How to Use a Contract for Deed to Acquire 1031 Exchange Replacement Property

Let’s say you’re at day 170 of your 180 day 1031 exchange period and you don’t have your new replacement property lined up and ready to go. What happens? Are you forced to pay the capital gains taxes and not do a 1031 exchange?

Cutting it Close in a 1031 Exchange

We’ve had clients who have gone right down to the wire on their 180 day exchange time frame. In one instance, it was caused by a snafu with the bank. For whatever reason, the bank could not get the financing approved. The seller was willing, the buyer was willing, but the bank had some sort of difficulty. Without the bank’s money, it’s hard to close on the replacement property. So we said to the client: “why don’t you approach the seller and offer to buy the property on a short term contract for deed, under which the buyer receives equitable title.”

Purchasing a property via a contract for deed is a clever way to get a deal done so that the client can identify their identified replacement property within the 180 day time frame.

In the Midwest, land contracts and contracts for deed are very popular. This particular client that we were working with was in New York, where they don’t do a lot of contracts for deed. So depending on your geographical location, the local customs and practices may dictate the extent of your options.

Contact a Qualified Intermediary

If you’re considering a 1031 exchange, contact a qualified intermediary at CPEC1031 today to work through the details of your transaction. Contact our qualified intermediaries today at our office in Minneapolis to get your 1031 exchange off the ground!

• 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

1031 Exchange Overlapping Timelines

Timelines are very important in any 1031 exchange of real estate. You want to always be cognizant of your deadlines so you don’t accidentally miss any and jeopardize your exchange. In this article, we are going to talk about overlapping timelines with forward and reverse 1031 exchanges.

Forward 1031 Exchange

When you’re doing a forward 1031 exchange that means you’ve sold the relinquished property first. The day of the closing of the relinquished property is day zero. You have 45 days thereafter to make your identification. At midnight of the 45th day the exchange will fail if there has been no identification made. According to the regulations, your replacement property identification must be sent by midnight of the 45th day.

Reverse 1031 Exchange

If you’re doing a reverse exchange, then you’re not identifying the replacement properties. Rather, you’re identifying the relinquished properties you’re going to be disposing of in the exchange.

Overlapping Timelines

There can be a situation in which you do a reverse exchange, followed by a forward exchange. In that scenario, you may park one property (let’s say a $200,000 piece of land that was previously purchased). Then you sell your relinquished property for $500,000, so you get the proceeds from that $500,000 sale. The qualified intermediary then immediately transfers the initial replacement property to the exchachor. Concurrently, the taxpayer has a forward exchange going and they can identify additional replacement properties within the 45 day identification period and receive them within the 180 day exchange period. So you can, as in this scenario, have two overlapping linear timelines.

Start Your 1031 Exchange

Considering a 1031 exchange? Contact a qualified intermediary to work through the details of your transaction. Our intermediaries have over two decades worth of experience facilitating exchanges of all shapes and sizes. Contact our qualified intermediaries today at our office in Minneapolis to get your 1031 exchange off the ground!

• 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

Estate Planning & Real Estate: What is a Stepped-Up Basis at Death?

Under the current estate tax laws, when an individual dies all of his or her assets are revalued to their fair market value - the value that the estate tax is imposed upon. The trade-off that the current tax regime contemplates is that, except for a few categories of assets like your retirement funds or other installment sales, all of your assets are given a new basis which is the value that is used to determine the gain that you incur when a sale takes place.

So if you owned an apartment building for a long period of time and depreciated that down to a very low value, but then owned that property at death, the value of that asset would be stepped up.

Consider Your Tax Situation

If you turned around the day after death and sold that property, your capital gains and other gains on that transaction would be zero if you sold it for that new stepped up basis. The other advantage of the stepped-up basis is that with real estate under certain circumstances you will be able to re-appreciate that asset again after the step up. In other words, you'll be able to take a depreciation deduction a second time. Those are some very significant advantages to utilizing the 1031 exchange in an estate planning scenario.

Contact a Qualified Intermediary

If you’re thinking about availing yourself of the tax-saving benefits of a 1031 exchange, contact a qualified intermediary to work through the details of your transaction. Contact our qualified intermediaries today at our office in Minneapolis to get your 1031 exchange off the ground!

• 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

Can Partners or LLC Members do Individual 1031 Exchanges?

Owning property in an LLC or an entity that is taxed as a partnership can be problematic when the various partners want to separately do 1031 exchanges. As a result, reconfiguring the ownership well before the sale might be advantageous. The best method of reconfiguration here is the tenancy-in-common model.

In a tenancy-in-common, you take those various individuals out of the partnership and deed them an undivided interest in the underlying real estate and have them hold that interest for some substantial period of time so that they can say they've held the property for investment or business and do a subsequent 1031 exchange on their slice of the relinquished property.

Coordinate with Your Team

That process requires coordination with your accountant, lawyer, financial planner, and the qualified intermediary because even if we break up as tenants-in-common but we still continue to report the asset as a partnership asset we may not have advanced the ball because we continue to conduct ourselves as a joint venture partnership.

Planning ahead is always a good idea and involving your accountant, lawyer, and intermediary early in the process can only benefit you.

Get Your Exchange Off the Ground

Considering the tax-saving benefits of a 1031 exchange? Contact a qualified intermediary today to work through the details of your transaction. Our intermediaries are well-versed in the process and can ensure that you defer 100% of your capital gains taxes – no matter where your sale is taking place. Contact us today at our office in downtown Minneapolis to get your 1031 exchange off the ground!

• 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

Is it Possible to Borrow Too Much Money in a 1031 Exchange?

In a 1031 exchange, the taxpayer needs to redeploy (or reinvest) all of their proceeds or exchange funds into the replacement property. However, if they have two large of a mortgage or deed of trust on their replacement property, the net result may be that they are receiving funds back at the replacement property closing. Here are some tips to keep in mind if you find yourself in this situation.

Avoiding Taxable Boot

If the taxpayer receives back money from the closing of the replacement property, these funds may be treated as taxable boot by the IRS. In order to avoid receiving access exchange funds back at the closing it may be necessary to lower the amount of debt being taken out in conjunction with the purchase of the property.

Consult Your CPA

It's always a prudent practice to have your CPA or tax advisor review your settlement or closing statement before completing the purchase of your replacement property to make sure everything is in order and the 1031 exchange goes off without 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