Can you 1031 Exchange from Oil & Gas into Land or other Real Estate?

In a typical 1031 exchange, you can exchange real estate for other real estate. But many taxpayers wonder if you can also exchange oil and gas rights.

Not all oil and gas programs qualify for 1031 exchange. So you have to be very cautious because not every deal that is set up as an oil and gas deal will work. This is particularly true for partnership deals, because if you own a partnership interest it doesn’t qualify for 1031 exchange.

Trading Deductions

Consider this situation: Let’s say you fully depreciate your single-family rental property. There’s nothing left but the basis in the underlying land. Then you take your profits in a 1031 exchange and parlay it into an oil and gas program that doesn’t allow depreciation, but allows a different kind of deduction called a depletion deduction for the theoretical depletion of the oil and gas reserves in the land that is the subject of the program.

In this situation you can trade one kind of deduction (the depreciation deduction) for a different kind of deduction (the depletion deduction). That could create some tax efficiency that would offset or mitigate the tax on your income. This is a creative way to pivot from a traditional real estate investment into an oil and gas program.

• 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.

© 2022 Copyright Jeffrey R. Peterson All Rights Reserved

3 General Rules of Thumb with 1031 Exchanges Involving Multiple Co-Owners

In a 1031 exchange of real estate involving multiple co-owners, for each co-purchaser/exchangor you will want to make sure that their percentage interest is sufficient to satisfy their Value, Equity and Debt accounting requirements in a 1031 exchange.

3 Guidelines for Deferring All Your Gain

There are three general rules of thumb to quickly see if you will defer ALL of the recognition of gain.

1. Typically you will acquire replacement property that is “up or equal” in Value* (price); {*net of sales commissions and customary transactional expenses}

2. You will roll over all of your Equity (net proceeds) from the relinquished property into your replacement property.

3. And to the extent that you were relieved of liabilities and Debt, such as mortgages on your old relinquished property, the debt relief is offset by (1) new liabilities or mortgages taken on in conjunction with your purchase of the replacement property; OR (2) by investing additional cash in the replacement property equal to the amount of liabilities and debts that were discharged.

You can have a partial tax deferral if you miss these general benchmarks. As always, it’s a good idea to talk with your CPA or tax accountant about this.

For more information, check out:

• Consequences of Doing a Partial Exchange

• The Napkin Test

Start Your 1031 Exchange

If you have additional questions about exchanging property involving numerous owners, reach out to CPEC1031 today. Our qualified intermediaries have over twenty years experience facilitating exchanges of all shapes and sizes. Contact us today to learn more about how we can help with your 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 Pick an Ownership Structure for Your Real Estate Investment

When it comes to investing in real estate, you have several options for how to structure the ownership of the property. In this article, we are going to offer some tips for choosing the right ownership structure for your next real estate investment property.

Real Estate Ownership Structures

Here are the most common examples of real state ownership structures:

• Partnership

• LLC

• S-Corp

• Grantor Trust

• Tenancy-in-Common (TIC)

Use Tenancy-in-Common for 1031 Exchanges

When it comes to 1031 exchanges of the property in question, a little foresight goes a long way. While all of the above listed ownership structures can do a 1031 exchange, there are some restrictions. If you want to do a 1031 exchange on property owned in a partnership, LLC, S-corp, or grantor trust, all investors need to re-invest into the replacement property together. This works just fine if all owners are in agreement about how to handle the sale. If you anticipate using a 1031 exchange when you sell your property, then the best ownership structure is the TIC (Tenancy-in-Common) option.

MN Qualified Intermediaries Conducting 1031 Exchanges

If you are selling real estate and want to avoid a big tax bill, consider a 1031 exchange, which allows you to defer your capital gains taxes. CPEC1031 is a Minnesota-based group of qualified intermediaries who specialize in 1031 exchanges of real property. Our skilled qualified intermediaries have more than twenty years of experience facilitating exchanges for investors all over the United States. Contact us today at our downtown Minneapolis office to learn more about how a 1031 exchange can benefit you.

• 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

The Importance of Not Underestimating the Fair Market Value of Your 1031 Exchange Property

Estimating the fair market value of your replacement property in a 1031 exchange is important. There are several potential negative ramifications if you underestimate the fair market value of your properties during a 1031 exchange. In this article, we'll take a look at a recent case study in which a taxpayer had a failed exchange because he underestimated the fair market value of his property.

Underestimating Fair Market Value

In a recent 1031 exchange audit, the California Franchise Tax Board (FTB) partly disallowed an exchange because the taxpayer identified more than 200% of the value of the property sold.

The taxpayer identified five properties during the 1031 identification period. The total value of the identified properties was 267% of the value of the property sold. The taxpayer acquired two properties during the identification period, and another property after the ID period had expired. The total value of these properties was less than 95% of the value of the properties identified.

1031 Identification Rules

Remember, a 1031 exchange needs to abide by the following 1031 identification rules:

• During the 45-day identification period, a taxpayer can identify up to three properties, regardless of value.

• A taxpayer can identify more than three properties as long as the total value of the identified properties does not exceed 200% of the value of the property sold.

• If both of these rules are violated, the taxpayer will be treated as having failed to identify any properties, except:

  • Any properties actually acquired by the taxpayer during the Identification Period will be considered properly identified; and

  • All properties identified during the Identification Period will be treated as properly identified if the taxpayer actually acquires properties with a total value equal to 95% of the total value of the properties identified.

In this particular case, the two properties acquired during the ID period were properly identified like-kind properties. The property acquired after the ID period was not like-kind property. As a result, the sales proceeds allocated to this third property were disallowed from the 1031 exchange and treated as boot.

•  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 Long Does Personal Use Real Property Need to be Used for Business Purposes Before it Can be 1031 Exchanged?

One of the most commonly asked questions about 1031 exchanges is how long do you need to use real property for investment or business purposes before it can be exchanged in a 1031 transaction?

The 1031 exchange holding period is a cognitive test – not an objective time frame. With that in mind, it’s important to discuss it with your CPA, accountant, and other advisors on the specific transaction. When you acquire your replacement property in a 1031 exchange, your intention must be to hold that property for investment or for use in your trade of business. That’s the requirement.

Safe Harbor

There is a safe harbor that is applicable to VRBO, Airbnb, or other intermittent rental properties. If a client buys a replacement property and puts it into an intermittent rental plan, the IRS under their safe-harbor tests two twelve month periods. In other words, after acquiring such a property, they examine two twelve month periods to ensure that you are using the property for investment or business purposes.

Since we know that the IRS has this standard for intermittent rental properties, some tax advisors use this standard (a minimum of 24 months) for other types of 1031 exchange.

I’ve had clients get audited who have moved into their replacement property. In one instance the client won the audit. She had rented the property to a tenant in an arms-length lease and documented receipt of rent checks for 18 months. Another client of mine moved into their replacement property after three months. This did not go over well with the IRS.

Intent Matters

At the end of the day, it’s your intent that matters. Things can change in the future, or course, but it’s your initial intention when purchasing the property that the IRS looks at when determining whether or not you are abiding by the regulations.

• 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