Video – The 1031 Exchange 45-Day Identification Period Rules and Exceptions

In a 1031 exchange, can you change your identification of replacement property after the passing of the 45th day of the identification period? The general answer is no. You compute the day of closing on your relinquished property as day zero and count 45 days thereafter – that’s your identification period. By midnight of the 45th day you need to have made your identification of replacement property.

The only exception to that general rule is if you’re impacted by a federally declared disaster, in which case you may be eligible for an extension under Rev. Proc. 2018-58. You need to work with your tax advisor to determine if you are actually eligible for this special exemption because generally the IRS has created these guidelines to limit the number of people completing 1031 exchanges.

Find A Qualified Intermediary For Your Next Like-Kind Exchange

If you are searching for a qualified intermediary to help with your next like-mind exchange, look no further! The intermediaries at CPEC1031, LLC have more than twenty years of experience in the 1031 exchange industry. We can help you through every aspect of the 1031 exchange process, from document preparation, to replacement property selection, to closing and reporting. Reach out to us today to learn more about the 1031 exchange services we provide and see how we can help you through the ins and outs of your next 1031 exchange of investment 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

DST Interest & Property Identification in a 1031 Exchange

DSTs are popular options in 1031 exchanges of real estate, but many people have questions about how to deal with property identification rules when it comes to DSTs.

DST Interest & Property Identification

There’s some uncertainty as to whether a DST interest constitutes a single property or if each property owned by the trust must be counted separately.

To clear up this potential confusion, we typically suggest that you look at how many properties are owned by all of the DSTs you plan to purchase. If the total number of properties you intend to purchase is more than three, we typically suggest that you make your property identification using the 200% rule just to be on the safe side.

Reduce Your Capital Gains Tax Burden with a 1031 Exchange

A 1031 exchange allows you to reduce your capital gains tax burden when selling like-kind real estate held for investment or business purposes. When set up properly, a 1031 exchange can save you a lot of money by deferring your capital gains taxes on the sale of your qualifying real property. Contact a qualified intermediary at CPEC1031, LLC today to learn more about the like-kind exchange process and see if your property is a good fit for 1031 exchange treatment.

• 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

Recaptured Depreciation: What Every Real Estate Investor Needs to Know

When it comes to real estate investment, tax deferral strategies like the 1031 exchange often take center stage. But there’s another concept investors need to understand to truly see the big picture: recapture of depreciation.

It sounds technical but the reality is simple: the IRS lets you take deductions during ownership, but they expect their share when you sell. Understanding how depreciation and recapture work can make the difference between a well-planned strategy and an unwelcome tax surprise.

What Is Depreciation?

Depreciation allows property owners to deduct the theoretical wear and tear of their investment property over time (IRS Code §167). These deductions reduce taxable income during ownership and provide meaningful cash flow benefits.

For example, residential rental property is depreciated over 27.5 years, and commercial property is depreciated over 39 years (IRS Code §168). Every year, investors may write off a portion of their property improvement’s value. This is a tax benefit that adds up quickly.

The Catch: Recaptured Depreciation

When you sell the property, the IRS doesn’t forget about those past deductions. They “recapture” the depreciation by taxing the portion of your gain that is tied to the depreciation you previously claimed.

• For most real estate, the rate for recaptured depreciation is generally taxed at a maximum of 25% (IRS Code §1250). If you took advantage of accelerated depreciation (such as, from a cost segregation study under IRS Code §1245), you may be subject to even higher rates of taxation.

• Sometimes there are structural components that are designated as property with a shorter depreciation schedule. If property with an accelerated depreciation recapture attribute is sold in a 1031 Exchange, the depreciation recapture must be recognized to the extent that the new replacement property doesn’t have enough components eligible for rapid depreciation (e.g., insufficient IRS Code §1245 property.)

• Tax rates are higher for recapture of depreciation. This means that even if you benefited from lower ordinary income tax rates while owning the property, you may owe at a higher rate when you sell.

Without planning, investors can be surprised by how much of their profit goes to the IRS through recapture.

Where 1031 Exchanges Come In

A 1031 exchange is a tax deferral tool. This type of exchange (IRC §1031) can defer capital gains taxes and the recapture of depreciation. When you roll proceeds into another like-kind property or properties, both types of tax liability may be pushed into the future.

That deferral can be a powerful wealth-building tool. But it is important to remember that liability does not disappear - it is deferred. When you eventually sell without exchanging, the IRS will expect both capital gains and depreciation recapture.

Why This Matters for Investors

Understanding recaptured depreciation is not about getting lost in the weeds of the tax code. It is about being prepared:

• Plan for the Exit: Whether you exchange or sell outright, know what tax consequences to expect.

• Run the Numbers: Work with your CPA or tax advisor to model the impact of depreciation recapture in your strategy.

• Use Exchanges Wisely: A 1031 exchange can give you more time and flexibility, but it is not a permanent escape hatch.

The Bigger Picture

Real estate investment is about more than buying low and selling high. The tax rules that apply along the way can dramatically shape your returns. Recaptured depreciation is one of those rules every investor needs to respect.

Handled wisely, it is simply part of the cycle of investing. Handled poorly, it can erode your hard-earned equity.

The key is clarity: know how depreciation works, plan for its recapture, and use tools like the 1031 exchange (IRC §1031) to align your tax outcomes with your long-term investment goals.

• 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

Qualified Intermediary Due Diligence: Protecting Your 1031 Exchange Strategy

In real estate investing, the 1031 exchange is a powerful tool. But as with any strategy that involves significant assets and IRS rules, the details matter. One of the most important details in a 1031 exchange is choosing the right Qualified Intermediary (QI).

A QI is an administrator of 1031 exchanges. They are entrusted to hold exchange funds and correctly prepare essential documentation. Yet unlike banks, trust companies, or registered investment advisors, QIs are largely unregulated. That makes due diligence not just smart, but essential.

Why Qualified Intermediary Due Diligence Matters

Without a qualified, trustworthy intermediary, investors run the risk of:

• Loss of Funds: In extreme cases, fraud or mismanagement has led to investors losing millions in 1031 exchange proceeds.

• Disqualified Exchanges: Errors in documentation or timing can invalidate the 1031 exchange, triggering a large and unexpected tax bill.

• Disruptions or Delays: Operational inefficiencies may cause frustration and even missed deadlines, which may put the exchange in jeopardy.

When you hand over your proceeds from a sale, you are not just trusting the QI with your money, you are trusting them with your tax deferral strategy and long-term financial goals.

Key Areas to Evaluate in a 1031 Exchange Qualified Intermediary

Not all QIs are created equally. Here are the core areas investors should consider when vetting an intermediary:

1. Financial Safeguards. Ask how client funds are held. Are they kept in separate, segregated accounts, or commingled with other clients’ money? Are they FDIC insured? The more transparent and secure the structure, the better protected you are.

2. Compliance and Documentation. A good QI will provide clear, accurate exchange agreements and ensure that all IRS timelines are tracked and met. Sloppy paperwork is a red flag.

3. Experience and Track Record. Look for a QI with decades of experience. Ensure the QI is well-versed in handling exchanges of different sizes and complexities. Ask about their experience: How many exchanges do they handle annually? How long have they been in business?

4. Operational Integrity. What controls are in place to ensure your transaction will run smoothly? Does the QI work with legal and tax advisors when needed? Is your QI also a tax attorney?

5. Transparency and Communication. 1031 exchanges involve tight deadlines and multiple parties. A reliable QI will be responsive, accessible, and clear in their communication.

Questions to Ask Before Choosing a QI for Your 1031 Exchange

When conducting due diligence, consider asking questions that go beyond the basic understanding of IRS rules:

• How are 1031 exchange funds held and protected?

• What insurance or bonding do you carry?

• Can they provide references or case examples?

• What internal controls prevent errors or fraud?

The goal is to confirm that you are working with a professional who values transparency and accountability as much as you do.

The Bigger Picture: Trust, but Verify

A 1031 exchange can fuel long-term wealth building without the drag of unnecessary taxation. But the wrong QI can turn that opportunity into a costly mistake. By taking the time to vet your QI with the same rigor you apply to your investments, you are protecting not just your money, but your future.

Due diligence is not about distrust; it’s about building a foundation strong enough to leave no room for mistrust.

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

Can You Use a 1031 Exchange for Profits from Real Estate Development?

At first glance, a 1031 exchange might seem like a smart way to reinvest proceeds from the sale of developed real property, especially if you are planning to roll those profits into your next project. But the IRS draws a line between real estate being held for investment or business purposes and real estate held primarily for sale.

A Real-World Scenario

A developer recently posed this thoughtful question:

“We developed a 20-unit condominium complex. Twelve units have been sold, and the proceeds paid down our construction loan. We have since paid off the balance and have some net proceeds. The last eight units will soon sell. Can we roll all (or some) of the proceeds from these final sales into a new parcel of land for development using a 1031 exchange?”

This is a great question and the answer is: it depends on the specific facts and circumstances.

Why All Real Estate Doesn’t Qualify for 1031 Exchange

When real estate held for investment or productive use in a trade or business is exchanged for like-kind property, Section 1031 of the Internal Revenue Code allows for the deferral of capital gains tax.

However, property held primarily for sale, such as property developed with the intent to sell to customers, is excluded from 1031 treatment.

This is spelled out in IRC §1031(a)(2):

“This subsection shall not apply to any exchange of real property held primarily for sale.”

In short: if your property is considered “inventory” in the eyes of the IRS, rather than held for investment, 1031 tax deferral is not an option.

How the IRS Determines “Held for Sale”

Courts look at a variety of factors to make this call, including:

1. Why you acquired the property

2. How long you held it

3. What improvements you made

4. The number, frequency, and permanency of sales

5. The scale and substance of your transactions

6. The nature of your business

7. Whether you marketed the property

8. Whether you used brokers or listing services

(Cited cases include Mathews v. Commissioner, 315 F.2d 101 (6th Cir. 1963) and Gardner v. Commissioner, T.C. Memo. 2011-137.)

If your activity looks more like a development business rather than long-term investment holding, the IRS may view the property as held for sale even if you only develop occasionally.

Development Projects and the “Dealer” Trap

In our condo example, the developer created a project with the intent to sell individual units. That’s a red flag for the IRS. Paying off a construction loan, profiting from individual unit sales, and rolling the gains into new land for further development mirrors the activities of a property dealer, not a long-term investor.

While it’s possible that some portion of the project might qualify, it’s a gray area that could lead to an audit or challenge. This is why consulting a qualified tax advisor early in the process is essential.

See if Your Property Qualifies for 1031 Exchange

1031 exchanges are powerful tools, but not all real estate deals qualify. If you are a developer or builder looking to defer taxes on your next project, it is important to understand the IRS rules and how your specific facts stack up.

When in doubt, get professional advice. Every situation is unique, and your tax advisor can help you evaluate your eligibility and avoid costly surprises.

• 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