2 Options for Exchanging into Replacement Properties

In a 1031 exchange, one way to buy numerous replacement properties without restriction on number or value is to close on all of them within the first 45 days after the date of the closing of your relinquished property. This is because you are deemed to have identified any replacement properties that you actually close on and receive within the first 45 days, and that way you do not have to make a written designation of replacement property identification (if you complete the purchases within the first 45 days).

95% Rule

Another option if you are going to purchase a large number of replacement properties after the 45th day, then you are permitted to designate your replacement properties under the little known and rarely utilized 95% Rule.  Under this rule you are allowed to designate or identify any number of replacement properties, however, in order for the identification to be considered valid, you must actually purchase and receive within the 180 day exchange period 95% of the value of those designated properties. That can be a real challenge.

If the above two options of closing within the first 45 days or utilizing the 95% Rule do not work for you, then you are restricted to identifying under either the Three Property Rule (any three properties, regardless of value) or the 200% Rule (which caps the number of designated properties to an aggregate of twice the value of your relinquished 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

An Example of Gifting 1031 Exchange Property

In a U.S. Tax Court case entitled Click v. Commissioner, 78 T.C. 225 (1982), a taxpayer named Dollie Click exchanged with the Marriott Corp., a farm she had held for investment purposes, for two residential homes (plus some taxable boot in form of a note and cash). After the exchange was completed, Dollie Click allowed her children to live in the two homes for seven months rent-free. Her children took out property insurance on the homes and paid property taxes. Her children also made and paid for repairs and improvements to the homes.

After seven months, Dollie Click gifted the homes to her children. The U.S. Tax Court decided (which holding was affirmed by the Fourth Circuit Court of Appeals) that Dollie Click did not qualify for Section 1031 tax deferral on her (partial) exchange of the farm for the homes, because she did not intend for the homes to be held for investment or business use. It was determined that her activities were highly indicative of intent at the time of the exchange to make a gift the homes to her children.

When you conduct a 1031 exchange and receive your new like-kind replacement property, your main desire (at the time of completion of the exchange) should be to hold your like-kind replacement property for productive use in business or for investment.

• 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

Replacement Property Purchase Agreements in 1031 Exchanges

In a 1031 exchange, you need to enter into purchase agreements for the replacement properties into which you intend to exchange. In each purchase agreement you want to include a cooperation clause explaining that you’re doing a 1031 exchange. Once you’ve got that signed you can give that to your qualified intermediary and they will prepare your 1031 exchange replacement documents and interact with the closing company to make sure the closing goes smoothly.

You’ll typically have to sign a replacement property assignment agreement wherein you assign your rights to the qualified intermediary and the qualified intermediary will direct the seller to deed that property directly to you. You will also need to sign a disbursement request or wire transfer authorization to move your funds to the title company for closing. Once closing occurs you own your final replacement property and your exchange is over.

Then you have to talk to your CPA about filing the appropriate forms and report this to the IRS.

• 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

Tax Deferral vs. Tax Avoidance – What’s the Difference?

When some people discuss the benefits of 1031 exchanges, they highlight how a 1031 exchange can help you “avoid” taxes. What they really mean is that 1031 exchanges can help you “defer” taxes. In this article, we are going to talk about the difference between tax deferral and tax avoidance.

Tax Avoidance

Put simply, avoiding taxes is illegal. The term “tax avoidance” implies that the taxpayer is actively working to avoid paying the taxes that they owe. This is different from the tax deferral benefits of a 1031 exchange. With tax deferral, you are simply postponing your tax payment until a later point in time – in this case, whenever you decide to sell your replacement property.

Tax Deferral

Tax deferral, on the other hand, is perfectly legal under the right circumstances – such as a 1031 exchange. A like-kind exchange allows you to defer (not avoid) your capital gains taxes when selling real estate. The difference is that you are deferring your taxes until a later date (if/when you decide to sell your replacement property), rather than avoiding them completely.

Start a Like-Kind Exchange Now

If you’re looking to start a like-kind exchange, reach out to our qualified intermediaries today! At CPEC1031, we have decades of experience helping clients through their 1031 exchanges. Our primary office is located in downtown Minneapolis, but we work with clients throughout the state of Minnesota and all around the United States. Contact us today to learn more about our 1031 exchange services and start your like-kind exchange now!

• 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 1031 Exchanges Benefit the Greater Economy

1031 exchanges of real estate are beneficial for the taxpayer conducting the exchange, as well as the economy as a whole. But many people may not understand why that’s the case. In this article, we are going to explain why 1031 exchanges of real estate benefit the economy.

Encouraging Investment

First and foremost, 1031 exchanges encourage investment in real estate. The ability for taxpayers to defer their capital gains taxes makes re-investing very attractive. Selling a piece of real estate can result in a hefty tax bill on the capital gains from the sale. A 1031 exchange allows taxpayers to defer that tax burden, and continue their investment in another property.

Consider the situation from the perspective of an investor. If the 1031 exchange did not exist and you were required to pay your capital gains taxes, you may hesitate to sell your property. But by doing a 1031 exchange, you can avoid a tax hit with the incentive of reinvesting your funds in bigger, better property. This keeps money moving around the market and stimulates growth!

Real Estate Exchanges in Minnesota

At CPEC1031, we work with taxpayers large and small in numerous industries to facilitate the like-kind exchange of real estate under Section 1031. A 1031 exchange can save you a lot of money in capital gains taxes when you’re selling real estate. It allows you to keep your money working for you in a continued investment. Contact our qualified intermediaries today to see if you are a good candidate for a 1031 real estate exchange. We have decades of experience advising clients through every step of the 1031 exchange 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