Video - Replacement Property Purchase Agreements

Many people wonder if they can find a patient seller of the replacement property and put the handcuffs on that seller by signing an option agreement or a purchase agreement so you know you’ve got a sure thing to identify and close on. The answer is yes. If you can find a patient seller that will allow you to sign a standard purchase agreement, you can lock them up. Then you can identify that property and quickly close on it. Or you can do a reverse exchange and have your qualified intermediary acquire the property under rev. proc. 2037 in a safe-harbor reverse exchange. You can go out and curate your own success by locking down the replacement property. What you can’t do is exchange into a property that you already own. You can’t buy a property on a contract-for-deed or executory contract that would give you rights of possession and shift equitable title to you prematurely. You’ve got to be careful not to buy the property and take the benefits and burdens of ownership before you’ve disposed of your 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

How to Know if Your Property Qualifies For A 1031 Exchange

If you are considering selling a piece of investment property and investing in another, you may wonder if the properties meet the eligibility requirements for a 1031 exchange. In order for this transaction to be eligible for 1031 exchange, the properties must be classified as “Like-Kind” properties. In the realm of real estate, the definition of “like-kind” is fairly broad in scope. Most investment real estate is considered like-kind to most other investment real estate. If you are selling some farmland and intend to purchase more farmland, you would be eligible to defer capital gains by pursuing a 1031 exchange since these are like-kind properties.

However, it’s important to realize that properties don’t need to be exactly the same in order for you to qualify for an 1031 exchange. After all, no two properties are exactly the same. This means that you could sell that same farmland and invest in a number of different properties besides farmland and still be eligible for a 1031 exchange. Below, we take a closer look at which properties qualify for a 1031 exchange and which ones would not.

Like-Kind Properties Explained

As we noted above, when performing a 1031 exchange, you must be buying and selling like-kind investment properties. In general, a real estate asset is considered “like-kind” to any other real estate asset so long as both are held for:

• Business or productive use in a trade

• Investment purposes

So in the farmland example, that farmland would be like-kind to a number of other assets, like an apartment or condominium rental. As long as they meet that threshold, the properties should be considered like-kind to one another.

There is a broad definition of what is eligible for a 1031 exchange, but not every single property is eligible. Some properties that would generally not be eligible for a 1031 exchange include:

• A primary residence

• Property that was held for resale (like a home you flipped)

• Personal property

• Foreign real estate

Of course, there can be some exceptions to these situations. Because of this, it is imperative that you work with a firm that understands the ins and outs of these exchanges. For more information, or to learn more about how we can help you with your asset exchange, reach out to CPEC1031 today at (612) 643-1031.

• 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

Video - Can You 1031 Exchange Into a Property that You Don’t Identify Within 45 Days?

Let’s say you’re doing a 1031 exchange and you’ve sold your relinquished property and you’re money is with the intermediary. Now you’re scrambling like a chicken with its head cut off trying to identify replacement properties that you can designate on the replacement property identification form. That form has to be transmitted to the intermediary after you’ve clearly and unambiguously described the properties, signed the identification form, and sent it into the intermediary. What happens on day 46 if your dream property pops up and you did not identify it during the 45 day identification period? It’s not on your replacement property list so it’s not eligible for 1031 treatment. So your dream property that becomes available after your identification period is not a property you can use your exchange funds for. Even if you did, it wouldn’t be considered like-kind property because it wasn’t designated properly with the time deadlines. 

• 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 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