Tips for Making Sure Your 1031 Property is Like-Kind

If you know anything about 1031 exchanges, you’ve probably heard the term “like-kind.” In this article, we are going to share a few tips for making sure your 1031 exchange replacement and relinquished property is like-kind.

The Importance of Like-Kind

The like-kind rule is one of the most important regulations that govern the 1031 exchange of property. There’s a reason 1031 exchanges are often called like-kind exchanges. Basically, section 1031 states that your relinquished property and your replacement property both need to be like-kind in order to qualify for a 1031 exchange.

Consult with a Qualified Intermediary

If you are at all confused about what does and does not constitute like-kind property, contact a qualified intermediary who specializes in like-kind exchanges. Among other things, a qualified intermediary can answer all of your questions regarding like-kind property, and even advise you on what types of property to identify in your exchange.

Minneapolis 1031 Exchange

Jeff Peterson has been facilitating 1031 exchanges of real property for decades. A 1031 exchange may help you defer capital gains taxes on the sale of your property. Contact CPEC1031 today to learn more about the 1031 exchange process and how you can benefit!

• Start Your Exchange: If you have questions about like-kind property 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

If I Already Signed a Contract to Sell the Relinquished Property, Can I Still Do a 1031 Exchange?

Timing is important in any 1031 exchange of real estate. With any exchange, you have 180 days to complete your exchange after you sell your relinquished property. But can you still do a 1031 exchange if you have already signed a contract to sell your relinquished property? That’s our topic for this article.

Setting up a 1031 Exchange at the Last Minute

The answer to the question at hand depends on the timing of your transaction. If you have already closed on the sale of your relinquished property, it is too late to set up a 1031 exchange – even if you have not yet cashed the proceeds check.

However, if you have not yet transferred the benefits and burdens of your property, it is not too late to set up a 1031 exchange. You can still call a 1031 exchange qualified intermediary, and have them set up the exchange prior to closing so you can realize the tax-deferral benefits of a like-kind exchange.

Minnesota Real Estate Exchanges

If you are interested in doing a 1031 exchange but you’ve already signed a contract to sell your property, don’t hesitate to contact a 1031 exchange company as soon as possible. As long as you haven’t closed yet, there is still time to put together the required documents for a 1031 exchange. The qualified intermediaries at CPEC1031 have been helping people with their real estate exchanges for decades. Contact us today at our downtown Minneapolis office to set up your exchange.

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

Defer the tax. Maximize your gain.

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved

Four Important Rules to Remember in a 1031 Exchange

1031 exchanges are excellent tools for deferring capital gains taxes on the sale of real property, but they come with a variety of rules and regulations. In this article, we are going to talk about four of the most important rules to remember when conducting a 1031 exchange of real property.

Rule 1 – Exchange Out of & Into Like-Kind Property

The like-kind property rule is perhaps the most important rule in any 1031 exchange. But what is “like-kind” property? When you’re dealing with real estate, like-kind has a very broad definition that includes basically all real estate (provided it’s held for the right purpose – more on that below).

Rule 2 – Hold Your Property for the Requisite Intent

Having the right intent or mindset is also important in a 1031 exchange. All of the property involved in the exchange needs to be held primarily for investment or business purposes, and not personal use. So your primary residence would be excluded from 1031 exchange treatment because of this rule.

Rule 3 – Finish Your Exchange within 180 Days

All 1031 exchanges (whether of personal property or real estate) need to be completed within 180 days after the sale of the relinquished property. The first 45 days of that time period are set aside for identification of the replacement properties into which you plan to exchange.

To figure out your 1031 deadlines, use our helpful calculator.

Rule 4 – Exchange Into Property of Equal or Greater Equity, Value, Debt

You also want to make sure that your replacement property is of equal or greater equity, value, and debt when compared to your relinquished property. This is also known as the “napkin test.”

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

Defer the tax. Maximize your gain.

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved

Can a Principal Residence be 1031 Exchanged?

Can a principal residence be exchanged in order to qualify for Section 1031? We answer that question and more in this article.

Investment or Business Purposes

In a 1031 exchange, the property must have been held for investment or business purposes. Most principal residences are not held for investment or business purposes. They’re held for the antithetical or completely opposite purpose of being your residence. It’s your home and generally speaking you can't do a 1031 on your home. That's usually not a big deal because under IRC section 121 the principal residence exclusion you get to take up to $500,000 of that profit tax return married filing a joint tax return, or $250,000 for single filing.

A Farm Example

But what do you do with a property such as a farm where you got the little farm house situated on 900 acres of tillable ground?

You’ve got one closing for the principal residence on which you take the exclusion under section 121 for the home and then for the rest of the farm (the tillable acreage) it's used for investment or business purposes on that portion of the sale you do a 1031 exchange to get the best result for both situations.

This situation also arises with part-owner occupied duplexes where you can use both section 121 for principal residence exclusion on the home portion and section 1031 on the rental portion.  We once had a 1031 exchange involving a funeral parlor business with the owner’s personal residence on the second floor of the building.

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

Defer the tax. Maximize your gain.

© 2016 Copyright Jeffrey R. Peterson All Rights Reserved

What is a 1033 Exchange?

There are two cousins in the Internal Revenue Code. There’s Section 1031 for voluntary sales, and section 1033 for involuntary sales (i.e. condemnations, requisitions, seizure or losses that may occur through theft, destruction or an act of god).

1033 Involuntary Sales

1033 is the provision for the involuntary sale or loss and it’s actually more favorable to the taxpayer than 1031. In 1033 you don’t need to hire a qualified intermediary. You can hold onto your own proceeds. And you’re not limited to 180 days to complete your exchange – you have 2 years (in certain circumstances that can even be extended to a 3 year period).

Like-Kind & 1033

The like-kind requirement in 1031 is a little more flexible and loose than that for 1033. Generally under 1033 the replacement property must be “similar or related in service or use,” which is a more stringent standard than under 1031. There’s a case where under section 1033 a taxpayer disposed of a bowling alley and replaced it with a billiards parlor.* The IRS said that was not like-kind enough and the exchange failed. So 1033 is perhaps more complex when it comes to the like-kind standard.

Try 1033 First

I would always try to exhaust the 1033 option first because of the longer time frame and the fact that you don’t need a QI. You do however need to file for the election on your tax return to take advantage of the 1033.

Here’s the deal though – 1033 exchanges are rare occurrences. You have to be subject to a threat of condemnation or have suffered an involuntary loss. And many municipalities are gun-shy of litigation and would rather work out a voluntary sale, rather than bring out the big guns and take a condemnation action. I would say that 99% of exchanges are 1031s because voluntary sales are much more frequent than involuntary sales.

• Start Your 1031 Exchangee: If you have questions about 1033 exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2016 Copyright Jeffrey R. Peterson All Rights Reserved

*In Rev. Rul. 76-319, 1976-2 C.B. 242, the owner of a recreational bowling center that was destroyed by fire, attempted to replace the property with a recreational billiard center. It was determined that bowling alleys and bowling equipment were insufficiently similar to billiard tables and billiard equipment for the billiard center to qualify as property similar or related in use to the converted bowling center. Similarly in Rev. Rul. 76-390, 1976-2 C.B. 243, it was determined that the physical characteristics and end uses of a motel were insufficiently similar to those of a mobile home park for the motel to qualify as property similar or related in service or use.