What is the Last Step in a 1031 Exchange?

We talk a lot about the initial steps involved in a 1031 exchange of real estate. We don’t talk nearly as much about the final steps in a like-kind exchange. In this article, we are going to discuss the last step in a 1031 exchange of real property.

The Final Stages of a 1031 Exchange

Technically, your 1031 exchange will end on the last day of your 180 day exchange period. The specific final step of your exchange will depend greatly on the type of exchange you are conducting and various other factors unique to your situation. In a typical forward exchange, the final steps will include closing on your replacement property, during which your net proceeds from the sale of your relinquished property will be reinvested in your replacement property.

Continued Deferral

Of course, once you’ve closed on your property and your exchange period has ended, the benefits of your 1031 exchange continue. You can now watch your net proceeds (which would otherwise have been paid out in capital gains taxes) compound and build wealth in your replacement property. Looking even further into the future, you may even decide to continue deferring your gains by doing another 1031 exchange.

Contact a Qualified Intermediary to Start Your Exchange

If you are looking for a qualified intermediary to start your 1031 exchange of real estate, you’ve come to the right place! CPEC1031, LLC has decades of experience facilitating exchanges of real property in Minnesota and across the country. Contact us today to learn more about the cost-saving benefits of section 1031 and see if your property is a good candidate. Our main office is located in Minneapolis. Set up an appointment with one of our qualified intermediaries to discuss the details of 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

Video - How to Identify to Somebody Other than the Qualified Intermediary

In a 1031 exchange, is it possible to identify to someone other than the qualified intermediary? Let’s say you are a syndicator and you have a client who said they were going to buy into one of your DSTs, but forgot to identify, and now they want to close into your DST.

To answer this question, let’s talk about the basic rules for identifying property in a 1031 exchange. First, your identification needs to be in writing. The writing also needs to clearly describe the property. That identification also needs to be signed by the taxpayer.

So yes, you can potentially identify to the seller of the replacement property.

Another prudent reason that we like to see a strong cooperation clause in the replacement property contract is that the purchase agreement itself could constitute an identification. It’s in writing, it’s signed by the purchaser, it clearly identifies the property. If you put a very strong cooperation clause in that agreement then you’ve pretty much got it made.

If an identification is submitted in the body of an email, does the email signature constitute a signature? In 1944, if you were serving in the Army and you wrote a letter back to your friends or family, often people would sign the letters. That was the custom of the time. Nowadays, the custom is to have an email signature block for such communications, so I think it might constitute a signature for identification purposes. All that said, we can’t be 100% sure on this because there hasn’t been a case to litigate this issue.

• 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 - A Question About 1245 Property

In the event that you go from chicken coop to raw land and there’s a percentage that’s 1245 property, are you liable for the tax on the entire deal or just the tax on the depreciation on that 1245 property.

This might be a planning opportunity because before you sell your chicken coop to the buyer, you may want to say in the purchase agreement: “let’s agree on the allocation of price between the land that I’m selling you and this worn out chicken coop.” You as the seller probably want to minimize the value allocated to the chicken coop building improvement that you’ve written off and you want to maximize the value attributed to the dirt.

The buyer is going to have the opposite intention because as soon as they buy it they’re going to want to take bonus depreciation on that used improvement. So there’s a tension between buyer and purchaser, but generally the IRS will respect an arms length allocated negotiation of value. If you truly did write down that chicken coop, it’s remaining basis should bear some resemblance to its remaining worn out value.

• 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

What Exactly is a Simultaneous 1031 Exchange?

1031 exchanges come in a variety of types. One such type, perhaps the most common, is the simultaneous 1031 exchange. In this article, we are going to explain how exactly a simultaneous 1031 exchange works and when you may want to consider one.

How a Simultaneous 1031 Exchange Works

A simultaneous 1031 exchange is a type of like-kind exchange in which the relinquished property is sold and, immediately after, the replacement property is acquired.

The Benefits of a Simultaneous 1031 Exchange

The benefits of a simultaneous 1031 exchange are the same as any type of 1031 exchange – capital gains tax deferral. A successful 1031 exchange can save you a lot of money that would otherwise be paid out in taxes. You can then keep that money building interest in a continued investment, compounding over time.

Realize the Cost-Saving Benefits of a 1031 Exchange

A 1031 exchange can be a vehicle for massive cost-savings as it allows you to defer capital gains taxes when selling qualified investment real estate. Section 1031 of the Internal Revenue Code is a tool that any United States taxpayer can use to defer their capital gains taxes. Reach out to a qualified intermediary at CPEC1031, LLC today to learn more about the like-kind exchange process and see how we can help facilitate your exchange. You can find us in downtown Minneapolis at our primary office. We also serve clients throughout the United States so don’t hesitate to give us a call if you are located in a different state!

• 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 - Dealing with 1250 & 1245 Gains

Let’s say that you’re a farmer. You own a piece of land. On that land is a chicken coop and maybe some other agricultural buildings. What can you do with real property improvements that helps your current tax situation?

You can’t depreciate land or dirt, but real property improvements can be depreciated so you can accelerate the depreciation on components that you own. You can use those accelerated deductions to offset your gains in other areas. If you’re a real estate professional, you might have almost unfettered ability to take those paper losses and use them against your other income.

Now when you go to sell your real estate, you really have two buckets of gain. You’ve got the land, and the long-lived improvements that are either depreciable (like dirt) or 39 years straight line (e.g. for a commercial building). But those components that can be rapidly depreciated are in a different bucket of gain called the “1245 gain.”

1245 trumps 1031. If you don’t offset and match up your 1245 gains with new 1245 real property components, you’re not going to be able to fully defer your gain. So if you’re going from a small agricultural hog building operation to a large hog building, you might be OK because you can match up your 1245 components with new 1245 property. Your gains can basically be moved over. And it doesn’t have to be identical properties. You don’t have to go from a hog building to a hog building. You just need to go from 1245 component to 1245 component. What that might necessitate though is thinking ahead and conducting a cost-segregation study on your replacement property to see what components are there and to make sure you have sufficient components to offset your 1245 gains.

• 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