How do you Fund an Escrow in a 1031 Exchange?

Escrow is a confusing topic for many taxpayers – especially those contemplating a 1031 exchange of real estate. Many people we work with have questions about the rules surrounding escrow accounts in a 1031 exchange. In this article, we are going to offer up a few tips for funding escrow in a 1031 exchange.

Sales Proceeds

One of the most common questions we hear when it comes to escrow accounts and 1031 exchanges is – “can I fund my escrow account with my 1031 exchange sales proceeds from my relinquished property?” This is an excellent question that many people run into during a like-kind exchange.

If you use any of your net proceeds to fund an escrow account, that will likely be considered taxable boot and your 1031 exchange will not be 100% deferred. The best course of action is to fund your escrow account with cash that you bring to the closing table. This will keep everything separate and allow you to defer all you’re your capital gains taxes.

1031 Exchange Services in the United States

Consult with a qualified intermediary about your 1031 exchange today if you are considering a like-kind exchange of property. Working with an intermediary as early in the process as possible is essential to the success of an exchange. We make everything as easy as possible for you by preparing your documents and answering your questions. Give us a ring today to learn more about how we handle exchanges and to get your exchange of real estate started! We provide 1031 exchange services to clients throughout 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

How Long to Hold Your Replacement Property in a 1031 Exchange

A lot of real estate investors have questions about the replacement property holding period in a 1031 exchange. In this article, we are going to clarify the tax implications of holding the replacement property in a 1031 exchange.

Holding the Replacement Property

When conducting a 1031 exchange, you have to “Hold” the Replacement Property for investment or business purposes in order to satisfy the requirements of IRC Section 1031.

How long you must hold the property is an open question, but the safe answer is probably two years, particularly if you are considering eventually doing something inconsistent with using for investment or business purposes…like moving into the property as a residence or gifting it away.

The IRS has not issued a bright line holding period, but there is a safe-harbor for rental pool properties that tests each of the two years after an exchange to see if it is primarily used for rental-pool purposes as opposed to 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

Is a Real Estate Agent Necessary in a 1031 Exchange?

There are many moving parts and many players required for a 1031 exchange of real estate. With so many moving parts, it can be confusing to determine who exactly you need on your “1031 team.” In this article, we’re going to talk about whether or not you need to involve a real estate agent in your 1031 exchange.

The Many Players in a 1031 Exchange

There are many players involved in a given 1031 exchange – your qualified intermediary, attorney, CPA, and real estate agent. While a real estate broker is not necessarily required in a 1031 exchange of real estate, it’s typically a good idea to involve a real estate agent. Your real estate broker can help you find a buyer for your relinquished property, and also help you find a suitable replacement property to exchange into. This is especially important in a hot seller’s market, where properties are in high demand.

1031 Exchange Company

At CPEC1031, we help taxpayers with their real estate exchanges under section 1031 of the Internal Revenue Code. There are many rules and guidelines that govern 1031 exchanges, and it’s important that you have a professional on your side to guide you through the process. With over two decades of experience, we have the skills necessary to handle your exchange. Reach out to us today to speak with one of our qualified intermediaries about your real estate exchange. Our primary office is in downtown Minneapolis, but we serve the entire state of Minnesota, as well as other 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

2 Things to Know Prior to Beginning a 1031 Exchange

A lot of taxpayers want to jump right into a 1031 exchange. But there are some things you should know before starting the process. In this article, we are going to walk through a few essential things to be aware of before starting a 1031 exchange of real estate.

Understand Recent Changes

Prior to 2019, it was possible to exchange both real and personal investment property under section 1031 of the Internal Revenue Code. The Tax Cuts & Jobs Act of 2019 changed that and got rid of the personal property aspect of the 1031 exchange. As a result, it’s important to be aware that you can only do a 1031 exchange of investment real estate. Personal property items like aircraft, artwork, and the like are all excluded from 1031 treatment. If you are exchanging real estate and your real estate includes items that are classified as Section 1245 property, these items are fully taxable. So be aware of that when conducting your exchange.

Mind Your Time Limits

In a 1031 exchange you only have 180 days total from the start of your exchange to its completion. That may seem like a long time, but it’s not when it comes to real estate. Make sure you are fully aware of your time limits so you don’t miss any deadlines.

Minnesota 1031 Exchange Tax Deferral

If you own investment real estate and want to learn more about how to defer your capital gains taxes, contact a qualified intermediary at CPEC1031! Our intermediaries have been guiding taxpayers through the ins and outs of the 1031 exchange process for the past twenty years. Reach out to us today to learn more about the 1031 exchange process and how it can benefit you from a tax perspective. Our main office is located in downtown Minneapolis but we work with clients throughout the state of Minnesota and 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

1031 Exchange Rules for Identifying Multiple Replacement Properties

In a 1031 exchange, you can identify more than one potential replacement property, provided that you satisfy one of these alternative rules:

The Three-Property Rule

Up to three properties regardless of their market values. All identified properties are not required to be purchased to satisfy the exchange; only the amount needed to satisfy the value requirement.

The 200% Rule

Any number of properties as long as the aggregate fair market value of all replacement properties does not exceed 200% of the aggregate Fair Market Value (FMV) of all of the relinquished properties as of the initial transfer date. All identified properties are not required to be purchased to satisfy the exchange; only the amount needed to satisfy the value requirement.

The 95% Exception

Any number of replacement properties if the fair market value of the properties actually received by the end of the exchange period is at least 95% of the aggregate FMV of all the potential replacement properties identified. In other words, 95% (or almost all) of the properties identified must be purchased or the entire exchange is invalid [except for any Replacement Property actually received within the 45 day identification period].

NOTE: The replacement property received must be substantially the same as property identified within the 45-day limit described above.

• 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