Can 2 Contiguous Properties Be Considered One Property in a 1031 Exchange?

Two contiguous properties with separate postal addresses may could still be considered one property (for the purposes of the three-property rule for designating replacement property for 1031 exchanges), such as a duplex, or a farm with adjoining land in two different counties, cities, or states.

Please review Rev. Proc. 2002-22: https://www.irs.gov/pub/irs-drop/rp-02-22.pdf 

Even if they are non-contiguous parcels of property, if they operate as a single economic unit (for example, an office building and a garage that services the tenants of the office building) may be treated as a single business unit even if the office building and the garage are not contiguous.

The IRS will generally treat contiguous parcels as comprising a single business unit. Even if the parcels are not contiguous, however, the IRS may treat multiple parcels as comprising a single business unit where there is a close connection between the business use of one parcel and the business use of another parcel.

The question is will the IRS treat a Delaware Statutory Trust (“DST”) as a single economic unit and deem it to be one property for 1031 identification purposes.

The safe play is to assume that a DST that is comprised of multiple non-contiguous parcels of property takes up multiple slots under the three-property rule.

• 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

Don’t Blow Up Your 1031 Exchange – Hire a Qualified Intermediary

Most people conducting 1031 exchanges utilize the services of a qualified intermediary. But there are rules surrounding who can act as your qualified intermediary. If you use a disqualified person to be your qualified intermediary, the presumption is that your 1031 exchange is blown because you’re supposed to use someone that’s neutral and unbeholden to you.

If you’re using your attorney to act as your qualified intermediary and that attorney has provided you legal services within the last two years, they are disqualified from acting as your intermediary.

It’s a good idea to have a representation and warranty from the party acting as your intermediary that they’re not a disqualified person. Even more importantly, don’t use a disqualified person as your qualified intermediary. The fees to hire a qualified intermediary are relatively nominal – especially when dealing with commercial real estate transactions. Use a professional, independent intermediary company that focuses on providing 1031 exchange services, rather than trying to use a friend or relative.

Section 1031 is a Powerful Tool for Tax Deferral

A 1031 exchange is a powerful tool for deferring taxes on the sale of qualifying real property. Any taxpayer can avail themselves of the many benefits of a 1031 exchange. However, there are a variety of rules that you must follow in order to complete a successful exchange. That’s why it’s essential to work with a qualified intermediary who has experience in the 1031 exchange industry. CPEC1031, LLC has over two decades of experience facilitating 1031 exchanges and can work with you to ensure your like-kind exchange is a success.

• 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

Closing Statement Best Practices in a 1031 Exchange

Let’s talk about some of the basics you want to include on a closing statement when conducting a 1031 exchange.

Party Identification

The first thing you want to do is make sure that you have the proper identity of the parties involved in the exchange. If you’re doing a 1031 exchange, often the identity of the seller is dressed up to reflect that the seller is the qualified intermediary on behalf of the taxpayer. The intermediary becomes the synthetic seller under the treasury regulations – a sort of surrogate that takes the sales proceeds. If you’re doing a 1031 exchange (either as a buyer or a seller) you may want to dress up the settlement statement to reflect that nuance.

Closing Date

Many things depend on the date of closing – the day that the benefits and burdens of ownership shift. For example, we use the date of closing to calculate your 45 day identification period as well as the 180 day exchange period. Sometimes people will prepare a settlement statement and then the transaction won’t close on the day that it’s planned to, but nobody changes the closing date on the settlement statement. Or perhaps there are multiple dates – a closing date and then a date for disbursing the funds. In this situation, what is the closing date? The date of closing or the date the funds were received? Determining the date of transfer itself is essential because all of your 1031 exchange deadlines will be calculated from that. If there’s a discrepancy it’s important to resolve it.

Another important detail is how much you sold your property for. In a 1031 exchange, if you’re using the 200% rule for identifying your property (which is a ceiling which caps how much you can identify) knowing the consideration that was paid for the relinquished property is critical because you double that amount to get to your ceiling. If there’s a change in purchase price, it should be reflected in the settlement statement.

Defer The Tax – Maximize Your Gain

With a 1031 exchange, you can defer your capital gains tax burden and maximize your gain by reinvesting your net proceeds into a bigger and better investment. If you want to learn more about the specific benefits and requirements of a 1031 exchange, contact an intermediary at CPEC1031, LLC today. Our qualified intermediaries have over two decades worth of experience working on all types of 1031 exchanges. We can help you navigate the waters of the 1031 exchange process. Contact us today at our Minneapolis offices to learn more!

• 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

1031 Exchanges Immediately Following a Partnership Distribution

There are some tax professionals who think you can do a 1031 exchange immediately after partnership distribution. These professionals rely on a specific case (Magneson v. Commissioner). In this case, a taxpayer did an exchange and then immediately contributed his replacement property to a partnership. The IRS said he wasn’t allowed to do that, but ultimately Magneson won. However, this case was decided based upon facts and law that no longer exist. This was pre-1984, prior to partnership interests being explicitly excluded from 1031 treatment.  So this case is not a great basis for building your tax planning.

Consult with Your Tax Attorney

The best advice is to consult with your tax attorney and reconfigure the ownership of your partnership assets early – well before you’ve listed the property for sale. That will be the most defensible position for your 1031 exchange. Right now the FTB (Franchise Tax Board) in California is going after these types of drop and swap 1031 exchanges. But they’re much more accepting of a pre-planned partnership division, where you spin off subsidiaries and drop the real estate into entities that are considered continuations of their predecessors. This is sometimes referred to as a 708 spin-off.

If you drop down out of your partnership to a tenancy-in-common and you don’t notify the bank, you’re technically in default of your sale clause. This isn’t a problem if you don’t have a bank lender. But if you own encumbered property you should probably ask the bank first. You should also probably change your insurance as well because the insureds have changed. Your accountant should also be immediately notified.

1031 Exchange Professionals in Minneapolis, MN

CPEC1031, LLC offers 1031 exchange intermediary services in Minnesota and across the United States. Our team of like-kind exchange qualified intermediaries has over two decades of experience working on like-kind exchanges of qualifying real property. Let us help you with your next 1031 exchange and defer your capital gains taxes when selling real estate. You can find us at our primary offices, which are located in downtown Minneapolis. We also provide 1031 exchange services to clients throughout the United States.

• 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

When is it Too Late to Begin a 1031 Exchange?

Timing is a huge factor in any 1031 exchange of real estate. Many people want to know how long they can wait to start their exchange. In this article, we are going to answer the question: “when is it too late to begin a 1031 exchange?”

Timing Restrictions

Once a real estate transaction has been closed, it’s not possible to do a 1031 exchange. That’s the biggest thing to remember when considering whether or not you want to do a 1031 exchange. You need to begin the process in advance of the closing because you need to get everything set up and designate that the property will be used in a 1031 exchange transaction. Sometimes we get calls from folks who are just about to close on their properties and they want to do a 1031 exchange. It is possible to delay the closing and set up an exchange in these situations but it’s really not ideal.

Start the Process Early

The best thing you can do to set your exchange up for success is start the process early. Give your qualified intermediary the time needed to prepare the required documentation and get everything ready before closing.

Begin the 1031 Exchange Process

Section 1031 of the Internal Revenue Code exists to incentivize US taxpayers to continue their investments in real property. If you are considering a sale of investment real estate and want to defer your capital gains taxes on that sale – you could benefit from a 1031 exchange. Work with the skilled and experienced qualified intermediaries at CPEC1031, LLC to ensure you have all of the details covered throughout your like-kind exchange. We work with taxpayers on exchanges throughout the United States.

• 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