Video - The First Step in any 1031 Exchange

The first step in a 1031 exchange is to sing it from the mountain tops in your contracts that you intend to do a 1031 exchange. When you sign the purchase agreement for the sale of your relinquished property you want to include language that affirmatively says you’re doing an exchange. You want to elicit the cooperation of the buyer because there will be a notice that will be given to that purchaser that pertains to your exchange. What you’re going to tell them is “I have assigned my rights in this purchase agreement to the qualified intermediary.” You want to be able to prove that you gave that written notice so you ask the buyer to sign an acknowledgement.

Furthermore, you want to get into contract with your qualified intermediary early in the process. As soon as you’ve got a purchase agreement signed with the buyer it’s time to make arrangements with the intermediary to have them step into your shoes as the seller so they can receive the proceeds and start interacting with the closing agent. There’s a lot of behind the scenes coordination that has to be done between the intermediary and the closing agent to make sure the transaction goes smoothly.

When you sign a purchase agreement for your replacement property, you may also want to include the standard language that states your affirmative desire to do a 1031 exchange and you want to engage with the intermediary as early as possible to make the arrangements behind the scenes. This will set you up for a smooth closing 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.

© 2023 Copyright Jeffrey R. Peterson All Rights Reserved

Video - Can You 1031 Exchange Foreign Property?

Interestingly, foreign property cannot be 1031 exchanged for US property. The code specifically says that foreign property is not like-kind to US property. But remember, US taxpayers are taxed on their gains from wherever they’re derived, including foreign transactions. So if you’re a US taxpayer selling foreign real estate you can still do a 1031 exchange on your foreign real estate, but you can’t exchange into the US. So you would have to do a foreign property to foreign property exchange. For example, if you sold a property in the UK you could buy your replacement property in Canada or Mexico, but you could not buy the replacement property in Minnesota because the US property would not be considered like-kind to the UK 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.

© 2023 Copyright Jeffrey R. Peterson All Rights Reserved

Essential Things to Keep in Mind When Doing a 1031 Exchange with a Contract for Deed

Some taxpayers completing 1031 exchanges are buying replacement properties from sellers with “seller-backed financing,” such as a contract for deed. Furthermore, this contract may be inconvenient to record because this conveyance of equitable title by contract for deed may violate the sellers existing bank financing agreements which is sometimes referred to as the “due on sale clause.” These provisions in the loan agreement and mortgage, often prohibit any convenience or transfer of the banks collateral without first paying off the debt owed to the bank. 

Minnesota requires that the contracts for deed be recorded in a timely fashion, and imposes both potential criminal and civil penalties for failure to record.

• 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 - Be Careful with Related Party 1031 Exchanges

In a 1031 exchange you generally want to avoid related party transactions (buying and selling with related parties). It becomes more murky and uncertain when you’re buying from a related party. So if you can avoid a related party transaction, do it. Try not to buy from a related party. That said, we do facilitate related party transactions. In those cases we add a disclosure to our 1031 documents talking about the additional complexity and requirements when you’re doing a related party transaction.

Form 8824, which is the IRS worksheet that you attach to your tax return to report a 1031 exchange, asks if you bought or sold property from a related party. Further, it requires you to give a written narrative of why your related party transaction isn’t part of a scheme to avoid the imposition of tax, and why it is permissible to do what you’re doing. There can also be a two year holding period applicable to you and the related party that you dealt with.

Related party transactions are definitely more complicated and do create a certain degree of uncertainty because of the harsh and difficult way that the IRS has applied these rules to small mom and pop investors.

• 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 Do Your Due Diligence on Qualified Intermediaries

When you do a 1031 exchange you want to do your due diligence on your qualified intermediary because you’re going to be entrusting them to hold your proceeds and to prepare the paperwork necessary to complete the 1031 exchange. So you want to work with a reputable outfit. Here are a few questions you’ll want to ask of your qualified intermediary:

• Do you have errors and omissions insurance?

• Do you have professional liability insurance?

• Do you have separate, segregated accounts?

• Do you have a qualified escrow deposit agreement in place where the bank is going to be the gatekeeper to authorize the disbursement of your funds?

At CPEC1031, we have all of these items and more to safeguard your exchange. All of this is part of a plan to make sure the client can sleep at night. If necessary we can even build additional safety and security protocols if you have massive transactions.

• 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