Keeping Things Separate in a Like-Kind Exchange Transaction

If you want to sell an industrial building and exchange it for an apartment building in a 1031 transaction, can you reside in one of the units of your replacement property apartment building?

This is a bit of a gray area. Theoretically, you can mix the use of the 1031 exchange replacement property. However, in general it’s not a good idea to get cute with the IRS by “crossing the streams” like this. It’s much safer (from a 1031 exchange perspective) to keep your 1031 exchange separate from your personal residence.

Let’s say a taxpayer wants to buy a farm with 78 tillable acres and a farmhouse that they want to live in. You can use 1031 monies and non-1031 monies to buy the whole thing, but it would be better and cleaner if you could break these into two separate transactions: a 1031 exchange for the tillable acres, and a separate straight forward purchase of the farmhouse. That keeps all the monies separate and distinct and leaves no room for confusion when it comes time to report it to the IRS. 

Set Up Your 1031 Exchange for Success

Set your 1031 exchange up for success by contacting a 1031 exchange intermediary to discuss the details of your next exchange. CPEC1031, LLC has been working on 1031 exchanges of all types for more than two decades. Our team is on hand to assist you through every stage of your 1031 exchange transaction. Reach out today to set up a time to chat about your upcoming 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

Determining Value in a 1031 Exchange

Let’s say you have a property with a five-year lease that contains a right of first refusal to buy it. Within that lease it says on day one you can buy the property for $2 million but by the time you sell the property it’s worth $2.5 million. What establishes value for 1031 exchange purposes? Is it the amount that the taxpayer paid for the property or the higher, future valuation?

We did a deal in which the taxpayer bought their replacement property in downtown Minneapolis and they needed to buy a more expensive property. So as part of the transaction, we held it in a parking arrangement while doing a construction exchange and ultimately attached that building to the skyway system. The costs to construct the skybridge were not much but then the client hired an appraiser to establish a value that was even higher than what they paid out for the actual cost for constructing improvements.

The IRS would likely prefer to have the lower number used (the amount that was actually paid for improvements) but a judge might side with the higher value since it truly did enhance the value of the property after making this exchange.

1031 Exchange Professionals

If you have questions about determining value in your 1031 exchange, don’t hesitate to reach out to a 1031 exchange professional at CPEC1031, LLC. Our qualified intermediaries have more than twenty years of experience facilitating like-kind exchanges of real estate. We know the 1031 exchange process inside and out and can help you make the most informed decisions possible.

• 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

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