Can I Do a 1031 Exchange with Business Property?

Many taxpayers are entrepreneurial. They might be in one business segment and want to 1031 exchange into a new business segment. For example, a restaurant owner might want to sell their restaurant and buy a hotel. How can this be an exchange? Isn’t a restaurant fundamentally different than a hotel?

Real Estate

In the realm of 1031 exchange, pretty much all real estate is considered like-kind. So if we’re dealing with only the real estate, it’s really easy to do an exchange from a restaurant building to a hotel building. As long as they’re both in the US and used for investment or business purposes, they’re like-kind.

Other Elements or Components

Other types of assets (other than real property) that may be involved in the sale, like the restaurant equipment or hotel furnishings – those types of property are not eligible for 1031 exchange treatment and should be left out of the 1031 transaction.

  • 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.

© 2023 Copyright Jeffrey R. Peterson All Rights Reserved

Video - 1031 Exchanges Involving Refinancing

What if you do a 1031 exchange and you reinvest all of your equity into the replacement property and then after you acquire the replacement property you find that you’re short of cash? You may have an unforeseen vacancy or repair expense, and you may conclude that you need to refinance your replacement property. Is that going to trigger gains from the sale of your relinquished property if you’re drawing out the equity?

Generally, as long as the refinance is done in a separate, subsequent transaction, it will not trigger gains. Please consult with your tax attorney and other advisors regarding this. You may want to separate your refinance and your purchase closing so that there is a substantial period of time between these two transactions. You don’t want to give the IRS the argument that the purchase closing and the refinance closing were one continuous transaction.

  • 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.

© 2023 Copyright Jeffrey R. Peterson All Rights Reserved

How to Take Title to a 1031 Replacement Property

In a 1031 exchange, taxpayer “A” typically sells their relinquished property and receives the replacement property, and everything matches up identically. But sometimes taxpayers want to take title to the replacement property in a different fashion. Let’s talk about some of the different ways you can do that.

Form a Single Member LLC

One idea is to form a single member LLC that is wholly owned by taxpayer “A.” The new LLC (let’s call it NewCo) can purchase the replacement property and from the perspective of the IRS it’s still taxpayer “A” that’s receiving the replacement property through its ownership of NewCo.  This is because NewCo is disregarded and seen as transparent by the IRS.

Revocable Living Trust

Another possibility is that a taxpayer may want to take title to the replacement property in a revocable living trust. A revocable living trust operates under the taxpayer’s social security number and for tax purposes it’s a disregarded entity – no different from the taxpayer. As long as they’re in a revocable trust and the grantor of that trust is the taxpayer, then taxpayer “A” could buy the replacement property as trustee of their own revocable trust.

  • 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.

© 2023 Copyright Jeffrey R. Peterson All Rights Reserved

Video - When to Receive Boot in a Partial 1031 Exchange

If you want to take some boot during a 1031 exchange, you can do so. The time to take boot in a 1031 exchange is at the closing of the relinquished property or at the end of the exchange.

During the closing of the relinquished property, you can take some non-1031 proceeds and we would augment our 1031 documents and closing instructions to specify the closing agent is supposed to give you a certain amount of cash boot. You can also take boot at the end of the 1031 exchange period. After you’ve acquired all of your replacement properties, if there is unused funds left in the qualified intermediaries hands at the end of the exchange, we can release those unused funds to you.

But remember – these funds will be boot, or non-like-kind property that you receive during a 1031 exchange. Receiving boot triggers the recognition of gain on the cash you receive. It will create some inefficiency. But remember – 1031 exchanges are not a zero-sum game. You can do a partial 1031 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.

© 2023 Copyright Jeffrey R. Peterson All Rights Reserved

Video - 1031 Exchanges Are Authorized by the Internal Revenue Code

1031 exchanges are authorized in the Internal Revenue Code at 26 U.S.C. 1031 and the treasury regulations. There are also a number of cases, private letter rulings, technical advice memorandums, and other legal authorities that authorize 1031 exchanges. You could say that 1031 exchanges are pretty cut and dry and not very controversial because they’ve been happening for almost 100 years.

  • 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.

© 2023 Copyright Jeffrey R. Peterson All Rights Reserved

Defer the tax. MAXIMIZE your gain.

Is a 1031 Exchange Right for Me? →