How to Reduce Your Capital Gains Tax on Investment Real Estate

Real estate is a common investment vehicle for many investors. When selling any investment property, you want to determine the most tax-advantageous way to proceed. Avoiding or reducing capital gains taxes is a big concern for many investors. In this article, we are going to offer some tips for reducing your capital gains tax burden on your investment property.

1031 Exchange

Instead of selling your investment property outright and being saddled with the associated capital gains taxes, consider a 1031 exchange. In a like-kind exchange, you can defer all of your capital gains taxes on the sale of your investment property as long as you meet certain benchmarks and follow certain rules. For example, all of your net proceeds need to be rolled into a new replacement property. This benefits the economy, and also your bottom line as it allows you to avoid a tax bill and keep your money working for you over time.

Partial Tax Deferral

If you can’t (for one reason or another) defer all of your capital gains when selling your real property, there is still hope for a partial tax deferral.

Qualified Intermediary Services

At CPEC1031, LLC we provide qualified intermediary services to clients across the country. If you’re looking to defer your capital gains taxes on the sale of a piece of real estate, a 1031 exchange is the tool for you. Working with a qualified intermediary is the best way to begin your exchange. An intermediary can prepare your required 1031 documents, and answer all of your questions along the way. Reach out to us today to learn more about the 1031 exchange process and how you can benefit.

• 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

New Bill Brings 1031 Exchanges to Pennsylvania

Big news in the 1031 exchange world! Pennsylvania will recognize 1031 exchanges effective 1/1/2023. Historically, the state had not recognized non-simultaneous 1031 exchanges at the state level.  Now, thanks to bill HB1342 that was just signed by the governor (after passing both chambers of the state legislature), Pennsylvania conforms to the federal tax paradigm for like-kind deferred exchanges.

1031 Exchange Tax Deferral

With this new bill, real property owners in the state of Pennsylvania will be able to avail themselves of the tax-saving benefits offered by section 1031 of the Internal Revenue Code. This is a great opportunity for owners of qualifying real estate in Pennsylvania who want to compound and build their wealth over time by exchanging into bigger and better replacement property, rather than taking a capital gains tax hit with a traditional sale.

Contact a Qualified Intermediary

If you have any questions about this new Pennsylvania law or how it might impact your 1031 exchange, reach out to our team today! At CPEC1031, LLC we have over two decades of experience facilitating 1031 exchanges across the United States. We can guide you through the process and answer any questions you might have along the way. Contact us today at our primary offices in downtown Minneapolis.

• 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

Is it Necessary to Receive all Identified Replacement Properties in a 1031 Exchange?

Many taxpayers will identify multiple potential replacement property candidates during the 45 day identification period. They don’t know if they’re going to be one, two, three, or more potential replacement properties but they want to keep hope alive as to those potential candidates.

95% Rule

You do not have to buy all of the identified properties under the three property rule or the 200% rule. If, however you’re using the 95% rule, you do have to actually receive 95% of the value of those identify properties that you listed. Lots of people will identify backup properties and multiple replacement properties in order to increase the chance of success for them to complete their exchange.

General Requirement

The flexibility of the identification rules should not be confused with the general requirement that in order to defer 100% of the gains you need to continue your investment into properties of equal or greater Value, Equity and off-set any Debt Relief.

Contact a Qualified Intermediary

Ready to get your 1031 exchange of real estate started? Contact an experienced qualified intermediary at CPEC1031, LLC. Our team of qualified intermediaries has over two decades of experience facilitating 1031 exchanges across the country. Let us help you through your next exchange of real estate!

• 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

How to Add a 1031 Exchange Amendment to a Purchase Agreement

If you forget to add 1031 exchange language into your final purchase agreement, can you still do an amendment, or do you need to rewrite the counteroffer and have it resigned?

Adding an Amendment to the Purchase Agreement

Yes. You can add the text in an amendment to the PA, it is not a problem. It is a very prudent practice to ‘shout it from the mountaintops’ at every juncture that… you intend to conduct a 1031 exchange. That way if there is ever a misstep, mistake or problem, everyone knows what you are trying to accomplish, and will give you the benefit of their understanding. Here is some sample text that you may use or adapt for your purchase agreements.

When Selling Relinquished Property

The Buyer herein acknowledges that it is the intention of the Seller to conduct an IRC Section 1031 Tax-Deferred Exchange and that the Seller's rights under this Purchase Agreement shall be assigned to CPEC1031, to facilitate such exchange. However, any warranties that may be expressed in this contract shall remain and be enforceable between the parties executing this document.   Buyer agrees to cooperate with the Seller and/or its assigns in a manner necessary to enable the Seller to initiate said exchange at no additional cost or liability.  This Purchase Agreement is part of an integrated, interdependent, mutual and reciprocal plan intended to effectuate an exchange by Seller of a like-kind real properties pursuant to and in accordance with the provisions of Section 1031 of the Internal Revenue Code. The Buyer shall execute and provide to Seller prior to closing, an acknowledgement, that Buyer has received written notice of the assignment of the Seller’s rights under this Purchase Agreement to CPEC1031.

When Buying Replacement Property

The Seller herein acknowledges that it is the intention of the Buyer to complete an IRC Section 1031 Tax-Deferred Exchange and that the Buyer's rights under this Purchase Agreement shall be assigned to CPEC1031, for the purpose of completing such exchange. However, any warranties that may be expressed in this contract shall remain and be enforceable between the parties executing this document.  Seller agrees to cooperate with the Buyer and/or its assigns in a manner necessary to complete said exchange at no additional cost or liability. This Purchase Agreement is part of an integrated, interdependent, mutual and reciprocal plan intended to effectuate an exchange by Buyer of a like-kind real properties pursuant to and in accordance with the provisions of Section 1031 of the Internal Revenue Code.  The Seller shall execute and provide to Buyer prior to closing, an acknowledgement, that Seller has received written notice of the assignment of the Buyer’s rights under this Purchase Agreement to CPEC1031.

Contact a Qualified Intermediary

To get your 1031 exchange of real estate started today, contact an experienced qualified intermediary! CPEC1031 has over twenty years of experience facilitating 1031 exchanges. Let us help you through your next 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

How Long Should You Hold your 1031 Exchange Property?

In a 1031 exchange you’re required to hold your property (both the sale property and the replacement property) for investment or use in your trade or business. But nowhere in the code does it specify how long you need to hold it. That leads to a lot of confusion among taxpayers.

The Safe Bet

So how long do you need to hold your replacement property in a 1031 exchange? The safest answer to this question is the longer you hold your property, the better. If you could hold your replacement property for 2-4 years, you’re probably air-tight and have a valid 1031 exchange.

On the other hand, if you complete your 1031 exchange and hold the property for 7 months before gifting it to your children, that might be a problem because you maybe haven’t held the property with the mindset of investment or business purposes.

Unsolicited Offers

The safest answer is to hold your property for a long period and to evidence your intention. That being said, I have had clients who have purchased their replacement property and shortly thereafter received unsolicited offers to buy the property for substantially more than the taxpayer bought it. Even though they have a short holding period, their mental intent is likely consistent with 1031 rules and regulations and they’re allowed to do an exchange because they actually did intend to hold it for investment. If an unsolicited offer manifests that would be silly not to take, you can still qualify for a 1031 exchange. Bottom line, it’s all about your intent.

• 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