Can You do a 1031 Exchange of Foreclosed Property?

If you are facing foreclosure on a property you own, you may be able to exchange the property and defer the capital gains taxes under section 1031 of the Internal Revenue Code. In this article, we are going to discuss whether or not you can complete a 1031 exchange of foreclosed property.

What is Your Gain on the Sale?

When facing foreclosure, it’s important to determine your gain on the sale. Remember, your gain on the sale is not the amount of cash proceeds that you may (or may not) receive. Rather, the gain is determined by calculating the difference between your adjusted basis in the property and the debt relief you will experience upon giving the property back to the lender. If your debt in the property is far above your basis, you may actually have a taxable gain on the property if you give it back to the lender.

1031 Exchange

If you find yourself in this situation, it may be better to conduct a 1031 exchange on your property in order to defer your capital gains taxes. The difficult part is that you will likely need to come up with a good amount of cash for a down payment on a replacement property. In any case, a qualified intermediary can help you determine what the best option is for you.

Like-Kind Exchange Intermediaries

At CPEC1031, we provide like-kind exchange intermediary services to clients throughout the state of Minnesota and around the United States. Our qualified intermediaries have over twenty years of experience facilitating all types of exchanges under section 1031 of the Internal Revenue Code. We bring that level of experience to the closing table with each transaction we facilitate so you can rest assured that your exchange is in good hands. Reach out to our qualified intermediaries today at our downtown Minneapolis office to chat about 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

Does an Assignment of a Sheriff’s Certificate Qualify for 1031?

Is an assignment of a sheriff’s certificate after a foreclosure an interest in real property that you can 1031 exchange into? That’s our topic for this article.

Foreclosures in Minnesota

When there is a foreclosure in Minnesota, the mortgagor often retains possession of the property and has an important right to redeem the mortgage and to basically pay off the lender. That redemption period can run for various different times. It may also be extended by other circumstances like the mortgagor filing bankruptcy.

So the question is if you buy the lender’s rights (i.e. the sheriff’s certificate of sale) have you bought an interest in real estate or is it more of a nebulous potential interest in real estate?

What Does Not Qualify

Under section 1031 what does not qualify is an interest in a note or other evidence of indebtedness. So a sheriff’s certificate that has not ripened is perhaps more akin to an interest in a note or evidence of indebtedness than it is an actual interest in real estate. This is because you don't have the right to possession, you can't depreciate the property, and it's not really your property until the mortgagor’s redemption rights have expired.

So an important thing to remember when you're trying to buy a deal, trying to get a good price on a foreclosed property is to look at what interest it is that you're purchasing and whether you have received an interest that qualifies for 1031. A mere sheriff’s certificate may not be sufficient unless the redemption period ripens and you actually are requiring a possessory interest in the property.

• Start Your Exchange: If you have questions about sheriff’s certificates in a 1031 exchange, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved

Home Foreclosures and 1031 Exchanges

If you're about to be foreclosed on a property and you’re going to lose it involuntarily, one opportunity that you may not have even thought of is to do a 1031 exchange (or debt exchange).

Gain on the Sale

Your gain on the sale is computed by the difference between your adjusted basis in the property and the amount of debt relief that you're going to experience when you give back that property to the lender; NOT the amount of cash that you may or may not receive.

So if your basis is far below the debt, you may have MOB “mortgage over basis,” and that will result in taxable gain to you if you just give back the property to the lender. So even though you don't have any net sales proceeds of cash coming to you, you may still want to structure it as a 1031 exchange so you can defer the gain on the difference between your basis and a debt relief.

How do you do that? You get your qualified intermediary to prepare all the documents that would normally be executed in a 1031 exchange. You give notice to the lender (the buyer), and then you go forward and acquire a new replacement property within the deadlines.  

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

Defer the tax. Maximize your gain.

© 2016 Copyright Jeffrey R. Peterson All Rights Reserved