The Rationale for 1031 Exchange is the Same as it was Back in 1921

In 1921, the United States Congress faced a crossroads. We had just finished beating the Germans in World War I. In the process of funding that war effort, the country ran up a deficit. Furthermore, we were taxing people heavier than they’d ever been taxed before. During that timeframe, the highest income tax bracket was 73%. To pay down the war debt, Congress faced a decision – either continue to maintain these high tax rates, or try to grow the economy by broadening the base of taxpayers and the velocity in the economy. They chose the latter.

As part of that legislation in 1921, we have the precursor of section 1031 – a provision that allowed for the deferral of gains. The rationale behind that provision was that if you’re going to have a continuity of investment, why should we penalize taxpayers for continuing their investment? If we did penalize taxpayers there would be a “lock-in” effect where taxpayers simply wouldn’t sell. If you knew you were going to have to give away a third of your hard-earned equity when selling your farm, would you sell it? Many would not. They would hold onto the property to avoid the imposition of tax.

Why is this history lesson even relevant? Because the same rationale exists today for maintaining section 1031. It stimulates the economy. I prevents the lock-in effect. It increases velocity in the marketplace.

Start Your 1031 Exchange Journey Today

Start your 1031 exchange journey today by giving a qualified intermediary a call. CPEC1031, LLC employs qualified intermediaries with more than two decades of experience. We have a proven track record of completing successful like-kind exchanges for our clients. We can help you through many hoops of a 1031 exchange – making sure all of the details specific to your transaction are covered. Contact us today to learn more about the numerous benefits of conducting a 1031 exchange and get yours started 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

Where to Keep Your Sales Proceeds During the 1031 Exchange Process

During the course of a 1031 exchange, you need to be extra careful with the sales proceeds from your relinquished property sale. Many people are not aware of the rules that govern like-kind exchanges and thus don’t know what to do with these proceeds.

Do Not Take Receipt of the Proceeds

The most important rule you need to remember is to not take constructive receipt of these proceeds during the 1031 exchange process. Doing so will trigger taxable “boot” and you will not be able to defer 100% of your capital gains taxes.

The safest way to insulate yourself from receiving these funds is to work with a qualified intermediary who can hold the funds on your behalf in a segregated account. When it comes time to acquire your replacement property, your intermediary will move the funds from this separate account into the new property, keeping you away from receiving any taxable boot.

Get in Touch with a Like-Kind Exchange Intermediary

Contact CPEC1031, LLC today to get in touch with a like-kind exchange intermediary and discuss the benefits of doing a 1031 exchange. Any US taxpayer can use section 1031 to their advantage and defer capital gains taxes when selling investment real estate. But there are a variety of rules you need to abide by in order to fully defer your taxes in a like-kind exchange. Our qualified intermediary have more than twenty years of experience in the 1031 exchange industry. Let us put our experience to work on your like-kind exchange and start realizing the many benefits of the 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.

© 2024 Copyright Jeffrey R. Peterson All Rights Reserved

How do I Determine the Seller’s Basis in the Property They’re Selling?

I have a question on determining the tax basis on a farm. Imagine a family that has owned a piece of farmland since the 1800’s. In such a situation, how do you figure out the tax basis of that property for tax liability?

This is an excellent question that can have a complex answer. To find the answer, here are some questions you should ask:

• How long has the person had the property and how did you get the property?

• Did they purchase the property and have a “cost basis" for what they paid for it (together with expenditures they may have for capital improvements)?

• Were they gifted the property and received it with “carry-over basis” from the grantor of the gift? (26 U.S.C. §1015(a) - providing for carryover basis of gifts) Taft v. Bowers, 278 U.S. 470 (1929)

• Did they inherit the property and receive a “step-up in basis” set at the fair market value of the decedent’s death? (26 U.S.C. §1014 providing for step-up the FMV)

Treasury Regulation Section 1.1001-1(a) Computation of gain or loss

• General rule. Except as otherwise provided in subtitle A of the Code, the gain or loss realized from the conversion of property into cash, or from the exchange of property for other property differing materially either in kind or in extent, is treated as income or as loss sustained. The amount realized from a sale or other disposition of property is the sum of any money received plus the fair market value of any property (other than money) received. The fair market value of property is a question of fact, but only in rare and extraordinary cases will property be considered to have no fair market value. The general method of computing such gain or loss is prescribed by section 1001 (a) through (d) which contemplates that from the amount realized upon the sale or exchange there shall be withdrawn a sum sufficient to restore the adjusted basis prescribed by section 1011 and the regulations thereunder (i.e., the cost or other basis adjusted for receipts, expenditures, losses, allowances, and other items chargeable against and applicable to such cost or other basis). The amount which remains after the adjusted basis has been restored to the taxpayer constitutes the realized gain. If the amount realized upon the sale or exchange is insufficient to restore to the taxpayer the adjusted basis of the property, a loss is sustained to the extent of the difference between such adjusted basis and the amount realized. The basis may be different depending upon whether gain or loss is being computed. For example, see section 1015(a) and the regulations thereunder. Section 1001(e) and paragraph (f) of this section prescribe the method of computing gain or loss upon the sale or other disposition of a term interest in property the adjusted basis (or a portion) of which is determined pursuant, or by reference, to section 1014 (relating to the basis of property acquired from a decedent) or section 1015 (relating to the basis of property acquired by gift or by a transfer in trust).

Treasury Regulation Section 1.1011-1 Adjusted basis.

The adjusted basis for determining the gain or loss from the sale or other disposition of property is the cost or other basis prescribed in section 1012 or other applicable provisions of subtitle A of the code, adjusted to the extent provided in sections 1016, 1017, and 1018 or as otherwise specifically provided for under applicable provisions of internal revenue laws.

Treasury Regulation Section 1.1014-1 Basis of property acquired from a decedent.

• General rule. ….The purpose of section 1014 is, in general, to provide a basis for property acquired from a decedent that is equal to the value placed upon such property for purposes of the federal estate tax. Accordingly, the general rule is that the basis of property acquired from a decedent is the fair market value of such property at the date of the decedent's death….

Treasury Regulation Section 1.1015-1 Basis of property acquired by gift after December 31, 1920.

• (a) General rule. ….In the case of property acquired by gift after December 31, 1920 (whether by a transfer in trust or otherwise), the basis of the property for the purpose of determining gain is the same as it would be in the hands of the donor or the last preceding owner by whom it was not acquired by gift….

Start Your Exchange on the Right Foot

Start your 1031 exchange off on the right foot by contacting a qualified intermediary at CPEC1031, LLC. With more than two decades of experience at our backs, we are well equipped to handle the specifics of your next 1031 exchange. We can draft up the necessary paperwork, answer your questions, and guide you through the process from start to finish. Defer your capital gains taxes on the sale of qualifying real estate today by contacting a member of the CPEC1031, LLC team.

• 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

What to Know About 1031 Exchanges Involving Disregarded Entities

Many people want to complete their 1031 exchanges by purchasing property in a disregarded entity or entities. In a 1031 exchange the “same taxpayer” needs to complete the purchase of the replacement property, but that taxpayer can do that by acquiring the property through a disregarded entity.

What is a Disregarded Entity?

A Disregarded Entity (DRE) is a business entity that the IRS does not consider separate from its owner for federal income tax purposes. This means that the income, deductions, and credits of the DRE are reported on the owner's personal tax return. 

What about the Community Property Exception?

In community property states, a business entity that is wholly owned by both spouses can also be treated as a disregarded entity. Key points include:

• The entity must be considered community property under applicable state laws.

• The entity must not elect to be treated as a corporation for tax purposes.

• This generally applies only if the spouses file a joint tax return and reside in a community property state.

State Law Considerations

While a disregarded entity does not exist separately from its owner for federal tax purposes, it is still recognized as a legal entity under state law. This means:

• The entity maintains limited liability protection, meaning its owners typically aren’t personally liable for the entity’s debts and obligations.

• A disregarded entity may have separate legal standing, which can provide business liability protections.

In summary, disregarded entities offer a simplified tax reporting structure for single-owner businesses while still providing some legal protections under state law. Taxpayers looking to complete exchanges may want to use disregarded entities to protect themselves or to compartmentalize liabilities.

The Many Benefits of Like-Kind Exchanges Under Section 1031

Section 1031 of the Internal Revenue Code offers numerous benefits that many taxpayers are unaware of. The most important benefit is that of tax deferral. 1031 exchanges are also known as “tax-deferred” exchanges because they allow you to defer your capital gains tax burden on the sale of qualifying like-kind property. However, in order to reap the benefits of tax deferral, you need to make sure you meet certain requirements. A qualified intermediary can help advise you on your best options and make sure you are aware of all the requirements of section 1031. Contact CPEC1031 today for more information.

• 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

California Post 1031 Reporting Requirements: FTB Form 3840

When Should You File California FTB Form 3840?

California FTB Form 3840 must be filed in the year the like-kind exchange takes place, and for each subsequent year during which the gain or loss remains deferred. It is important to note that you are not required to file Form 3840 to report properties acquired in a Section 1031 exchange if they are located in California.

For detailed instructions, you can refer to the FTB Form 3840 instructions

Form 3840 is necessary for the taxable year in which the exchange occurs, and it should be filed for each following taxable year until the deferred gain or loss is recognized on a California tax return. For further details, consult R&TC Sections 18032 and 24953.

Failure to file California FTB Form 3840 as mandated may result in the FTB estimating your net income and levying taxes along with any applicable penalties and interest. For more information on this matter, visit FTB Miscellaneous Information

1031 Exchanges Made Easy

At CPEC1031, LLC we do everything we can to make your 1031 exchange as easy as possible. Our intermediaries are standing by and ready to help you through all the unique details of your like-kind exchange. With over two decades of experience facilitating exchanges via section 1031 of the Internal Revenue Code, we have the skills and experience needed to make your exchange a reality. Contact us today at our Minneapolis offices to learn more about our services and see how we can help with your next tax-deferred 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.

© 2024 Copyright Jeffrey R. Peterson All Rights Reserved