Determining What Items Can be Reimbursed in a Like-Kind Exchange

Many taxpayers conducting a 1031 exchange have questions about what can and cannot be reimbursed at closing. Can the following items be reimbursed to the seller at closing for a 1031 transaction?

  • Staging

  • Light Timer

  • Cleaning Supplies

  • Handyman Work

  • Painting

  • Changing locks

  • Repair to Boiler

The short answer is no. None of these items may be reimbursed to the seller in a 1031 exchange. All of the proceeds should be sent to the 1031 account.

Generally, only “transactional items” that are “customary” may be paid out of the proceeds. These seem more like operational repairs and ownership/maintenance expenses and not customary. These do not seem transactional or routinely on closing statements. From the IRC:

  • (ii) Transactional items that relate to the disposition of the relinquished property or to the acquisition of the replacement property and appear under local standards in the typical closing statements as the responsibility of a buyer or seller (e.g., commissions, prorated taxes, recording or transfer taxes, and title company fees).

It’s a good idea to consult with your accountant or CPA about this matter as well.

1031 Exchange Professionals

At CPEC1031, LLC we have been working in the 1031 exchange industry for the past two decades. Our team of qualified intermediaries can help you through any type of like-kind exchange under section 1031 of the Internal Revenue Code. Contact us today to learn more about our services and see how we can help you defer capital gains taxes on the sale of qualifying real property.

  • 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 Less Frequently Asked Questions About 1031 Exchanges

We have answered many frequently asked questions about 1031 exchanges. Today we’d like to look at some less common questions. Here are a handful of uncommon questions we’ve recently been asked about 1031 exchanges.

Is it possible for my ex-wife to quitclaim her interest in the relinquished property to me prior to closing so that I can 1031 exchange 100% of the proceeds?

In this situation, you arguably have not “held” your ex-wife’s 50% interest for investment or business purposes. In order to qualify, the property must have been held by you, so this is likely not a good idea.

I’m considering doing improvements to my replacement property. Does the work have to be done before I close or can the contractor do the work after closing? 

The improvements will need to exist before you receive them, so either the seller will need to make the improvements before the replacement property closing, or the qualified intermediary will have to take title and hold the replacement property until the improvements are constructed, and then transfer the replacement property to you (within the 180 exchange period).

How do I allocate the proceeds from the relinquished property if I’m buying 2 replacement properties? Can I put most of the money into one property or does it need to be a specific percentage?

You can allocate the funds in any proportion that you want. The basis on the multiple replacement properties will be in proportion to the values (not the equity).

  • 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 1031 Exchange into Numerous Replacement Properties

In a 1031 exchange, you need to go up in value, equity, and debt on your replacement property. With the amount of value that you need to match, it sometimes makes sense to exchange into more than one property.

1031 Exchange Example

For example, let’s say you are selling a condo and want to purchase 2 replacement properties, as well as a piece of land as a 3rd purchase with any leftover money from the sale. Is that allowed with a 1031 exchange?

Multiple Replacement Properties

The short answer is yes, you can purchase multiple replacement properties, as long as they are US real property and held for investment/business.

Contact a Qualified Intermediary

If you’re interested in saving money in capital gains taxes with your next sale of investment real estate, a 1031 exchange may be right for you. At CPEC1031, LLC our qualified intermediaries can help you through all the steps of a 1031 exchange. We have over twenty years of experience in the 1031 exchange industry and have the knowledge to guide you through your exchange. Contact us today at our downtown Minneapolis offices to learn more and see 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

What is Qualified Purpose in a Real Estate Exchange?

In a 1031 exchange, you need to hold your like-kind property with a “qualified purpose.” But what does that mean?

Qualified Purpose

A qualified purpose means that you are holding the property either as an investment or for use in your trade or business.  This means that you cannot do a 1031 exchange on your family home because this family home is being held primarily for personal use.

To avoid making a costly mistake before you sell, you should make the proper arrangements with an experienced qualified intermediary first so that the transaction is treated as a trade or exchange (rather than a sale and repurchase) to be sure that you qualify for maximum tax savings. Often deals are done informally without much of a contract or closing; a good QI can help add-back in the structure to make the deal work.

1031 Exchange Services

At CPEC1031 LLC, we work with clients across the United States on 1031 exchanges of all types. Our team of qualified intermediaries has over twenty years of experience and can help you through the details of your like-kind exchange. Contact us today to learn more about our extensive services and see how we can help. You can find us at our primary office located 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

Be Wary of Chasing Yield in Delaware Statutory Trusts

Many investors that are looking at potential properties will investigate properties that are part of a DST (Delaware Statutory Trust) and oftentimes taxpayers get very myopic about the yield or the rate of return on the investment.

Chasing Yield

If you’re chasing yield you may do yourself a disservice because if the only thing you’re worried about is getting a 6.5% return, you may take on a property that has a much higher risk and a less certain outcome than if you would have settled for a property with a 5% return but was much more stable and solvent.

A very important aspect of choosing a replacement property is to look at the potential for underlying appreciation of the asset because at the end of this run when you are going to sell the underlying asset you want an asset that will have appreciated and not declined in value. So underlying the monthly rate of return is the more important appreciation of the asset itself.

After-Tax Cash Flow

Another consideration is to look at the after-tax cash flow from the property that would include depreciation and other deductions that pass through to you as one of the fractional owners of the underlying real estate.

Further, not all DSTs are the same when it comes to debt. Some have zero debt. Others have debt that may come due after 5 or 7 years. That maturity date on the debt can create a crisis if you have to sell the property to pay off the financing.

So there are a lot of different variables to look at when exploring what DST is the best for you. If you’re chasing yield alone, your eye may not be on the ball for these other very important facets of a DST.

Reach Out to CPEC1031, LLC to Begin Your Exchange

Are you looking to learn more about how to save money in capital gains taxes on the sale of investment real estate? If so, you’ve come to the right place! CPEC1031, LLC focuses exclusively on facilitating 1031 exchanges. Our qualified intermediaries have been helping taxpayers with their 1031 exchanges for over two decades. Contact us to learn more about our services and how we can help you begin your 1031 exchange. Our primary offices are located in downtown Minneapolis, but we work with clients across the United States.

  • 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

Defer the tax. MAXIMIZE your gain.

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