Video - Important Deadlines to Remember in a 1031 Exchange

In a 1031 exchange there are two critical deadlines. First you’re going to sell your relinquished property. At the date of that closing, when the benefits and burdens of ownership shift, that is day zero for computing the 45 day identification period (in which you have to designate your replacement property) and the 180 day period to complete the purchases of all your replacement property.

But the IRS throws a curveball at us. They say “look, we don’t want to wait until next year’s tax return to figure out how this shakes out, so we’re going to shorten the exchange period to the due date for the filing of your federal income tax return.” So let’s say you start your exchange late in the year. You sell your relinquished property on December 27th. If you file your tax return on April 15th, you’re not going to get the full 180 day period because your April 15th filing deadline will be the last day of your exchange period. That’s the case unless you extend your April 15th filing deadline to say October 15th. Then you would get the full breadth of your 180 day exchange period. Many accountants and real estate agents will tell people to plan on filing an extension if you’re starting your exchange late in the year to make sure that you get the full use of your 180 day period if you’re going to need that time to complete all of your purchases.

• 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 - The Basic Criteria for a 1031 Exchange

The criteria for a 1031 exchange is that the property must be held for investment or for use in a trade of business. So you can’t use the property as your personal use property like your lake cabin or personal home. Properties that are held primarily for your personal use are excluded from 1031 exchange treatment because your personal use is antithetical to holding for investment or business purposes. Also you can’t exchange property that is held for inventory, or property that is held primarily for resale.

• 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

Is it OK to Use Your 1031 Exchange Proceeds to Pay Your Legal Fees?

Many people ask if they can pay their legal fees out of the proceeds from the sale of their old relinquished property in a 1031 exchange.

Fees Related to Your 1031 Exchange

The answer to the question is yes, if the legal fees relate to your 1031 exchange or relate to the real estate matter. However, you can’t pay unrelated legal fees out of the 1031 sales proceeds. For example, if you were doing estate planning or had a criminal action unrelated to your 1031 exchange – those cannot be paid out of the net proceeds. You can’t pay legal fees unrelated to your transaction.

Treasury Regulations

The treasury regulations state that you can pay ordinary, standard, customary transactional expenses out of the exchange funds and certainly your legal fees related to the exchange are ordinary and customary.

• 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 - The Importance of Cognitive Intent in a 1031 Exchange

When you’re doing a 1031 exchange you need to walk like a duck and talk like a duck so that the IRS interprets your 1031 exchange as being a qualifying exchange. What we mean by “talking and walking like a duck” is that you have to hold your properties involved in a 1031 exchange for a qualifying purpose which is investment or business purposes.

Many clients think in the indeterminate long-term that they may want to convert their replacement property into personal use down the road. Well, for the first two years after you acquire that property, it may be a good idea to rent it out or otherwise hold it for investment or business purposes, and not convert it to personal use prematurely because you want to be able to substantiate that you had the right intention with the property. There’s really no way to know what’s really going on in a person’s head so the IRS has to interpret what you do with the property. Renting out the property, using it for investment or business purposes for a substantial period of time is probably the best way to prove that you had the right cognitive intent.

• 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 - How to Calculate Capital Gains in a 1031 Exchange

Capital gains are not calculated based on the amount of proceeds that you walk away from a closing with. Capital gains are determined by the difference between your adjusted basis and the net sale price. Let’s say that you bought a property or a million dollars and over time it appreciated to two million dollars. Your original cost basis was a million dollars but over time you may have whittled down your basis to some lower number through depreciation deductions. In order to know what the gain is you need to know how much it appreciated (or increased in value) over time, and you also need to be cognizant of how much your basis declined as a result of depreciation deductions. Your total gain is the difference between your current low adjusted basis and the net selling price (net of only the transactional costs of the sale such as your commission and other amounts that reduce the amounts realized). So gains are not determined by how much cash you have, but the difference between your basis and the net selling price.

• 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