If Your 1031 Exchange Fails, How Soon Can You Get Your Funds Back?

Sometimes, 1031 exchanges fail. This can happen for a number of reasons. Perhaps the taxpayer couldn’t find a suitable replacement property within their 1031 exchange time limits, or perhaps the taxpayer simply changed their mind before completing the process. In this article, we are going to talk about what happens when an exchange fails and how soon you can get your funds back.

Treasury Regulations

When you engage a qualified intermediary to help you with your 1031 exchange, the intermediary holds your money in a separate, segregated 1031 exchange escrow account so that you (the taxpayer) do not have constructive receipt of those funds. If, later on in the process, the taxpayer decides they do not wish to do a 1031 exchange any longer and wants their money back, this can cause some headaches.

Let’s talk a little bit about how the treasury regulations work. After you sell your relinquished property, you have 45 days to identify your replacement property. If you don’t make an identification, or if you revoke your identification, at midnight on the 45th day your exchange will fail. If you want to tank your 1031 exchange, the best way is to fail to identify or revoke identification of your replacement property. At that point, your qualified intermediary will return your funds to you on the next business day, typically by wire transfer.

A Difficult Scenario

The difficult situation comes when the taxpayer identifies several replacement properties. Let’s say the taxpayer closes on one of those properties but still has unused exchange funds in their account and the other two properties fall through. If this happens in the period between the 45th day and the 180th day of your exchange, you’re in a tough predicament because the intermediary can’t release your funds without jeopardizing your exchange. In that situation, your money may be tied up until after the 180th day.

Qualified Intermediaries at CPEC1031 LLC

At CPEC1031, LLC we facilitate like-kind exchanges of real estate in Minnesota and across the United States. Our qualified intermediaries have decades of experience helping taxpayers defer their capital gains taxes on investment real estate. Contact our team today to learn more about the full extent of our services and how we can help with your next 1031 exchange. You can find us at our primary offices 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.

© 2022 Copyright Jeffrey R. Peterson All Rights Reserved

Tips for Buying Replacement Property with Little or No Funds in Your 1031 Exchange Account

One common question that some taxpayers run into during the course of a 1031 exchange is: “how do you buy a replacement property when you have little or no funds in your 1031 account?” In this article, we are going to offer a few tips for buying replacement property when funds are low.

Down Payments & Offsetting Debt Relief

It may be necessary for you to come up with some cash so that you have a down payment to make on the replacement property.

Furthermore, you may be limited in what replacement properties you can buy because you're going to need to offset a lot of debt relief. That means you're going to have to acquire a more highly leveraged replacement property to offset all of the debt that you’re freed of when you give back the old relinquish property to the bank.

Fortunately, there are some syndicated replacement property options designed to fit the needs of a debt exchange. These products typically have higher leverage that hyper-amortize to accelerate the pay down of the loan and build-back equity (and stability) more quickly.

Section 1031 Exchanges of Real Property

Under IRC section 1031, any taxpayer in the US is able to defer capital gains taxes on the sale of real estate, provided they meet the requirements. At CPEC1031, our qualified intermediaries have decades of experience working with taxpayers on their exchanges. Contact us at our Minneapolis offices today to learn more about our services and get your 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.

© 2021 Copyright Jeffrey R. Peterson All Rights Reserved

Follow these Tips to Secure Your Funds During a 1031 Exchange

So you’ve decided to do a 1031 exchange. You're going to sell your relinquished property, and your proceeds are going to get wired out into the interwebs. Who knows where your money is going and who knows how safe and secure your exchange funds are?

There's been a couple of cases where 1031 intermediaries have goofed up.

In one case that came out of Minnesota, a taxpayer’s monies were used by the intermediary to invest in Internet stocks. The internet stocks bubbled and the intermediary didn't have the cash to pay back for the purchase of the replacement property.

In a much larger case called Land America Exchange – a huge national 1031 exchange company had invested the funds allegedly in securities that became illiquid and when it came time for people to complete their exchanges they weren't able to access their funds to acquire the replacement properties.

This Begs the Question: How can I Know if my Money is Safe?

The best way to make sure that your money is safe is to never ever allow your funds to be co-mingled with anyone else’s funds. When you set up a 1031 exchange you need to make sure that you have a separate segregated bank escrow account. You need to know what that account number is and you need to know that that account is only going to be used for your funds.  It's not co-mingled with the operating account of the intermediary, and it’s not commingled with any other money.

If you have your money separately segregated you know exactly where it is during the entire process - that's great.

But wouldn’t it be great if you could lock down that money in a dual-signature account? The first signature required to release any funds would be the intermediary’s because they’re the holder of the account. But the second co-authorization could be the taxpayers for whom we’re doing the exchange.

So we want to get a co-written authorization from the taxpayer to make sure that it’s proper and appropriate to transfer out these funds to make sure they're returning them to the taxpayer of the exchange or for the purchase of the replacement 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.

© 2021 Copyright Jeffrey R. Peterson All Rights Reserved

How Much Money do You Need to Re-Invest into Your 1031 Replacement Property?

In any 1031 exchange, the taxpayer conducting the exchange needs to re-invest their net proceeds from the sale of their relinquished property into their new replacement property. But how much money do you need to re-invest into the replacement property? This can cause a lot of confusion among taxpayers. In this article, we’ll discuss what exactly you need to re-invest into your replacement property during the course of a 1031 exchange.

Defer All of Your Taxes

If you want to defer 100% of your capital gains taxes in a 1031 exchange, you need to re-invest your proceeds into a property of equal or greater value than your relinquished property. By way of an example, if your relinquished property is sold for $600,000 (with $300,000 equity), you would need to re-invest in a replacement property that has a value of at least $600,000 (with $300,000 equity).

But what if you want to exchange into a replacement property that has a lower value than your relinquished property? In this instance, you would likely face some tax exposure during the exchange. You could also exchange into multiple properties to satisfy this requirement.

Learn How to Save Money on Capital Gains Taxes

CPEC1031, LLC is a full-service 1031 exchange company. We have twenty years of experience facilitating like-kind exchanges for clients under section 1031 of the Internal Revenue Code. Our intermediaries can prepare your 1031 exchange documents and walk you through each and every step of the process. Contact us today to learn more about our like-kind exchange services and how we can help you save money on your next real estate sale. Our main office is located in downtown Minneapolis, but we work with clients from all over the United States.

• 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.

© 2020 Copyright Jeffrey R. Peterson All Rights Reserved

Legal Fees to be Aware of in a 1031 Exchange

There are a number of fees you will need to pay in a 1031 exchange transaction – fees to your intermediary, fees to your CPA, and fees to your attorney, to name a few. It’s important to understand how to pay these fees without disrupting your exchange. This article is all about legal fees in a 1031 exchange – what to expect and how to pay them.

Customary Expenses

Most taxpayers conducting a 1031 exchange want to know if they can pay their legal fees using the sales proceeds from the exchange. This can get a little dicey. You are allowed to pay customary transactional expenses using the sales proceeds. This would include any legal fees that are directly associated with your 1031 exchange. But any indirectly related legal fees should be kept off of the closing statement. For example, if you had an attorney do some estate planning work done in relation to your exchange, this should not be paid with the sales proceeds.

When in Doubt, Pay Cash

If you are at all nervous about how to handle your legal fees in a 1031 exchange, it’s always a good idea to simply pay them in cash at the closing table. This completely avoids any potential issues. Your qualified intermediary will be able to guide you in the right direction with these issues.

CPEC1031

At CPEC1031, our team has been facilitating 1031 exchanges of real estate for more than twenty years. We bring those years of experience to the table for every single exchange. Using our expertise, we can help you identify appropriate replacement property, prepare your 1031 documents, and meet all the requirements of a successful 1031 exchange. Contact us today at our downtown Minneapolis office to learn more about the 1031 process, our services, and to see if you are a good candidate for an 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.

© 2020 Copyright Jeffrey R. Peterson All Rights Reserved