In What Situations Should You Wait to Start a 1031 Exchange?

Timing is an essential part of all 1031 exchanges of real estate. In this article, we are going to talk about some situations in which you might want to consider delaying the start of your 1031 exchange.

When to Delay Your 1031 Exchange

Here are some situations in which you may want to delay your 1031 exchange:

  • It’s the Wrong Time of Year. While you can start a 1031 exchange at any time of year, there may be tax considerations to bear in mind when your exchange straddles two separate years.

  • You Can’t Find Suitable Replacement Property. Another reason you may consider delaying is if you can’t find ideal replacement property. Remember you only have a limited amount of time to complete your exchange after it starts. If you can’t find suitable replacement property by the 180 day deadline, your exchange might fail.

Every 1031 exchange is different and these guidelines don’t apply to all exchanges. The best thing you can do when considering an exchange is talk to a 1031 intermediary who can advise you on the best course of action.

It’s Never Too Early To Contact a Qualified Intermediary

That said, even if you plan to wait to begin your 1031 exchange, it’s never too early to consult with a qualified intermediary about your exchange. Getting the ball rolling early by talking with a qualified intermediary can help you ensure everything is set up perfectly and that your exchange will be executed as planned.

CPEC1031, LLC

At CPEC1031, LLC we help taxpayers defer capital gains taxes when selling investment real estate under section 1031 of the Internal Revenue Code. Our team of qualified intermediaries has over twenty years of experience in the like-kind exchange industry. Let our professionals help guide you through the many details of your 1031 exchange and ensure you are able to defer 100% of your gains. You can contact us at our primary office in downtown Minneapolis. We facilitate 1031 exchanges of real estate throughout Minnesota and across the United States.

  • 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 Deal with a 1031 Exchange Involving a “Gross-Up” or Partial Rebate of a DST

How do you deal with a “gross-up” or partial rebate of a DST fee/commission that results in the taxpayer getting more DST product than they normally would receive?

Any real property received after the 45-day identification period must have been properly designated, otherwise it is not considered like-kind and thus is not eligible as replacement property. It may be boot or other non-like property received in the exchange.

The Treasury Regulations state that the 1031 identification has to be unambiguous. The Treasury Regulations also state a Taxpayer has to receive substantially the same property that was designated in the 1031 identification.

If the taxpayer closes on all replacement property purchases within the 45-day identification period, then there is no requirement to make a written designation or to complete, sign and send in a 1031 Replacement Property Identification Form. If they use the three-property rule, then there is no value cap.

However, if they use the 200% rule to designate the replacement properties (because there are more than three underlying parcels within the DSTs or comprised in the other designated real properties), and because of the gross-up in value of the DST (or partial rebate of the commission/fee that would normally be charged)…they end up purchasing and receiving more DST (a greater amount or value in of the DST product) than they previously designated on the replacement property identification form than was submitted; then I think there is a potential problem because the extra DST is arguable not like kind property as it was not designated. It may be boot.

The 1031 proceeds of the sale must be re-invested in a like kind asset within 180 days of the sale. Restrictions are imposed on the number of properties which can be identified as potential Replacement Properties within the first 45 days after closing. More than one potential replacement property can be identified as long as you satisfy one of these ALTERNATIVE rules:  

  • The Three-Property Rule - Up to three properties regardless of their market values. All identified properties are not required to be purchased to satisfy the exchange; only the amount needed to satisfy the value requirement.

  • The 200% Rule - Any number of properties as long as the aggregate fair market value of all replacement properties does not exceed 200% of the aggregate Fair Market Value (FMV) of all of the relinquished properties as of the initial transfer date. All identified properties are not required to be purchased to satisfy the exchange; only the amount needed to satisfy the value requirement. This rule can be dangerous when listing DSTs under the 200% rule if the gross-up kicks you up and over the 200% Cap.

  • The 95% Exception - Any number of replacement properties if the fair market value of the properties actually received by the end of the exchange period is at least 95% of the aggregate FMV of all the potential replacement properties identified. In other words, 95% (or all) of the properties identified must be purchased or the entire exchange is

Qualified Intermediary Services

If you are looking for high quality 1031 exchange services, you’ve come to the right place! CPEC1031, LLC has over twenty years of experience working with taxpayers across the country on their like-kind exchanges. We can guide you through the exchange process and make sure you are able to defer 100% of your taxable gains when selling investment real estate. Contact our team today to learn more about our services and see how we can help. You can find us at our downtown Minneapolis offices. Not in Minnesota? Not a problem! We provide qualified intermediary services to clients throughout the United States.

  • 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

5 Ways to Reconfigure an LLC to Allow Members to Do 1031 Exchanges

In this article, we are going to discuss a few ways to reconfigure an LLC that is taxed as a partnership to allow one or more of the members to conduct 1031 exchanges.

Jettison the Other Guy Out of the LLC

In this scenario, you split the real property into two parts. The exchange minded owner(s) keeps the old LLC, and the non-exchange minded owner is moved into a new LLC. For example 25% of the real property is retained by the old LLC, and 75% of the real property is transferred to the new LLC. Split the 1099-S for tax reporting. This allows the exchange minded owner to do an exchange, and the other guy to take his money and pay the taxes.

Partnership Installment Note (PIN) Solution

You could also split up by buying out the non-exchange minded owner interest in the LLC with an installment note. After the sale closing is complete the QI gets in 25% of the net proceeds directly in the exchange minded owner’s separate, segregated 1031escrow account; and 75% of the sale proceeds is received by the QI in another different account, and is then used by the QI to pay off 90% of the installment note in the current year, and the remaining 10% (plus interest due) in the subsequent year.

Keep the Old LLC Intact and Complete the 1031 AND Split up LLC Down the Road

Fully defer the gain and complete the 1031 at the LLC level with all members remaining in the entity. After the dust has settled on the 1031, split up the LLC and distribute out the UPREIT shares to the owners – Later each owner could sell portions of the UPREIT in small allotments to stay under the preferential tax rates (when retired).

Partnership Division 708 Spin Off

A 708 spin-off would allow both owners to do separate exchanges. A 708 spin-off is when an LLC that is taxed as a partnership divides into two or more partnerships/limited liability company [§708(b)(2)], and each is considered to be a continuation of the predecessor entity so that the holding period or qualified purposes requirement is met by all entities. Each entity has the same partners as owners, but the ratio of ownership in each entity is skewed/weighted to benefit one partner.

Crude, Simple Drop and Swap

A drop and swap exchange allows real estate owners to "drop" their ownership structure out of an "entity level" to a co-ownership as tenants-in-common (deed out real property from the entity to the individuals) – turning former partners into tenants in common in the underlying real property. When the property is sold, the proceeds are divided proportionally, and co-owners can now either cash out and pay their taxes or reinvest into another investment property through a qualified intermediary (QI) and still defer taxes. This method has some significant issues regarding holding periods and qualified use requirements for a 1031. PRO TIP: Get the banks consent to the change in ownership if there is a mortgage on the relinquished property; and refrain from acting like a partnership or de facto partnership.

  • 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 - Seller Backed Financing in a 1031 Exchange

Seller-backed financing issues are coming up quite frequently so I thought I’d make a quick video to talk about when you’re doing a 1031 exchange and the buyer wants you to sell it to them on a contract for deed or with seller-backed financing. In a 1031 exchange, the seller wants to take all of their equity and reinvest it into a replacement property of equal or greater value, so they need to redeploy their cash. The problem with a lot of seller-backed financing arrangements is your cash isn’t released – it’s loaned to the buyer. Therefore, you’re not coming up with as much equity for redeployment into the replacement property. One easy way to fix this is to simply bring an equivalent amount of cash from your own pocket to the relinquished property closing and loan it to the buyer so that the net proceeds that go out to the qualified intermediary are the same as they ordinarily would be if there was a cash purchaser. We call this the “cash is king” solution. This is just one of many ways to approach 1031 exchanges involving seller-backed financing, but this is typically the easiest.

  • 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

Where to Find 1031 Exchange Replacement Property

Finding a great replacement property is often the most difficult part of a 1031 exchange of real estate. In this article, we are going to offer up a few tips for finding your ideal 1031 exchange replacement property.

Look in Different Locales

Many taxpayers starting their first exchange begin their replacement property search in the same general geographic area as their relinquished property. While there’s certainly nothing wrong with that, it is quite limiting. When you are looking for replacement property, expand your search to different cities or even different states. 1031 exchanges can be conducted between US states and locales so there’s no reason to limit your search.

Look in Different Market Sectors

You should also investigate properties in different market sectors. Nearly all investment real estate is considered like-kind to all other investment real estate. That means you can 1031 exchange between property in different industries and market sectors. In fact, this is quite a common practice among taxpayers. If you’re selling a retail property, perhaps you should consider a rental property like a duplex or apartment complex.

Contact a 1031 Intermediary

If you are considering a like-kind exchange for your investment property, the first thing you should do is contact an experienced intermediary who can make sure you are fully prepared before you even begin the process. 1031 exchanges can get complicated quickly, but the qualified intermediaries at CPEC1031, LLC make things as easy as possible for you. We can answer all of your questions, prepare the required documents, and walk you through the 1031 exchange process from start to finish. Contact our team of professionals today to get your exchange off the ground. We are located in Minnesota, but provide 1031 exchange services across the country.

  • 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

Defer the tax. MAXIMIZE your gain.

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