Do You Need a Certificate of Occupancy in a 1031 Construction Exchange?

In a 1031 construction exchange, do you need to have a certificate of occupancy before the end of your 1031 exchange period?

The short answer is no. You do not need to have a certificate of occupancy. Whatever exists as real estate, exists as real estate – that’s all that matters from the 1031 exchange perspective.

When a qualified intermediary parks a property on behalf of a taxpayer in a 1031 exchange, they often form one or more single-purpose LLCs in which to park the property in question. To transfer that property to the taxpayer, all the intermediary needs to do is re-assign the LLC membership interest to the taxpayer. For tax purposes, this is as good as deeding the property to the taxpayer. The good news is, you don’t have to go to the county recorder, show a certificate of occupancy, or anything similar.

The Contract for Deed Option

We’ve had people come to us on day 178 of their 180 day exchange period and inform us that the developer hasn’t completed the planned construction on the replacement property. In this situation, we can get a contract for deed, get the equitable title of whatever construction is completed transferred to the vendee. Even though you can’t record a deed, the contract for deed will suffice.

Find out if You Qualify for 1031 Exchange

Find out if you qualify for 1031 exchange treatment today by contacting the intermediaries at CPEC1031, LLC. Our team has been working with taxpayers throughout the United States on like-kind exchanges of all shapes and sizes for over two decades. Let us guide you through your next 1031 exchange and start deferring your capital gains taxes when you sell qualifying investment property. Contact us today at our Minneapolis office to learn more and get your 1031 exchange up and running.

• 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

Prepare Your 1031 Exchange Before Starting Your 45 Day Identification Period

The linear timeline of a standard 1031 exchange consists of a total of 180 days from the sale of your relinquished property to the acquisition of your replacement property. Running concurrently with that 180 day exchange period is your 45 day identification period. The first forty-five days of your exchange period are the time in which you must identify in writing your replacement property.

Right now, we’re in somewhat of a hot seller’s market. There’s an ongoing problem of inventory being thin. If you want something good, you’re competing against a lot of other bidders. 45 days is not a lot of time to find and identify suitable replacement property in a hot market. There’s a lot that goes into the process of purchasing your investment real estate. You may need to negotiate a deal, get a survey, review leases, have an inspection done, and more.

Savvy real estate investors try to lock in a sure thing even before they sell the relinquished property so they’re not hampered by this short 45 day identification period. This simply illustrates the importance of being prepared and giving yourself enough time to tackle your exchange before you begin the process by selling your relinquished property.

Build Your Wealth with a Like-Kind Exchange

Build your wealth by deferring capital gains taxes on the sale of investment real estate under section 1031 of the Internal Revenue Code. This tax-advantageous tool can help you defer a hefty capital gains tax bill and keep your hard-earned money working for you in a continued replacement property investment. Get to know the ins and outs of section 1031 by reaching out to a qualified intermediary at CPEC1031, LLC today. Our like-kind exchange professionals are ready and waiting to assist you through all the details of your next 1031 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

2 Different Types of Gain in a Like-Kind Exchange

Land is not depreciable from a tax perspective. You can’t take tax deductions on the theoretical wear and tear of dirt. A commercial office building, on the other hand, is depreciable. You will recoup your outlay for a commercial building slowly over the course of years or decades. That slow, straight line depreciation is typically called 1250 depreciation – as deductions are taken you have a corresponding decrease in your basis. At the end of the depreciation period your basis will be whittled down to zero.

Some fixtures that exist on your property (such as floor coverings, electrical components, and other things) can be depreciated at a more rapid rate but they generate 1245 gain because they push down your basis.

In a 1031 exchange, you’re not only doing a like-kind exchange of real estate for real estate. If your property has the added complication of 1245 gain, you have to make sure that your replacement property has enough 1245 components to match up with the sale.

Unless you’re careful in your allocations, you can have very little 1250 gain from the sale of the land itself and a whole lot of 1245 gain from the sale of the more rapidly depreciating assets.

To avoid this situation, consider exchanging into property types that are inherently rich in 1245 assets like facilities that have a lot of electrical components or specialty agricultural buildings.

Realize the Tax-Saving Power of a 1031 Exchange

Section 1031 of the Internal Revenue Code offers powerful tax-savings to taxpayers who own investment real estate. Contact the qualified intermediaries at CPEC1031, LLC today to learn more about the awesome power of like-kind exchanges and see if your property is a good candidate for 1031 treatment. We have been guiding taxpayers through the 1031 exchange process for decades. You can trust us to help you through the entire like-kind 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

A 1031 Exchange Trap for the Unwary – Exchange Periods that Fall After the Federal Tax Deadline

In a 1031 exchange your exchange period (the time you have to complete your exchange) is 180 days. In most 1031 exchanges, this is pretty straight forward. However, things get a little interesting with exchanges that occur near the end of the calendar year.

If you were to sell your relinquished property on December 26, your 180th day would be sometime in mid-2025. The IRS doesn’t want to wait another tax year to find out about your exchange, so they cap your exchange period at the due date of the filing of your federal income tax return. If your 180th day falls after that, your exchange period is curtailed to that federal income tax filing deadline.

Thankfully, there’s an easy way to fix this issue if you give yourself enough time. Simply inform your CPA or tax-preparer that you are doing a 1031 exchange and that you’ll need to do an extension on your tax filing. That will give you the full 180 days for your 1031 exchange. In order to pull this off, you need to make sure that all of the professionals involved in your 1031 exchange are communicating with each other so that your CPA doesn’t accidentally file your return on time without requesting an extension.

1031 Tax-Deferred Exchange Services

CPEC1031, LLC offers tax-deferred exchange services to clients throughout the United States. Our team has been working hand-in-hand with taxpayers from all walks of life on their 1031 exchanges of rental properties, retail spaces, raw land, and more. If you are considering a 1031 exchange but don’t know where to begin, contact a qualified intermediary at CPEC1031 today to get started. We can help you figure out if a 1031 exchange is right for you and how to begin the process of exchanging your 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.

© 2025 Copyright Jeffrey R. Peterson All Rights Reserved

Is It Possible to Revoke a Replacement Property Identification in a 1031 Exchange?

It is possible to revoke your 1031 exchange property identification. Let’s say that you sent in an identification on day 30 of your exchange period and then you had a change of heart. You have the opportunity to revoke that identification. However, if you do so, you have to re-identify in writing new replacement property and you must send that identification to the original party to whom you identified the original property.

You have to identify your replacement property to someone who is not a disqualified person (a family member, your employee, your business partner, etc.) You need to identify to someone who is unbeholden to you.

Construction Improvement Exchanges

More importantly, if you’re doing an improvement exchange you must identify the improvements that don’t yet exist. Let’s say you sold a property for $500,000 and the land is only $100,000. In order to fully defer your taxes in a 1031 exchange you need to continue into a property worth $500,000 or more. So you can have the intermediary purchase the property for $100,000 and during the remainder of your 180 day exchange period, you’ll arrange for the construction of at least $400,000 worth of improvements to the property. That way, when you receive the property it exists as real estate worth at least what your relinquished property was valued at.

Get the Most out of Your 1031 Exchange

Get the most out of your 1031 real estate exchange by working with a skilled qualified intermediary. At CPEC1031, LLC we have been performing qualified intermediary services for more than two decades. Put your trust in us and we can help you maximize the tax-deferral of your 1031 exchange. Contact our 1031 exchange professionals today at our Minneapolis office. We facilitate 1031 exchanges throughout the state of Minnesota and across the United States. We have helped countless taxpayers complete their exchanges – let us help you with yours.

• 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