The Importance of Giving Written Notice to the Buyer in a 1031 Exchange

When you do a 1031 exchange, it’s prudent to put a clause in the contract for the sale of your relinquished property notifying the buyer and any other parties to the agreement that you’re doing a 1031 exchange. This should be affirmatively stated in the agreement.

The treasury regulations assume that the qualified intermediary is going to actually take title to your property before selling it to the buyer, or is going to synthetically receive your property before selling it to the buyer. Synthetically receiving the property means that they are taking an assignment of the seller’s rights in the contract and then directing the seller to convey it to the buyer.

Under the old English common law rules, an assignment was not effective until all other parties to the contract were given written notice. That’s why you want to give written notice to the buyer.

Here’s a strategy. When you’re dealing with buyers and you’re in the strong negotiating position, place into the contract language stating what you’re going to do and ask them to sign it. This is important because sometimes you’ll give notice to a buyer at the closing table and they don’t know what an exchange is and they’re mad at the seller. You want that buyer to be committed to signing your 1031 documents from the outset.

Like-Kind Exchanges of Real Estate

Section 1031 of the Internal Revenue Code is a great provision that allows any United States taxpayer to defer capital gains taxes when selling qualified property, so long as they meet certain criteria. It’s easy to get bogged down in the details of a like-kind exchange. That’s why it’s a great idea to work with a qualified intermediary who can guide you through the details of your exchange. At CPEC1031, LLC we have decades of experience working on all types of 1031 exchanges. Let us help you navigate the process and start saving money today!

• 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

Video - How to Deal with Partnership Interests in 1031 Exchanges

Partnerships are great for buying real estate. They’re efficient vehicles for owning, holding, and managing real estate. But when it comes time to sell, there’s no elegant exit for the individual partners. The partnership has owned the property. The partners themselves don’t own an interest in real estate. Partnership interests are excluded from 1031 exchange treatment. This is the biggest planning opportunity – to figure out an elegant exit before you list your property for sale.

The high level thinkers in the 1031 exchange industry are constantly thinking about the concept of qualified use. If I distribute out your partnership interest to you and you now own an undivided 1/7 of the property (because you owned 1/7 of the partnership), how long must you hold that property before you are eligible to do a 1031 exchange? There is a debate going on about this scenario. Some tax professionals think that you can tack the period of time that the partnership owned the property to the period of time that you owned it so you could immediately do an exchange after distribution out of the partnership. Other tax professionals think that doing a 1031 exchange so quickly after distribution would not qualify for 1031 treatment.

• 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

Video - An Ideal DST for 1031 Exchange Purposes

I think that somebody should invent a DST (Delaware Statutory Trust) that has two unique components – 1) it should be maximum leveraged, and 2) it should consist of a lot of 1245 components. Perhaps it could be a fiber optic building or some kind of sewage treatment building – something that would have a lot of specialty components that could be rapidly depreciated.

Why would that be helpful from a 1031 exchange perspective? Because there are a lot of people that can’t find adequate 1245-rich replacement properties. These people don’t want to pay the piper. They want to continue their investment, but they need a 1245-rich replacement investment 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.

© 2024 Copyright Jeffrey R. Peterson All Rights Reserved

Why Related Party Transactions were Created to Prevent Basis Shifting

Related party transactions were designed to stop abuses that were happening in the realm of 1031. In this article, we are going to talk about why related party transactions were created to prevent basis shifting.

An Example

Imagine you own two subsidiaries. One subsidiary is a $40 million property that was bought 30 years ago and has low basis (owned in entity A). Recently, you bought another $40 million property in entity B. In the past you could just do an inter-company transfer – a swap between these two wholly owned subsidiaries and move the basis between the two properties. This is known as basis shifting. The IRS wanted to stop the practice of basis shifting so they created rules that state that when you do a related party transaction, you and your related property cannot transfer properties for at least two years. There also cannot be an intent to avoid the imposition of the tax.

What’s the difference between legitimately wanting to defer tax and illegitimately trying to avoid the imposition of the tax? That’s hard to quantify. To combat this, the IRS requires that those who do related party transactions must provide a written narrative on form 8824 stating why your related party transaction is not an abuse of the rules.

CPEC1031, LLC in Minneapolis, MN

At CPEC1031, LLC our team of professionals is well-equipped to handle all the aspects of your like-kind exchange of real estate. We have more than two decades of experience facilitating real property exchanges all over the United States. Contact us today at our Minneapolis offices to set up a time to chat with one of our qualified intermediaries, learn about the process, and see how a like-kind exchange can help you defer capital gains taxes when selling qualifying investment property.

• 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

Video - An Explanation of the 3 Identification Rules Under Section 1031

There are several identification rules in a 1031 exchange. Most mom and pop investors keep it simple by identifying three or fewer properties. When you identify three or fewer properties, you’re not constrained by a value cap. You could identify the Sears Tower in Chicago, the Empire State Building in New York, and the IDS Center in Minneapolis. These are three properties.

If, however, you’re going to identify more than three properties, the total aggregate value of all your identified properties cannot exceed twice the value of what you relinquished. If you sold a property for $10 million, you can list up to $20 million as replacement property. However, if you sold a property at $100,000, then your cap is $200,000. Is that enough bandwidth? In that instance, probably not and you might be better off with one of the other identification rules.

The third rule (the 95% rule) isn’t used very often. It’s typically used in big portfolio purchases involving oil, gas, and mineral purchases. If you’re buying a huge portfolio, and one of the wells runs dry and you decide not to purchase it, that’s fine as long as you’re getting 95% of the total value of everything you identified.

Here’s where it gets crazy. Some DSTs are comprised of a multitude of components. You may blow yourself out of three property contention just by identifying one multi-property DST. Nobody really knows for certain whether a DST is one property or the sum of its parts for identification purposes. Let’s say you want to identify a DST. You should ask your advisor how many component parts are in that DST. If it’s comprised of a multitude of properties, you may need to get into value specifics to see what identification rule is best for you. You should also ask your advisor about how debt from the DST will be allocated to you based on the amount of money you put into it.

• 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