is the norm in the industry, however, under the Treasury Regulations, a taxpayer can technically identify to:

1. The person that is obligated to transfer the replacement property to the taxpayer (such as the seller of the Replacement Property if you have signed a purchase agreement to buy the replacement property);

2. Any other person involved in the exchange other than the taxpayer or a disqualified person.

A Word of Warning

Your real estate agent, attorney or accountant may be involved in your exchange, but these people are probably disqualified because they are acting as your agent or employee. Also people that you are “related” to you by familial relation or business relationships [set out in IRC Section 267(b) or 707(b)] such as business partners are also disqualified.

If there is a title company or escrow company involved in your exchange, that title company or escrow company could theoretically be sent your 1031 replacement property identification form, and they likely would not be considered to be your agent, so that could be sufficient.  However, the better practice is to send the identification to your qualified intermediary. 

• 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