Options for Covering Non-Qualified Expenses in a 1031 Exchange

In a 1031 exchange, you may find that you have some boot items on the settlement statement that you clearly don’t want to pay for out of the 1031 proceeds. In this situation, the first thing you want to look at is whether you have some of your own money in the transaction that you can apply toward these items. For example, if there was an earnest money deposit that you paid for the replacement property, you could earmark a portion or all of that deposit to pay for the boot items.

Additionally, you may be getting some credits from the other side. Maybe the seller has agreed to give you a concession of some kind. You could apply that credit from the other side to pay for boot items.

Lastly, you can choose to pay for these boot items with outside money. Send in your 1031 exchange funds from the intermediary to pay for the exchange, and then send in non-1031 exchange funds out of your own pocket to pay for the boot items.

However you approach this, it’s important to inform the closing agent so they can properly notate the settlement statement.

Like-Kind Exchanges of Real Property

Like-kind exchanges of real property offer tax-saving benefits that are available to all US taxpayers. When you sell a property in a 1031 exchange, you reinvest all of your net proceeds from the sale into a new replacement property. This allows you to continue your investment while deferring your capital gains taxes from the sale of the relinquished property. Contact the intermediaries at CPEC1031, LLC to learn more about how you can save money with a 1031 exchange. Our team has more than twenty years of experience facilitating exchanges under section 1031 of the IRC.

• 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 Exchange Fictions

The current 1031 exchange treasury regulations that were issued in 1991 are designed so that the taxpayer is not considered to be in receipt of the sales proceeds. The fiction is that the intermediary insulates the taxpayer from receiving anything but like-kind property (assuming the exchange is done correctly). The intermediary holds the money, but that holding of the money has to be pursuant to a written exchange agreement signed by the taxpayer and the intermediary. That exchange agreement has to contain limitations (sometimes referred to as the G(6) limitations), which are the modern iteration of the idea that you can’t get your hands on the 1031 exchange funds while they’re being held by the intermediary.

Direct Deeding

Another 1031 exchange fiction is the “direct deeding” fiction. Back in the old days (pre-1991), if the qualified intermediary was the seller of the relinquished property, you may have deeded your relinquished property to your intermediary acting as your escrow agent and the escrow agent would have sold the relinquished property directly to the buyer by deed. That extra deeding was unnecessary and burdensome, so in the 1991 regulations they came out with the idea of direct deeding wherein there would simply be a deed from the taxpayer conveying the relinquished property to the buyer, but there will have been an assignment to the intermediary of the seller’s rights in the relinquished property sale. That assignment wasn’t considered effective unless there was written notice given to the other parties involved.

So when we say we want to correctly identify the names of the parties on the settlement statement, that’s all in an effort to fully comply with the treasury regulations.

CPEC1031, LLC – Qualified Intermediaries

When you’re doing a 1031 exchange, you want to have a like-kind exchange professional by your side to guide your decision making. CPEC1031, LLC focuses solely on 1031 exchanges of investment real estate. Our qualified intermediaries are ready to help you through all the specific details of your next 1031 exchange of real estate. Contact our team today to learn more about the like-kind exchange process, its benefits, and to see if your property qualifies for like-kind exchange tax deferral.

• 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

How to Handle Boot Received During a 1031 Exchange

A 1031 exchange is not a zero sum game. Not everybody wants to do a 100% tax-deferred 1031 exchange. If you want to take some taxable proceeds (boot) during your 1031 exchange, the best time to do that is before the rest of your net proceeds are sent to the intermediary.

In this scenario, you would amend the exchange documents and the closing instructions. Then on the settlement statement, you have the settlement agent (the title company or escrow officer) send the boot to the taxpayer before the rest of the net proceeds are sent to the qualified intermediary. Once the intermediary gets the proceeds, you can’t put your hand in the cookie jar without disrupting your 1031 exchange. The time to receive the boot (if you want to) is when the settlement statement is still in control of the proceeds. Take the boot at the beginning of the closing process if you know what you want.

Alternatively, if you’re not sure how much boot you want to take, you could wait until the exchange period has ended and get your unutilized surplus exchange funds back from the intermediary as taxable boot.

A 1031 Exchange is a Powerful Tool

A 1031 exchange is one of many tools available to taxpayers who want to put themselves in the most tax-advantageous position possible. When you sell your real property in a 1031 exchange you are deferring your capital gains taxes and compounding your wealth over time in a continued investment. As an added bonus, it’s a great way to stimulate the economy and move money into different segments of the real estate market. Learn more about the tax-saving benefits of the 1031 exchange by contacting the qualified intermediaries at CPEC1031, LLC 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

Be Careful What You Choose as Your 1031 Exchange Replacement Property

In a 1031 exchange, you need to be careful when picking replacement property, as it must be considered to be real property.

There are other securitized real estate investments that are considered to be an interest in real property. These are often called a Delaware Statutory Trust or “DST.”

Delaware Statutory Trust Rev. Rul. 2004-8618 (the DST guidance) addresses whether a DST will be treated as an investment trust or business entity for federal income tax purposes.

If the DST is treated as an investment trust, interests in the DST will be treated as interests in the property owned by the DST for purposes of section 1031, and therefore beneficial owners can exchange their relinquished property for interests in the DST.

See: 2004-2 C.B. 191

As you may now know the IRS generally won’t allow one to exchange from real property into a partnership or even certain de facto partnership disguised as a tenants-in-common arrangement.

The newest Treasury Regulation that defines what real property is states that:

(5) Intangible assets—(i) In general. Intangible assets that are real property for purposes of section 1031 and this section include the following items: Fee ownership; co-ownership; a leasehold; an option to acquire real property; an easement; stock in a cooperative housing corporation; shares in a mutual ditch, reservoir, or irrigation company described in section 501(c)(12)(A) of the Code if, at the time of the exchange, such shares have been recognized by the highest court of the State in which the company was organized, or by a State statute, as constituting or representing real property or an interest in real property; and land development rights. Similar interests are real property for purposes of section 1031 and this section if the intangible asset derives its value from real property or an interest in real property and is inseparable from that real property or interest in real property. The following intangible assets are not real property for purposes of section 1031 and this section, regardless of the classification of such property under State or local law—

(A) Stock not described in paragraph (a)(5)(i) of this section, bonds, or notes;

(B) Other securities or evidences of indebtedness or interest;

(C) Interests in a partnership (other than an interest in a partnership that has in effect a valid election under section 761(a) to be excluded from the application of all of subchapter K);

(D) Certificates of trust or beneficial interests; and

(E) Choses in action.

• 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

Dealing with Incidental Personal Property in a 1031 Exchange

In a 1031 exchange, you have to buy like-kind real estate. Let’s say you sold an apartment building and you bought a bigger apartment building. That would be fine in a 1031 exchange because you’re exchanging like-kind real estate for other like-kind real estate.

But what if some of your 1031 exchange funds are being used to pay for incidental personal property that goes along with the apartment building? Perhaps there are window air conditioners, tools, or lawnmowers. These items aren’t real estate but may be thrown in with the deal and would customarily be sold with the building.

Identification Rules

You must identify your 1031 replacement property. If you’re receiving some incidental items as a part of the purchase, do you have to identify those items? As long as those incidental items don’t amount to more than 15% of the real estate you’re identifying, then you don’t have to worry about it from an identification point of view. Notice that we’re talking about 15% of the real estate, not 15% of the total deal. So you have to be careful. This is a trap for the unwary.

Pro Tip

If you’re getting used air conditioners, appliances, or other equipment, the IRS will generally respect a written allocation of value between the parties. It might be a good idea to formally allocate that all of these incidental personal property items are going to be sold to you at garage sale prices out of pocket – just out of an abundance of caution.

Questions About 1031 Exchanges?

Do you have questions about the 1031 exchange process? If so, you’ve come to the right place! CPEC1031, LLC provides 1031 exchange services for US taxpayers looking to defer capital gains taxes on the sale of qualifying real estate. We focus solely on like-kind exchanges and have over two decades of experience working in the 1031 exchange industry. Let us put our knowledge and expertise to work for you and help ensure your 1031 exchange is successful. Contact us today to learn more and schedule a time to discuss.

•  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