PIGs (Passive Income Generators): A Smart Strategy for Unlocking Passive Income and Building Wealth

In the world of real estate investing and tax planning, there is a saying worth remembering: “Pigs get fed, hogs get slaughtered.” When it comes to generating passive income and making the most of your passive losses, it pays to be the right kind of pig: a Passive Income Generator, or PIG.

Why Passive Income Matters

Passive income is the dream: money that shows up whether you are laboring or not. But in the tax world, the IRS has its own definition and a strict set of rules about what counts as passive activity and how losses can be used.

Back in 1986, the Reagan administration rewrote the rules with the Passive Activity Loss (PAL) limitations, designed to shut down abusive tax shelters. The result? The losses from passive investment activities can only be used to offset the income from other passive investment activities. That’s where PIGs come in.

The Problem: Trapped Losses

Real estate investors often find themselves with passive losses they cannot use, at least not immediately. Unless your income is under certain thresholds, or you qualify for one of the key exceptions, those losses just sit there.

Here are the three most common paths to unlock those losses:

1. The $25,000 Passive Loss Allowance: For rental property owners under certain income limits, this exception allows up to $25,000 of losses to be used against non-passive income.

2. Real Estate Professional Status (REPS): Qualifying as a real estate professional allows you to treat rental activities as non-passive, but the requirements are strict and well-documented.

3. Short-Term Rental (STR) Loophole: If your average rental stay is 7 days or less, and you materially participate, those rentals may be treated as non-passive, even without REPS status.

But what if none of these apply?

The Strategy: Find a PIG

Enter the Passive Income Generator (PIG), an investment that produces income without material participation. When the income is passive, it can unlock the value of your passive losses.

Think of a PIG as a tool in your wealth-building toolbox. It does not reduce your taxes on its own but when paired with existing passive losses, it can create meaningful tax savings and improved after-tax cash returns.

What Qualifies as a PIG?

Not all “hands-off” investments qualify as passive under IRS rules. Here are some examples that do qualify:

• Real Estate Limited Partnerships (RELPs): You invest capital, receive distributions, and leave the operations to someone else.

• Rental Properties (when the management is outsourced): If you are not materially involved, your income is passive.

• Private Equity Real Estate Funds: These funds are designed for limited partner investors, providing income and potential appreciation without active participation.

• Peer-to-Peer Lending: Returns from P2P platforms can generate passive income in the form of interest.

On the other side of the spectrum, here are a couple of examples that do not qualify as passive investments under IRS rules:

• Dividend Stocks, Real Estate Investment Trusts (REITs) or Capital Gains: While they may feel passive, this is technically portfolio income, and it cannot be used to offset passive losses. Under Treasury Regulation §1.469-2T(c)(2 & 3), portfolio income is not considered income from passive activity and that includes interest, dividends, annuities, and royalties not derived in the ordinary course of a trade or business.

• Your Own Business (if you materially participate): Even if you are not grinding it out every day, your involvement may still be deemed active under IRS rules.

Use Caution, Not Just Optimism

A true PIG isn’t just a tax strategy; it is an investment. That means due diligence is critical. Before jumping in, ask:

• How much income will this realistically generate?

• What’s the risk profile?

• What’s the liquidity and redemption policy?

• Does the tax benefit justify this investment?

The goal isn’t just to feed your losses; it is to feed your future wealth.

PIGs and the Bigger Picture

Finding and funding a PIG is a strategic move for investors who have already done the hard work of building a portfolio and accumulating passive losses. When used wisely, PIGs can accelerate your returns and reduce your tax liability without requiring you to qualify as a real estate professional or convert to short-term rentals.

But don’t forget the bigger picture: a good PIG should stand on its own as a solid investment. The tax benefit is icing on the cake, not the cake itself.

Think Like a Strategist

When it comes to wealth building, passive income plays a powerful role, but the IRS rules mean it is not as simple as “make money while you sleep.” Understanding the role of PIGs, and how to unlock passive losses with passive income, can make all the difference in your long-term strategy.

Think carefully. Choose wisely.

• If you are considering a 1031 exchange, feel free to call me, Jeff Peterson, at 612-643-1031, or email me at jeffp@CPEC1031.com.

Defer the tax. Maximize your gain.

© 2025 Copyright Jeffrey R. Peterson All Rights Reserved

Video – Important Players in a 1031 Exchange: A Strong Real Estate Agent

In a 1031 exchange, you’re going to need to work with a strong real estate agent. An agent can find replacement property for you to use in your 1031 exchange. In this hot seller’s real estate market, selling your relinquished property isn’t necessarily the hard part. The more difficult part is knowing that you have a replacement property that you can acquire and identify within 45 days after the closing of your relinquished property. A prudent real estate professional is going to encourage their client to plan ahead and begin the process early so they’re not scrambling to find property at the last minute. Instead, it’s a good idea to split your energies up into getting the relinquished property ready for sale while also looking for a replacement property (even before you’ve listed the relinquished property).

Take the First Step on the Road to Tax Deferral with a 1031 Exchange

Take your first step in the 1031 exchange process and start your journey down the road to capital gains tax deferral. A 1031 exchange can help you defer taxes and build wealth over time by way of a continuing investment. Reach out to the qualified intermediaries at CPEC1031, LLC today to get started. Our team of 1031 exchange professionals has over two decades of experience facilitating all types of 1031 exchanges (forward, reverse, and construction exchanges). Let us guide you through the exchange process from start to finish.

• 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

Qualified Intermediaries: Why You Need One for Your 1031 Exchange

A qualified intermediary is an important element in any 1031 exchange of real estate. In this article, we are going to explain the role of the qualified intermediary and discuss why you need one for your 1031 exchange of real estate.

The Importance of a Qualified Intermediary

There are many important professionals you want to have on your team when embarking on a 1031 exchange of investment real estate. You should involve your CPA or accountant, your attorney, your real estate broker, a good title company – just to name a few. Perhaps the most important professional you want to engage in a 1031 exchange is a qualified intermediary. A qualified intermediary (or QI for short) is a professional that specializes in the facilitation of like-kind exchanges under section 1031 of the Internal Revenue Code.

Your qualified intermediary can guide you through the 1031 exchange process – making sure you understand all the rules and benchmarks that you need to satisfy in order to defer your capital gains taxes. They can also help prepare important documentation during the exchange. The most important role that a QI plays is that of a neutral third-party that insulates the taxpayer conducting the exchange from receiving any of the net proceeds from the sale of the relinquished property. Taking constructive receipt of any sales proceeds would trigger taxable boot (and thus result in a partial or failed exchange). Your intermediary holds the funds on your behalf and then reinvests them into the replacement property so you can defer 100% of your capital gains taxes.

Call a Qualified Intermediary at CPEC1031, LLC to Start Your Exchange

Interested in learning more about the tax-saving potential of a 1031 exchange? Call a qualified intermediary at CPEC1031, LLC today to start the exchange! We have more than twenty years of experience working with taxpayers across the United States on 1031 exchanges of all types (forward, reverse, build-to-suit, etc.) and we can help you through the details of your like-kind exchange. You can find us at our primary Twin Cities office located in downtown Minneapolis.

• 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

Video – Building 1031 Exchange Improvements on Land You Already Own

Let’s talk about some sophisticated 1031 exchange arrangements.

One such arrangement is when people want to build improvements on land that they already own.

Let’s say you’re selling a single family home in Faribault, MN but you already own a single vacant lot in Edina, MN. You’d like to take the proceeds from the sale of your Faribault property and construct improvements on land that you already own in Edina. Is that considered a 1031 exchange?

For decades, the IRS took the position that building improvements on land you already own was not an exchange. However, there have been a few favorable Private Letter Rulings in which the intermediary doesn’t construct improvements on the fee title that’s already owned by the taxpayer. Instead, the intermediary constructs the improvements upon a new ground lease. Let’s say the intermediary’s LLC enters into a 99 year ground lease with the fee owner and the intermediary constructs the improvements on top of this new estate that didn’t previously exist. This is a very sophisticated type of 1031 exchange that should only be done with the help of a skilled intermediary.

Find a Qualified Intermediary for Your Next 1031 Exchange

Contact CPEC1031, LLC to find a qualified intermediary for your next 1031 exchange of real estate. Our 1031 exchange professionals have been working on like-kind exchanges throughout the United States for more than two decades. We can put our combined knowledge to work on your next 1031 exchange and make sure you have the greatest possible chance of deferring 100% of your capital gains taxes. Contact us at our Twin Cities office to learn more about the full extent of our services and see how we can help you through 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.

© 2025 Copyright Jeffrey R. Peterson All Rights Reserved

Can I Get Pre-Closing Repair Costs Reimbursed in a 1031 Exchange?

If you are preparing to sell an investment property via 1031 exchange and have spent money on repairs prior to closing, you may be wondering: Can I get reimbursed for those costs using 1031 exchange proceeds?

The short answer is, “not directly.” But there are a few strategic options that may allow you to recover those costs without jeopardizing your like-kind exchange.

Why Pre-Closing Repairs Don’t Typically Qualify

In a 1031 exchange, certain transactional costs can be paid from exchange proceeds without creating a taxable event. Pre-closing repair costs are not generally considered allowable exchange expenses under Treasury Regulation §1.1031(k)-1(g)(7). However, if the repairs are made pursuant to a buyer-negotiated concession that is documented in the purchase agreement and reflected on the settlement statement, they may be treated as a seller obligation rather than personal reimbursement.

This distinction matters because expenses that fall outside the allowable category could trigger “boot,” or taxable income, which diminishes the tax-deferral benefit of the exchange.

Option 1: Accept Some Taxable Boot

One approach is to allow some boot at closing to reimburse yourself for those pre-closing repairs. While that portion would be taxable, it may not significantly impact your overall tax situation. In many cases, these repair costs are tax deductible in the year they were incurred, which could offset the tax liability, potentially making it a “wash.”

Before going this route, consult with your CPA or tax advisor to confirm whether this partial approach aligns with your broader tax picture and the nature of the expenses.

Option 2: Do a Full Exchange and Refinance Later

If your goal is to complete a 100% tax-deferred exchange, another option is to delay reimbursement. Instead, you could complete your exchange in full, then later refinance the replacement property through a separate loan transaction. This allows you to pull out equity and repay yourself for the earlier expenses without affecting the integrity of the exchange.

What Costs Can Be Paid from 1031 Exchange Proceeds?

Under Treasury Regulation §1.1031(k)-1(g)(7), several transactional expenses are recognized as safe to pay using 1031 exchange funds. Typically, these are typically costs that:

• Are customary in local real estate closings,

• Appear on the settlement statement, and

• Relate directly to the sale of the relinquished property or the purchase of the replacement property.

Examples include:

• Broker commissions

• 1031 exchange intermediary fees

• Title insurance premiums

• Escrow and closing fees

• Appraisal fees (if required by contract)

• Transfer taxes

• Recording fees

• Professional fees (CPA, attorney, or financial advisor) directly tied to the sale or purchase

These costs are supported not only by Treasury regulations but also by long-standing IRS guidance, including Revenue Ruling 72-456 and IRS Private Letter Ruling 8328011.

Connect with a 1031 Exchange Qualified Intermediary

Pre-closing repairs that are not made pursuant to a contractual requirement negotiated as a concession with the buyer, don’t fit neatly into the list of exchange-approved expenses. However, with smart planning, whether accepting some taxable boot or structuring a post-exchange refinance, it may still be possible to recoup those costs without completely undermining the benefits of your 1031 exchange.

As always, the key is consulting with a tax professional who understands the nuances of 1031 exchange rules and can guide you toward the most advantageous strategy for your situation.

Thinking about a 1031 exchange? Feel free to call me, Jeff Peterson, at 612-643-1031, or email me at jeffp@CPEC1031.com.

Defer the tax. Maximize your gain.

© 2025 Copyright Jeffrey R. Peterson All Rights Reserved