Why You Should Let Your Qualified Intermediary Handle Your Sales Proceeds in a 1031 Exchange

In this article, we are going to talk about why you should let your qualified intermediary take care of your sales proceeds in a 1031 exchange of real estate.

Avoiding Boot

The primary reason you want to allow your qualified intermediary handle your sales proceeds in a 1031 exchange is to avoid boot. During the course of a 1031 exchange, if you at any point receive cash proceeds (known as boot) from the sale of your relinquished property, you will likely be taxed on these proceeds, simply because you received them.

The better course of action is to allow your qualified intermediary to take possession of and safeguard your sales proceeds from the relinquished property sale in a separate, segregated escrow account. Then, when it comes time to reinvest your proceeds into your new replacement property, your intermediary will move the funds from the escrow account into the new property. When done correctly, you (the exchangor) will never receive any of the funds and you will be able to defer 100% of your capital gains tax burden.

1031 Exchanges of Real Estate

1031 exchanges of real estate offer a tax-saving opportunity for investors who want to keep their money compounding and building wealth over time in a continued investment property. If you are ready to get the ball rolling on your like-kind exchange, your first step is to contact a qualified intermediary who specializes in 1031 exchanges of real estate. They can help guide you through the exchange process and ensure your property is a good fit. CPEC1031, LLC is here to meet all of your 1031 exchange needs. With over two decades of experience in the 1031 exchange industry, we have the knowledge and the skills needed to work through all the details of your next 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 Exchanges Involving Contracts for Deed & Seller-Backed Financing

If you sell your property under a contract for deed with a percentage down and the balance paid in a balloon in five years, can you do a 1031 exchange?

First of all, a disclaimer: every contract is written differently. In general, when you enter into a contract for deed you’re effectively conveying equitable title to the buyer. You’re giving them possession of the property. Typically, the vendee on a contract has to pay the property taxes, insurance, and more. They’re the owner for tax purposes. Think about who takes the depreciation deductions on the property that was purchased on a contract for deed. The vendee does (generally speaking) because they have the rights to utilize the property.

When you’re a vendor on a contract for deed you’re selling the property with an installment sale. You’re retaining the bare legal title as an enforcement mechanism to compel the vendee to make their required payments. You’re retaining the bare legal title, but you’ve effectively given the vendee equitable title for tax purposes.

So you’ve basically sold the farm when you entered into the contract for deed. Five years from now when you get paid off on the balloon payment you probably cannot do a 1031 exchange when you’re giving the legal title to the buyer.

How do you work around the fact that you’ve conveyed equitable title in this situation? The first option is to not do seller-backed financing because it complicates 1031 exchanges. That’s not a satisfying answer for many, particularly when interest rates are rising.

Here’s another option: let’s say you’re selling a duplex for $500,000, the buyer is giving you $100,000 down at closing and you’re financing $400,000 for five years. One way to fix this problem is to have the vendee bring their $100,000 in and have the vendor bring in $400,000 out of their own pocket. If you bring in your own cash to loan to the buyer, that means amount of funds in the exchange account will be the same as you’d normally get if there wasn’t seller-backed financing. Having the exchangor finance the buyer out of pocket is a great way to fix the problem, but it requires some liquidity.

In the Uptown area there’s a real estate broker that acts as a sort of problem solver for sellers. If you want a clean break from your property – you don’t want to do seller-backed financing and you don’t want to bring capital to the deal, this broker interposes himself and agrees to buy the property with cash and then sells it to the vendee on a contract for deed. This might be another option.

• 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 - Consolidating Ownership During a Trust Distribution

There are two favorable private letter rulings that deal with consolidating ownership. Let’s say a trust distributes one fifth interest in a farm to you and your other four siblings. You could tell your siblings that you’d like to retain the south quarter of the land. You could say that you’re willing to trade your interest in the remainder of the land to the siblings if the siblings give you their interest in the south quarter of the land so that you own that particular spot in its entirety.

Post-distribution from a trust, there’s an opportunity to consolidate a portion of the property in question, solely in your name by doing simultaneous related party transfers. The IRS and treasury seem to think those are OK because you’re trying to consolidate a parcel wholly in your name. In this situation there’s really no intention to trick the system because the other parties that are going to receive your fractional interest in the other parcels if they sell, they’re going to be paying the same taxes that you would’ve paid.

• 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.

© 2024 Copyright Jeffrey R. Peterson All Rights Reserved

The Details of a Build-to-Suit Like-Kind Exchange

Let’s say that you own a retail business in Minneapolis and the local municipal regulations have changed around you, and the location just isn’t right for you any longer. However, you’ve got a lot of appreciation in the property. Maybe you’d be better off repositioning your property into an outer lying suburb. In a build-to-suit exchange, you sell the relinquished property, place the money with the intermediary, and then the intermediary (acting through an exchange accommodation titleholder) purchases the replacement land. You are not only identifying the replacement land, you’re also identifying the real property improvements to be constructed. The intermediary insulates you from receiving that land prematurely. During the remainder of your 180 days you arrange for the construction of new property improvements to build your new facility.

This may be the best way to take your business to the next level, but you don’t want to get slapped on the wrist with taxes in the midst of that transition.

The 180 Day Exchange Period

In a 1031 exchange, your exchange period is 180 days. Is 180 days enough time to complete such an exchange? You need to receive a replacement property of equal or greater value, equity, and debt. If you sell your Minneapolis location for $1 million and the new land in the suburbs costs $500,000 then your bogey for constructing improvements is $500,000. You don’t need to have the construction fully completed. You just need to have enough construction completed so that the land and buildings are worth $1 million or more.

The Benefits of Section 1031

There are many rules and regulations that you need to satisfy in order to ensure your 1031 exchange is a success and you defer 100% of your capital gains taxes. A qualified intermediary can help inform you of these guidelines so you can set your exchange up for success. The team of intermediaries at CPEC1031, LLC has been working on like-kind exchanges of real property for over twenty years. We understand the ins and outs of the like-kind exchange process and can help bring your exchange across the finish line. Reach out to us today at our downtown Minneapolis office to learn more about the benefits of section 1031 and how we can help!

• 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 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