Can Furniture & Fixtures in the Replacement Property Be Included in Your 1031 Exchange?

Remember – the IRS has restricted 1031 exchanges to only real estate. Defining what real estate actually is can get a little tricky when it comes to build to suit exchanges.

• Is a dining room table real estate? No.

• Is a new 4K TV that’s attached to the wall real estate? No.

• Is a two by four that’s lying on the job site (not affixed to anything) real estate? No.

• Is the plumber’s invoice for work not yet complete real estate? No. Pre-paid materials and contractors don’t count.

However, built-in fixtures (a water heater that’s permanently plumbed in, for example) may be included. These are items that were personal property until they were incorporated into the structure of the replacement property. So some things may count because they are permanently affixed to the property. Other moveable items of tangible personal property, such as a table, cannot be included for 1031 exchange purposes.

In a construction exchange, you have to do a like-kind exchange meaning you need to build enough real property improvements that exist as real estate. How do you prove that? The title company may be disbursing for your mortgage lender and they keep very accurate records. Your general contractor could provide a written statement. You could even go out with your camera and take video and pictures of the site. It’s on your shoulders to prove that you received real estate of equivalent value and equity.

CPEC1031, LLC – Located in Minneapolis, MN

At CPEC1031, LLC we are your go-to professionals for facilitating 1031 exchanges of like-kind real estate. Our team of 1031 exchange intermediaries have over two decades of experience working with clients throughout the United States on tax-deferred exchanges of real property. Let us put our expertise to work on your next 1031 exchange. We can walk you through the exchange process from beginning to end and make sure you have a full understanding of the various rules and requirements. Contact us today at our Minneapolis location to learn more about the tax-saving benefits of section 1031 and how you can start your next like-kind 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 - 1031 Exchange Deadlines & Extensions

I get a lot of calls from accountants who say: “I didn’t know my client was doing a 1031 exchange and I filed their tax return on time before the closing of the replacement property, effectively shutting down their exchange early. They want to know if they can amend the tax return to include the replacement property.”

If you’re an accountant or a CPA, make it part of your process to ask the client if they’re in the midst of an exchange. At CPEC1031, we send out a written letter to the taxpayer that gives them their estimated 45 day deadline and 180 day deadline. If those deadlines fall after their tax filing deadline, we encourage taxpayers to consult with their tax preparers.

Some people wonder whether or not there could be an extension of the 1031 exchange deadlines if the exchange ends on a weekend or a federal holiday. The practice in the 1031 exchange industry is to not anticipate that there will be any extensions. That’s the general rule. However, there is a small minority of thinkers who argue that there is an extension permitted under the code. In the initial proposed regulations for 1031, they specifically said that these extensions do not apply. They then pulled that out because they thought it was unnecessary. So there is a small minority of people who think you can extend your identification period to day 46 if it lands on a holiday or a weekend. Until we see a case litigating this matter that gives us a more definitive answer to this question, I would err on the side of caution and assume you cannot extend your 1031 exchange deadlines.

The only exception to that is if you’re in a federally declared disaster area. If you’re impacted directly by a hurricane, forest fire, earthquake, or some other federally declared disaster, then you may have some provisions that allow you to complete your exchange at a later date.

• 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 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