Safe Harbor vs. Non Safe Harbor Reverse Construction Exchanges

In a reverse construction exchange, can you use your 1031 exchange proceeds to buy raw land and then construct improvements on that land? That’s a great question that we’ll be tackling in this article.

In a 1031 exchange, a general rule of thumb is you can’t exchange into property you already own because it wouldn’t be an exchange. So the best course of action is to have the qualified intermediary buy the new land and hold title to it while the improvements are constructed. This allows the taxpayer to exchange into, not only the raw land, but also the improvements that are constructed on the land.

Safe Harbor Exchange

Now, there are a couple of ways to go about this. The first is a safe-harbor 1031 exchange. This is the safest and easiest method, but any improvements you want to construct on the land must be completed within 180 days. There are only so many improvements you can construct during that amount of time.

Non Safe Harbor 1031 Exchange

The more complex and sophisticated method would be to do a non-safe harbor reverse exchange. With this option, you would purchase your replacement property (the raw land) and construct improvements on it first. Then, when construction is complete, you can sell your relinquished property after the fact – hence the “reverse” 1031 exchange.

Start Your 1031 Exchange Today!

Start your 1031 exchange today with CPEC1031, LLC and start realizing the tax-saving benefits of a like-kind exchange. At CPEC1031, we have over twenty years of experience working on 1031 exchanges of real estate. Let us put that experience to work for you on your next like-kind exchange. We can walk you through the entire process and make sure you are fully prepared when it comes time to close you’re your property. Contact us at our Minneapolis offices today to see how we can help you 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.

© 2022 Copyright Jeffrey R. Peterson All Rights Reserved

The Importance of Involving an Experienced Lender in the 1031 Exchange Process

There are many important players that you want to involve in your 1031 exchange. In this article, we are going to explain why it’s so important to work with a nimble, creative lending on your 1031 exchange of real estate.

1031 Exchange Rules & Benchmarks

When you’re doing a 1031 exchange you typically try to buy a property of equal or greater value, you try to reinvest all of your equity into the new property, and to the extent that you paid off debt on the old property, you want to offset the debt relief that you enjoyed on the sale with new debt of at least equivalent value.

Entrepreneurial people are often not happy making an unexciting lateral move between investment real estate. Rather, savvy investors often try to build their wealth by levering up and exchanging into a more expensive property using their debt plus the equity they’ve accumulated in their relinquished property.

Having a creative, nimble lender who can create these opportunities and finance these acquisitions is absolutely essential to a successful 1031 exchange.

1031 Exchanges of Commercial Real Estate

CPEC1031, LLC offers 1031 exchange services to clients throughout the state of Minnesota and across the United States. Our team of 1031 exchange officers has over two decades of experience working on like-kind exchanges of real estate. Let us put our experience to work on your next 1031 exchange. We can help guide you through the process and make sure all of your questions are answered along the way. You can find us at our Minneapolis offices to learn more about our services and how we can help!

• 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

Can AirBnB & VRBO Properties Qualify for 1031 Exchange Treatment?

AirBnB, VRBO have become quite popular in recent years, but many taxpayers may wonder if these types of property qualify for 1031 exchange treatment.

IRS Safe-Harbor

The short answer is yes, these types of AirBnB and VRBO properties can qualify for 1031 exchange so long as they are held long enough for investment or business use. The IRS came out with safe-harbor that directly addresses these types of property. In that safe-harbor, the IRS states that they will test each of the two 12-month periods after you acquire the property. In each of the two 12-month periods you have to have a minimum of 14-days of rental, and your personal use can’t exceed more than 14 days in each of the 12-month periods, or more than 10% of the time the unit was rented out.

Personal Use of the Property

Hypothetically, let’s say you 1031 exchange into a property that’s located in the Smoky Mountains of Tennessee, where the rental season is really long. You could feasibly rent out the property for 300 days per year. In that specific scenario, you could use the property for personal use for up to 29 days in each of the two 12-month periods. That being said, the safest advice is to steer clear of any personal use in those two 12-month periods. Don’t give the IRS any reason to doubt that your property completely satisfies the requirements for 1031 exchange.

CPEC1031, LLC

Contact us with any additional questions you have about the 1031 exchange process. Our qualified intermediaries have been helping taxpayers with their 1031 exchanges for more than two decades. Reach out to us 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.

© 2022 Copyright Jeffrey R. Peterson All Rights Reserved

1031 Exchange Challenges in a Hot Seller’s Real Estate Market

We recently worked with a married couple on their 1031 exchange who were selling depreciated properties (two duplexes) in Minneapolis that they’ve held for over twenty years. The couple wanted to exchange these properties in a 1031 like-kind transaction. The husband wanted to buy new property in Hawaii, while the wife wanted to buy a new property in Florida. Their plan was to initially use this new property for investment or business purposes. Long-term, however, their goals may change and they may wish to transform that property to personal use (after a substantial period of using it for investment or business).

Challenges in a Hot Seller’s Market

The biggest challenge that this couple faced was that both real estate markets in Hawaii and Florida are currently hot. In any 1031 exchange, it’s really important to try and find your replacement property early in the process. That way, when you sell your appreciated relinquished property, you’ve got a sure thing. If you wait until late into the 45 day identification period, you might be stuck without a chair to land on.

Important 1031 Exchange Deadlines

When you sell your relinquished property, you have two important deadlines. The first deadline is the 45-day identification period in which you must make a written designation clearly describing your replacement properties. The other deadline is the 180 day exchange period in which you have to close on your property and receive the title to the property. 1031 exchanges are all about exchanging real property for other real property. These deadlines constrain and limit the process.

• 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

Consider Your Initial Intent when Doing a 1031 Exchange

When you 1031 exchange into a property, you need to intend on using that property for investment or business use in order for the exchange to be valid. But what if you want to move into the property yourself at some point in the future? In this article, we are going to talk about the importance of having the right initial intent with your 1031 exchange and some considerations when moving into a 1031 property.

Consider Your Initial Intent

In any 1031 exchange, when you initially acquire a property your intent must be to hold it for investment or business purposes (lease it out, put it into a rental program, or otherwise hold it for business purposes). That being said, your long-term intentions when buying a property may be indeterminate. When you buy a property with the intent of renting it, you may not know if you’re going to continue renting it ten years down the line.

But it’s extremely important to the success of your 1031 exchange that when initially purchasing the property, your intent is for qualified use (investment or business purposes). You want to make sure that you walk like a duck and talk like a duck so that the IRS perceives you to be a duck.

We have seen clients get audited after moving into a 1031 exchange property. Make sure everything you do is above board and that you can prove that the property was used for investment or business for a substantial time before you even think about moving into the property and using it for personal use.

• 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