How to Avoid Common Missteps During the 1031 Exchange Process

The 1031 exchange process can be complex, and less experienced taxpayers can easily mess things up if they aren’t working with a professional. In this article, we are going to discuss how to avoid some of the most common missteps during the 1031 exchange process.

Make Sure Your Property Qualifies

Before you do anything, it’s important to determine if your property even qualifies for 1031 exchange treatment. First off, your property needs to be real estate that’s used primarily for investment or business purposes. No personal property or real estate used primarily for personal use allowed.

Hit Your Deadlines

Section 1031 outlines very strict deadlines for any taxpayer conducting a like-kind exchange. You need to complete your exchange within 180 days, and you have the first 45 of those days to identify your replacement property.

Don’t Wait Until the Last Minute

When you don’t give yourself (or your intermediary) enough time, mistakes are more likely to occur. Contact your qualified intermediary well before you want to sell your relinquished property, and keep in constant communication with them throughout the identification process. That way you will be fully prepared for the closing table.

Qualified Intermediaries in Minnesota

Of course, the best way to avoid all of these missteps is to work with a skilled intermediary throughout your exchange. CPEC1031 employs qualified intermediaries in the state of Minnesota who can help you facilitate your next 1031 exchange transaction. Like-kind exchanges should be considered by anyone looking to sell a piece of investment real estate because they allow you to defer your capital gains taxes on the sale. This can help you avoid a huge tax bill. Contact our 1031 exchange professionals today to learn more about the 1031 exchange process and how we can help you through the steps of your 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.

© 2019 Copyright Jeffrey R. Peterson All Rights Reserved

What is the Last Step in the 1031 Exchange Process?

We’ve talked a lot about the 1031 exchange process as well as the first step you need to take to begin your exchange. But what about the end of your exchange? In this article, we are going to talk about the last step in the 1031 exchange process.

Closing on the Replacement Property

The big final step in a 1031 exchange is the closing on the replacement property. During this process, you will move your net proceeds from the relinquished property into your new replacement property and defer your capital gains taxes in the process. After the closing is complete, don’t forget that you will need to report your exchange on your tax filing.

Beyond Your Exchange

Once your exchange is complete and you’ve successfully deferred your capital gains taxes, you can rest easy in the knowledge that you sold your property in the most tax-advantageous method possible. But don’t forget that 1031 exchanges allow you to defer your tax – which means you will still need to pay capital gains taxes if and when you sell your replacement property in the future. However, you can also opt to exchange that property and continue your tax saving if you so choose.

Finish Your 1031 Exchange

Finish your 1031 exchange and defer your capital gains taxes when selling real estate. The qualified intermediaries at CPEC1031 can help! Our intermediaries have two decades of experience facilitating exchanges throughout the United States. We have the knowledge and experience needed to ensure your exchange goes as smoothly as possible. Contact our 1031 exchange professionals today to 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.

© 2018 Copyright Jeffrey R. Peterson All Rights Reserved

The 1031 Exchange Process Part 2: Identification & Replacement Property

Recently, we began a conversation about the 1031 exchange process. In this article, we are going to continue our discussion of the 1031 exchange process - from replacement property identification to completion.

Identification & Exchange Period Commence

You are now in the 45-day identification and 180-day exchange periods.  These time frames run concurrently.   Note that the 180-day period can be shortened to your deadline for the filing of your federal tax return, for the year in which the sale occurred.

Identify the Replacement Property

Before the end of the 45-day identification period, you must fax or send us a detailed list of the Replacement Property you intend to acquire. We prefer that you use the form we supplied you in our initial timeframe letter.  You must sign the identification form and clearly and unambiguously describe the Replacement Property.  We recommend that your letter be postmarked and sent by US Mail to prove that you sent us the identification during the 45-day period. If you plan on faxing in your identification, please fax to CPEC at (612) 395-5475.

Purchase/Sale Agreement for the Replacement Property

Enter into a purchase/sale agreement(s) and add a cooperation clause as you did in the first transaction. Please fax the replacement property purchase/sale agreement to CPEC at (612) 395-5475.

Select a Closing Company

Arrange for a title company or attorney to close your transaction.  Make sure you tell the closing agent that this transaction is going to be a 1031 exchange and that CPEC is serving as your Qualified Intermediary. Once you have your closing title company selected, please notify CPEC of your pending closing.

Replacement Property Closing

CPEC will contact the closing agent and obtain any additional information needed to set up the replacement closing for you.  We will prepare the 1031 replacement documents and send two sets of these documents directly to the closing agent. At closing, you will sign the replacement property exchange documents along with your other closing documents.  The closing agent should give you one set of the documents for you to keep for your tax records and send one set to CPEC, together with a copy of the closing statement and deed transferring title to you.

End of Exchange

When you have closed on the last identified property, or at the end of the 180-day exchange period, your exchange ends.  CPEC will return any unused proceeds to you.  In order to defer all gains, you should reinvest all of your proceeds in like-kind replacement property of equal or greater value and equity. Talk with your accountant or tax advisor to make sure this requirement is correctly satisfied.

Report The Exchange on Your Tax Return

 When you file your tax return for the year in which the relinquished property was transferred, you will need to attach IRS Form 8824 to report your exchange to the IRS.

• Start Your 1031 Exchange: If you have questions about the 1031 Exchange Process, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2018 Copyright Jeffrey R. Peterson All Rights Reserved

Tips for Doing a 1031 Exchange with a Significant Other

When a taxpayer is doing a 1031 exchange, they may want to buy their new replacement property together with another person. Maybe they want to buy the replacement property with their significant other or partner, for example.

The Problem with Proceeds

The problem with this generous idea is that in order for the exchange to be respected, all of the proceeds from the relinquished property need to be earmarked and used exclusively for that taxpayer’s exchange.

If the proceeds from the relinquished property are utilized to buy someone else's interest in the replacement property, the IRS will say:

"These funds were earmarked to buy the taxpayer’s interest in the replacement property but instead were used by someone else who is not the exchangor’s interest in the property. We don't see that as being a continuation of investment by the taxpayer.”

So you may inadvertently cause the recognition of gain as to any proceeds that were sidetracked and used to basically ante up someone else's interest in the replacement property.

The Best Course of Action

The better course of action is to have the taxpayer that relinquished the property use their proceeds solely for their purchase of the replacement property. If someone else is coming in as a cold purchasor they should bring in their proportionate share of the down payment and contribute their cash out of their pocket so that they have a place at the table that they pay for out of their own funds.

• Start Your Exchange: If you have questions about 1031 exchange funds, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved

What's the First Step in the 1031 Exchange Process?

Many taxpayers who are interested in a like-kind exchange don't know how to get the process rolling. In this article, we outline the first steps you need to take to get your 1031 exchange started.

Consulting Your Qualified Intermediary

Talking to your qualified intermediary, exchanging information, and letting the qualified intermediary know about your situation is the first critical step in any 1031 exchange.

Here are some questions your qualified intermediary might ask during your initial conversation:

• How do you own the relinquished property?

• Is it vested in your own name, in a trust, or a in business entity?

• Do you have a spouse in title with you?

• What's the value of your relinquished property?

• How much debt do you have encumbering the property?

• What do you expect is your net amount of proceeds or walking away money going to be?

• What is your basis? How much do you have into this relinquished property?

• When is your transaction closing? Is the closing eminent or is it a long ways out?

There are so many questions and unique circumstances to discuss with your qualified intermediary at this first initial call that you want to get started early.

Replacement Property

Another very important discussion point is what you want to buy for your replacement property. Do you want to have a management free, relatively low-risk investment? Or are you looking to accelerate your depreciation by leveraging up and buying a much more expensive perhaps more management intensive property?

Early discussions with your professional advisers and qualified intermediary are critical to setting the stage for a successful 1031. The first step is to pick up the phone and start the process with your qualified intermediary.

• Start Your Exchange: If you have questions about the first steps in the exchange process, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved