Tips for 1031 Exchanging Rental Property

In a 1031 exchange, both the relinquished property that's sold, as well as the replacement property have to be held for a qualifying purpose of investment or business use.

Renting to Related Persons

Many people that are acquiring replacement properties in a 1031 exchange may be inclined to rent them out to related persons such as a son or a daughter. The concern with this situation is that this rental arrangement with your related-party may be perceived by the IRS as just a sham. That you're really intending to put a roof over your kid’s head instead of using the property for investment or business purposes.

Tips for Upholding your Qualifying Purpose

If you are actually acquiring the property with business intent to rent it out and you're renting it out to a son or daughter, you want to make sure that you are legitimately using the property for business purposes and you're able to substantiate that. Make sure you have all of the following:

• A real written lease between the taxpayer and the tenant at market rate.

• Rent checks coming in incrementally and regularly according to the terms of the lease.

• Finally, you want to report your rental activity on your tax return just like you would with any other investment or business property that's not rented out to a related party.

If you intend to move into the replacement property after some years of renting it out you need to be cautious that it doesn't appear that this whole rental arrangement was just a sham to make the replacement property fit into an investment or business paradigm when in fact you never really intended to rent it out. Getting too cute with the IRS and jumping through a charade of renting it out may backfire for taxpayers.

• Start Your Exchange: If you have questions about 1031 exchanges of rental properties, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved

An Example of a Non-Safe Harbor Construction Exchange

Let’s say you have a 60 unit apartment complex in Minnesota that you’ve owned for a long time and depreciated down over the years. Let’s also assume that the complex has a lot of deferred maintenance and it’s located in a neighborhood that doesn’t seem like it will grow in the future. You might decide that you’d rather be in Florida with a 120 unit complex. So you tell your intermediary to buy a piece of raw land in Florida and hold it for 25 months while you build the new unit. Towards the end of the construction, you decide to list your 60 unit property for sale. As long as you acquire your new completed replacement property within 180 days of the sale of your relinquished property, you should have a valid 1031 construction exchange.

However, it’s important to note that this type of exchange would fall outside of the Rev. Proc. 237 safe harbor and would be considered a bit riskier than a safe harbor exchange. It’s always a good idea to work with a qualified intermediary on any like-kind exchange but it’s especially important in non-safe harbor exchanges like the one outlined here.

Get the Help You Need with Your Next Like-Kind Exchange

Get the help you need with your next like-kind exchange by contacting the professionals at CPEC1031, LLC. With more than twenty years of experience, we have the skills necessary to make your 1031 exchange dream a reality. From document preparation, to fielding any questions you might have, we’ve got you covered throughout the entire 1031 exchange process. Reach out to our team of qualified intermediaries today to talk about the details of your next 1031 exchange of real estate.

• 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.

© 2025 Copyright Jeffrey R. Peterson All Rights Reserved

Basis Shifting & Related Party Transactions

Lately, the IRS has been trying to stop abusive basis shifting gains under partnership law. However, abusive basis shifting originated with section 1031.

Consider the following example. Let’s say that you have owned a business property in Roseville, MN for 40 years. Your basis is low but the value is high. On top of that, you recently built another business property in San Diego for the same price (but with a much higher basis). Now let’s say you swap these two business properties between your own wholly owned subsidiaries, effectively moving that high basis you have in the San Diego entity and flip-flop it so that it moves to the Minnesota property. When you ultimately sell that Minnesota property, now you’ve got a high basis and you have to pay a lot less tax. To stop that type of abusive basis shifting from occurring, section 1031(f) was introduced to the code.

One of the precepts for section 1031(f) is that if the motivation for doing the related party transaction is to avoid the imposition of the tax, then the exchange is invalid.

Get Your 1031 Exchange Moving Today

Get your 1031 exchange moving today by reaching out to a qualified intermediary who can help you navigate the like-kind exchange process. CPEC1031, LLC works with taxpayers throughout the United States on real estate exchanges under section 1031 of the Internal Revenue Code. These exchanges, when set up correctly, can allow you to defer 100% of your capital gains tax burden when you sell qualifying investment real estate. Contact the skilled intermediaries at CPEC1031, LLC today to learn more about our process and see how we can help you!

• 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.

© 2025 Copyright Jeffrey R. Peterson All Rights Reserved

Related Party 1031 Exchanges of Farmland

In the Midwest, we do a lot of family related party 1031 transactions. That’s because we have a lot of farmers in the region. If you’re a farmer and you want to buy a productive farm right next to your home farm, oftentimes you’ll be buying that property from a family member. These farmers have synergistic economic reasons for buying property as well as emotional connections to the land itself.

Accountants in rural Minnesota are accustomed to filing form 8824 that specifically asks you to disclose if you bought or sold directly or indirectly from a related party. If you do a related party transaction, you’re required to provide a narrative explanation of why this transaction is legitimate and not part of a scheme to avoid the imposition of tax. It’s important to work with your 1031 intermediary to craft this narrative statement to ensure your exchange doesn’t run afoul of IRS guidelines.

Contact a 1031 Intermediary

Contact a 1031 intermediary at CPEC1031, LLC today for help with your next 1031 exchange. Our team is standing at the ready to walk you through all the details of the 1031 exchange process, from the sale of your relinquished property to the acquisition of your replacement property. We’ll make sure you set yourself up to defer as much of your capital gains tax burden as possible. Set up a time to chat with one of our Minnesota qualified intermediaries 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.

© 2025 Copyright Jeffrey R. Peterson All Rights Reserved

Estate of Bartell & Non-Safe Harbor Construction Exchanges

You can do a build-to-suit exchange under the safe harbor of Rev. Proc. 237, but that caps you at 180 days to complete all your construction. Another, slightly riskier, option is to do a non-safe harbor construction exchange. In a case called “Estate of Bartell” in Florida, there was a business owner who had a drug store that was built into a strip mall. They were contained inside of a bigger structure and they wanted to have their own stand alone building. So they hired a qualified intermediary to procure a new out lot and to hold the property while the new building was constructed. This process took 17 months to complete, after which the taxpayer sold the old property and exchanged into their newly constructed property.

Everything seemed fine until they got audited and went to tax court. The tax court judge sat on the decision for a long time but eventually held in favor of the taxpayer. The IRS subsequently chose not to appeal the decision, but they did file a Notice of Non-Acquiescence, stating that they disagreed with the court’s decision.

As a result, non-safe harbor construction exchanges are a little bit riskier than safe harbor exchanges, but some taxpayers still choose to do them.

Hire a Qualified Intermediary

Hire a qualified intermediary to help with your next like-kind exchange of investment real estate today. The qualified intermediaries at CPEC1031, LLC have decades of experience working with taxpayers on their 1031 exchanges. We can guide you through the exchange process and make sure you are making informed decisions every step of the way. Contact us today to learn more about the 1031 exchange process and see how we can help. Our office is located in downtown Minneapolis but we serve clients throughout state of Minnesota and the entire 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.

© 2025 Copyright Jeffrey R. Peterson All Rights Reserved