Video - The 2 Litmus Tests of a 1031 Exchange

When it comes to 1031 exchanges, there are really two essential litmus tests. The properties involved in the exchange need to be held for investment or business purposes, and you have to exchange for like-kind property.

The two areas we often see properties not qualifying for 1031 exchange. If you own a lake cabin you may have a property that’s used for your own personal edification. That property isn’t an investment or business property. Even though you may want it to go up in value, your personal use of the property trumps the purported investment intent. There have been many cases in which people have fought with the IRS about their appreciated personal property. The IRS has been making a point of winning those cases.

In the area of VRBO and AirBnB properties, the IRS has granted a pretty broad safe harbor for properties used primarily for rental programs. In that safe harbor, the IRS will look at the first two 12-month periods after you buy the property to decide if you have used the property primarily for investment or business purposes. So they’re going to test those periods to see that a) you’ve rented it at least 14 days a year, and b) you haven’t used it more than 14 days a year or more than 10% of the time the property has been rented out. So on your use side you could use it for 14 days. Or let’s say the property was rented out for 300 days. You could use It for 29 days personally because that would be under the 10% threshold.

It’s always a good idea to be very safe with these types of properties. Keep the property rented out as much as possible for the first two years.

The other property that doesn’t qualify for 1031 is property that’s been held primarily for resale. If you buy an apartment building and you convert it to condos and you sell each of those individual units to the public, then you’re a dealer. That real estate is your product, your stock in trade. You can’t do a 1031 exchange on your dealer property – property that you intend to hold for resale. The same goes for land developers.

In order to get around this, you can change the way you do business. Rather than buy a property and do a quick flip, you could instead buy the property and rent it out for a year or more. After that time, then you can do the improvements and sell the property in a 1031 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 - The Predecessor to Section 1031

When Congress enacted the first predecessor to the 1031 exchange, they allowed for the exchange of property tax deferred. It was a law that came about after World War I, in which the United States had just spent a lot of money fighting a war in Europe and they had increased taxes during the war to fund the war effort. When the war was over, they needed to find a way to stimulate the economy to dig themselves out of the debt they had incurred. The first iteration of 1031 allowed the swapping of properties to occur. That provision didn’t just relate to real estate at the time. That provision allowed for the exchange of properties but it was anticipated to be a simultaneous swap. So in 1921 people were doing old fashioned horse swaps with actual horses as the property in question.

This provision was really intended to promote transfers. The government didn’t want people to be locked in. They wanted capital to flow to the most advantageous investment, thus stimulating the economy and creating jobs.

• 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

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