2 FAQs About 1031 Exchanges in Minneapolis

We recently assisted a real estate broker with a 1031 exchange for their client who was selling a duplex in the Twin Cities. They intended to move the proceeds from the sale into a fourplex property in a 1031 exchange. Here are some pertinent questions relating to this particular 1031 exchange that may be applicable to other exchanges.

Commercial Plus Residential Space

Is there a problem with one of the properties having commercial rental space as well as residential? One place, in particular, has three apartments with 2800 sq ft of commercial space below.

The replacement property must be held for investment or business purposes and may be residential or commercial rentals (or a combination of both).

Rolling Proceeds into More than One Property

Is it possible to roll the sales proceeds from the relinquished property into more than one replacement property?

You are allowed to purchase multiple replacement properties (provided that they are designated / Identified in writing within 45 days of the closing of the 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.

© 2023 Copyright Jeffrey R. Peterson All Rights Reserved

Video - 3 Ways to Identify your 1031 Exchange Replacement Property

In a 1031 exchange you have to identify or designate you replacement property within 45 days after the closing of your relinquished property, which isn’t very much time. Furthermore, it has to be identified in writing clearly and unambiguously describing the replacement properties and it has to be signed by the taxpayer and sent in before midnight of the 45th day. Generally, people use either the three property rule (which restricts the number of properties you can exchange into to three or fewer), or the 200% rule (which allows you to identify properties that in aggregate don’t exceed twice the value of the relinquished property), or the 95% rule (under which you can identify any number of properties buy you have to actually acquire at least 95% of those identified properties). Any of these rules will be valid for identifying your replacement 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

Video - Can You Use 1031 Exchange Funds for Earnest Money Deposits?

In a 1031 exchange, your qualified intermediary needs to hold your 1031 exchange proceeds in a separate account and make sure that you don’t have any actual or constructive receipt of the funds. But the intermediary can advance that money for either the purchase of the replacement property or a deposit (such as an earnest money deposit) for the purchase of the replacement property. So you can use your 1031 funds to advance an earnest money deposit. This is very convenient because it’s probably you preference to use the money in the exchange account to pay your deposits, rather than money out of your own pocket.

• 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

Partial 1031 Exchange Consequences

From an accounting point of view when you’re doing a 1031 exchange, if you want to defer every cent of tax in a 1031 exchange you need to kind of juggle three balls in the air at the same time – value, equity, and debt. In this article, we are going to talk about the consequences of dropping one of these balls and only qualifying for a partial 1031 exchange.

Value

First, you need to continue your investment into like-kind property that is equal or greater value than what you relinquished. If I sell a property for 1 million dollars and I only buy a replacement property for $10,000 the IRS is going to say “hey where is your continuation of investment? We only see this paltry $10,000 replacement property.”

So to the extent you buy down in value you’re going to recognize the gain dollar for dollar to the extent that you have a gain.

Equity

The next ball that we’re juggling is the equity. Whatever net proceeds you have from the sale of your relinquished property, that equity needs to be redeployed into the new replacement property. If you put some of that cash proceeds into your pocket instead of into the replacement property the IRS is going to tax you dollar for dollar to the extent that you put that cash in your pocket. So during the exchange process you don’t want to touch any cash, you want to reinvest all of the proceeds into the new property.

Debt Relief

The last ball we’re juggling is debt relief. To the extent that you pay off mortgages, deeds of trust, liens and debt associated with the relinquished property we need to offset that debt relief with new debt on the replacement property or cash. If you win the Powerball lottery on the way to your replacement property closing and you can pay cash for the replacement property that cash in out-of-pocket will also offset the debt relief.

• 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 Exchange Holding Period Rules

Many people ask – “is there an objective minimum timeframe that one has to hold a property in order to qualify for a 1031 exchange?” Strangely, the answer is no. The IRS seems to have hidden that piece of information by not articulating a bright line holding period in the code or in the regulations. What they say is that you have to have had an intention to use the property for a qualifying purpose of investment or business purposes. One of the important factors in determining if you had that requisite intent is how long you held it. So holding it for a long period of time can be a good fact.

• 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