Video - Can You 1031 Exchange Between Residential & Commercial Property?

If you’re selling a commercial property, can you also do a 1031 exchange and purchase a residential property? The answer is almost all real estate in the United States is considered like-kind. Commercial, residential, retail, agricultural – it’s all real estate. So you can sell a commercial building and buy a residential property in a 1031 exchange. Remember, both the relinquished property and the replacement property must be held for investment or business purposes. So if you buy a vacation condo on the coast of Sanibel Island, you need to use it for investment or business purposes if you want to qualify for a 1031 exchange on that property. In a 1031 exchange you have to hold the property primarily for investment or business purposes in order to garner the lucrative tax deferral offered by section 1031.

• 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 There a 5-Year Ownership Period Required for 1031 Exchanges?

There is oftentimes confusion between the various rules and code sections applicable to different types of real property sale transactions. One of the more common questions we get is about a supposed 5-year ownership requirement. That’s our topic for this article.

Section 1031 Rules

There is no such 5-year rule under Section 1031 of the IRC. Section 1031 is for investment and business real property, and it states that:

• No gain or loss shall be recognized on the exchange of real property held for productive use in a trade or business or for investment if such real property is exchanged solely for real property of like kind which is to be held either for productive use in a trade or business or for investment.

So for Section 1031, one must have held the real property for the qualified purpose of “productive use in a trade or business or for investment,” and the length of time is somewhat undefined in the IRC. For more information, see this video.

Principal Residence Exclusion

Under another, different and unrelated rule, for personal-use property such as one’s home, the Principal Residence Exclusion under Section 121(a) states that:

• Gross income shall not include gain from the sale or exchange of property if, during the 5-year period ending on the date of the sale or exchange, such property has been owned and used by the taxpayer as the taxpayer’s principal residence for periods aggregating 2 years or more.

Under the In Principal Residence Exclusion for one’s home, there is a five year look back period; and in order to qualify for the exclusion, one must pass both ownership and usage tests: The two-out-of-five-year rule states that one must have: (1) Owned the property; and (2) Used as ones domicile (home) the property that is being sold for at least two years (24 months) in the five years prior to the sale closing. One can meet the ownership and use tests during different 2-year periods. However, one must meet both tests during the same 5-year look-back period ending on the date of the sale closing (when the benefits and burdens of ownership shift). Generally, one is not eligible to take the Principal Residence Exclusion if one has already excluded the gain from the sale of another home during the two-year period prior to the sale of your home. So one can only take advantage of the Principal Residence Exclusion every two years or more.

For more information See IRS Topic 701, and IRS Publication 523.

• 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 Do a 1031 Exchange with Your Spouse?

When you’re doing a 1031 exchange you want to go from apples to apples. If Stephon owns the relinquished property, Stephon has to buy the replacement property. Maybe Stephon bought the property prior to getting married and owns it in his own name alone, without his spouse in title. Whose property is it for federal tax purposes? In non community property states, a spouse that is married still owns the property and their spouse only has an intangible interest in their property until a divorce decree states that non-titled spouse has an interest in the property, they don’t have an interest in the property. When Stephon sells his relinquished property in a 1031 exchange, Stephon should be the one who purchases the replacement property because Stephon’s exchange funds need to be used exclusively for the purchase of his replacement property. He can’t siphon off some of his equity to pay for his spouse’s portion of the property that’s being purchased.

What if your spouse absolutely wants to go into title with you? Perhaps the spouse can pony up some money and pay for their proportionate share of the property. Maybe it’s 99% Stephon and 1% Stephon’s spouse and that money that is contributed comes from the spouse’s own funds, whereas the 1031 funds are used exclusively for the 1031 exchange portion of the purchase. That way you can have both spouses on title, which may be a requirement of your lender, but we aren’t jeopardizing the exchange.

Now, laws differ from state to state. In community property states where a spouse may be considered to have an ownership interest in the real estate even if they’re not in title, that can change the analysis. So it’s always important to consult with local counsel so you can get the best advice specific to your situation.

• 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 When Selling 1031 Exchange Property to Family Members

In a 1031 exchange, a relinquished property could be sold to anyone – even a related party. But if you’re selling to a related party, know that you’ll have to disclose that on form 8824 and that the related party may have to hold the property for two years after acquiring it. If they sell that property too quickly they could end up foiling your 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

Have you Taken Accelerated Deprecation on Your Agricultural Building?

Like-kind exchanges (post 2017) are limited to only real property. You can have both I.R.C. §1245 real property components (inherently permanent structures and the structural components of inherently permanent structures) and I.R.C. §1250 real property components (e.g. raw land).

3 Categories of Property Components

Under the new regulations, three categories of property components may qualify as real property for Section 1031:

1. Property specifically listed as real property in the IRS regulations

2. Property classified as real property under state or local law

3. Property that satisfies an IRS facts-and-circumstances test

Sometimes there are agricultural structures that are designated as I.R.C. §1245 property (shorter depreciation life) such as irrigation systems, drainage tile, and other specialty improvements to farm real estate. If property with an I.R.C. §1245 depreciation recapture attribute is sold in an I.R.C. §1031 exchange, the I.R.C. §1245 depreciation recapture must be recognized to the extent that the new replacement property has insufficient I.R.C. §1245 property.

You can match up I.R.C. §1245 relinquished real property with new I.R.C. §1245 replacement real property, it just takes a little more planning and persistence in a 1031 exchange.

The IRS regulations broadly construe like-kind real property to include all business and investment real property in the United States, whether improved or unimproved. Reg. Section 1.1031(a)-3(a)(4).

The term inherently permanent structure means any “building.” The term “buildings” include the following distinct assets if permanently affixed: houses, apartments, hotels, motels, enclosed stadiums and arenas, enclosed shopping malls, factories and office buildings, warehouses, barns, enclosed garages, enclosed transportation stations and terminals, and stores. Also the list of “other inherently permanent structures” is extensive and broad and includes “grain storage bins and silos”.

• 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