Can you Exchange a Residential Property in a Like-Kind Exchange Transaction?

Some of the most common questions we get about 1031 exchanges involve the question of residential property. Can you use a residential property as one of your 1031 properties? Does it make a difference if it is entirely used for personal use, rented out some of the time, or if it is just a rental property and not used at all for personal use?

In order to qualify for 1031 treatment, the Replacement Property should be held for investment or business purposes. If you immediately start using the Replacement Property for extensive personal use that may jeopardize the 1031 exchange.

From the IRS

Both the relinquished property you sell and the replacement property you buy must meet certain requirements.

Both properties must be held for use in a trade or business or for investment. Property used primarily for personal use, like a primary residence or a second home or vacation home, does not qualify for like-kind exchange treatment.

CPEC1031, LLC

If you have questions about the specifics of your 1031 exchange, reach out to CPEC1031 today. Our qualified intermediaries have over two decades of experience helping clients facilitate 1031 exchanges of real estate. Contact us at our downtown Minneapolis office today to learn more!

• 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 Tips for Conservation Easements

If you’re a farmer or land owner and you’re approached by a government entity to grant a permanent conservation easement in exchange for a huge amount of cash you may be scratching your head thinking “what am I going to do with this large amount of cash? I’m going to have to pay a lot of it out in taxes.”

1031 Permanent Conservation Easement

The interesting thing is that a permanent conservation easement is eligible as a 1031 relinquished property. Now the trick is that at the very beginning of these negotiations you want to tell the government entity that you’re doing a 1031 exchange and you want to make sure that the proceeds – the check that’s going to be issued – is not given to you, but instead is given to the qualified intermediary.

Whenever you’re working with a bureaucratic governmental entity it helps to start early and to say it often that you’re doing an exchange and that there’s going to be a little bit different payment method here. Often, if you try to raise this at the eleventh hour and change the plans it can be difficult to get the governmental entity to come into alignment with what you want to do for the exchange.

Start Early & Notify

So start early, notify them early, and let them know where you want your proceeds to be sent. The whole idea in a 1031 exchange is to insulate the seller from receiving the proceeds and to have those monies instead go to the qualified intermediary so they can be earmarked to purchase new replacement property that will qualify for your 1031 tax deferral.

• 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

Tips for Handling Items on the HUD Statement in a 1031 Exchange

Many taxpayers who are engaging in a like-kind exchange have questions about how certain items on the closing statement should be handled. In this article, we’re going to take a look at some of those common closing items and how they should be addressed from a 1031 exchange point of view.

Items on the HUD Statement

Here are a few items that generally appear on the HUD statement and how they should be handled in a 1031 exchange transaction:

• Earnest Money– The original earnest money funds should come from the exchange as part of the purchase price and be paid back.

• Broker’s Creditshould be returned at closing.

• Accrued Rental Incomeshould be returned at closing.

• Property Tax Credit should be paid back for a property tax escrow account or prepaid to the County.

A Note on Earnest Money

It is OK to return the earnest money, but it is important to take steps to make sure it can’t be misunderstood as exchange funds coming into the taxpayer’s hands (boot). The best way to do this is to show a debit line item on the settlement statement as “Return of Earnest Money Deposit.”

• 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

A Brief Explanation of the Starker 1031 Exchange

Many people ask “who is this Starker character and why are like-kind exchanges often called Starker 1031 exchanges?”

Starker Exchanges

There was a lumber baron in Oregon who was named Starker who had this novel idea that 1031 exchanges did not have to be simultaneous horse swaps, where the taxpayer gave up his relinquished property and immediately and simultaneously received his new replacement property.

Changing the Paradigm

Instead, Starker had this idea: “hey I think I’ll give up my relinquished property in exchange for some replacement properties that I’ll receive some time in the future.”

In doing so, Starker created a new paradigm in the real of 1031 exchanges. The IRS challenged his exchange but the IRS lost on a procedural argument and Starker prevailed.

Starker opened up the door for this entire industry of delayed exchanges in which taxpayers give up relinquished property and later at some future date received their new replacement property. In 1991 the IRS constrained this process by issuing treasury regulations that limited The Exchange period Down to 180 days and further required taxpayers to identify the replacement property within the first 45 days. so it’s no longer the Wild West that Starker opened up for us back in the 1970s.

Work with a Qualified Intermediary on Your Next Starker Exchange

No matter what you call it – starker exchange, 1031 exchange, like-kind exchange, etc. – we can help you through the process. At CPEC1031, our qualified intermediaries have been helping taxpayers throughout the United States defer capital gains taxes on the sale of real estate. Contact our team of professionals today to learn more about how we can help with your next exchange. Our primary office is 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

Don’t Forget to Consider Mortgages and Other Debt When Conducting a 1031 Exchange

As we’ve discussed many times before, there are quite a few rules and regulations that govern the 1031 exchange of property. One piece that commonly gets taxpayers into trouble with their 1031 exchange is failing to consider loans on the relinquished and replacement properties. In this article, we are going to explain why it’s essential to consider mortgages and other debt in your 1031 exchange.

Mortgages & Debt

Failing to take loans into account is one of the primary reasons why exchanges fail. In any 1031 exchange, you have to consider your mortgage or other debt on your relinquished property, as well as any existing debt on your replacement property.

In any 1031 exchange, you are not allowed to receive any cash (also known as “boot”) from the sale of your relinquished property. Any boot received is subject to tax. However, even if you don’t receive any cash but your liability decreases, that will also be treated as taxable boot.

Let’s look at an example to illustrate this point. Say your relinquished property had a mortgage of $1 million, but your replacement property is only $900,000. In this situation, you would have $100,000 of taxable boot.

Minnesota 1031 Exchange

The qualified intermediaries at CPEC1031 have been helping taxpayers facilitate 1031 exchanges of property for decades. Our team has the knowledge and professionalize to handle your 1031 exchange. We can advise you on the 1031 exchange rules and regulations, prepare your 1031 documents, and make sure your exchange goes off without a hitch. Contact us today to get started with your 1031 exchange or 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