Giving Written Notice in Your Purchase Agreement

In a 1031 exchange, typically the purchase agreements for the sale of the relinquished property or the purchase of the new replacement property are assigned to the intermediary by the taxpayer that's doing the exchange.

Old English Common Law

Under the Old English common law, an assignment was not considered effective until all of the parties to the contract were given written notice of the assignment. The IRS has adopted this Old English concept and in the context of a 1031 exchange when the seller of a relinquished property assigns their rights in the relinquished property purchase agreement to their intermediary, that necessitates the seller giving notice to the buyer of the relinquished property as well as any assignee, or parties that were assigned rights in that contract.

Well sometimes that's easy to do and sometimes it's hard to do because the buyer that's actually purchasing the property may or may not be affiliated with the original contracting party and it's sometimes difficult to track down all of the parties to the contract and give them written notice.

Replacement Property

The same thing goes on the replacement property. When you contract with the seller of the replacement property and then assign your rights in that purchase agreement to the intermediary, you must give written notice to that seller. There is often less rigmarole and assignments of the replacement property purchase agreement but nevertheless, if there are any other parties in that purchase agreement the treasury regulations require that the taxpayer give those other parties written notice of the assignment to the intermediary.

Making it Happen

So how do you make sure that you get that written notice proved up? You ask those other parties to sign an acknowledgement that they received written notice. How do you make sure that these other parties do that and give you the written proof? You make it a contractual requirement in your purchase agreements that ALL of the other parties will cooperate and will provide you with that requisite acknowledgment at or prior to closing.

For a sample 1031 cooperation clause, check out this link.

• Start Your 1031 Exchange: If you have questions about 1031 purchase agreements and cooperation clauses, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2016 Copyright Jeffrey R. Peterson All Rights Reserved

Don’t Burn up Your Loss Carry-Overs on Real Estate

Sometimes taxpayers opt not to conduct a 1031 exchange because they have prior loss carry-overs that can be applied to reduce their tax liability. 

What is a Loss Carry-over?

If in the past a taxpayer has sold a capital asset for less than their adjusted basis, this results in a capital loss. If the taxpayer is unable to take advantage of the loss with a corresponding tax deduction for the entire amount for the current tax year…then that loss (lingering or pending tax deduction) can be carried over into future tax years.

Keep your Powder Dry

Loss carry-overs are valuable tax attributes because they can be used in the future to offset future income (this is especially so if tax rates increase). Generally, I tell people to save their loss carry-overs for gains that cannot be deferred, and indefinitely defer the real estate gains through a 1031 exchange, especially if they own other assets such as stocks.

Always Exhaust the 1031 Option First

If the taxpayer is inclined to buy more real estate anyway, it may be prudent to set up a 1031 to keep their options open for 45 days to see what they want to do, and if they want to identify any replacement properties.

You Gotta Know When to Hold'em

Sophisticated taxpayers and their tax advisors know that it is better to not burn up their loss carry-overs without considering an alternative that allows them to defer their gains and also keep these valuable tax attributes (to use against other future gains).

Defer, Defer, Defer…Die

Because of the step-up in basis, the ability to refinance replacement properties (to pull out equity tax-free) and the long duration that 1031 properties can be held (until after the death of the taxpayer), it is prudent to consider all of the alternatives before playing the loss carry-forward card on real estate.

• Start Your 1031 Exchange: If you have questions about real estate loss carry-overs, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved

Sale-Lease Backs & 1031 Exchanges

Many taxpayers own a business and they also own the real estate and building in which they run their business.  Over time, this real estate may appreciate significantly, while the debt on the property is reduced from years of paying down the mortgage.  This can represent a large, concentrated piece of a taxpayer’s net worth. These taxpayers may come to realize that they have too many eggs in one basket, and have too much risk exposure if that one property falls in value.

Diversify & Position Yourself for Retirement

As the taxpayer gets up in years and is looking to retire, they may want to diversify their wealth (and lessen their risk exposure) by selling the real estate, but still have their business continue to stay in the property as a tenant on a long-term fixed lease.  The advantage for the taxpayer is that they can 1031 exchange their hard-earned equity into a more safe and diverse portfolio of like-kind properties in different geographic localities and in different business segments such as:

• Retail

• Multi-family

• Industrial

The advantage for their buyer is that the buyer gets a good property with a steady reliable tenant already in place on a long-term fixed lease that both parties can rely on.

1031 the Real Estate…Then Sell the Business

If the taxpayer is also considering selling their business, the buyer of the business would not have to purchase the real estate, and could get into the business with a lower down payment, because they would not have to qualify for a loan on the real estate. The buyer of the business would also have the certainty of being able to assume the long-term fixed lease and continue to run the business where it has been located.

Cash is King for 1031 Exchanges of Real Estate

Generally if you are selling real estate, you want to receive cash on the barrelhead so you can reinvest ALL of your equity through a 1031 exchange into your new replacement properties. So selling to a strong unrelated cash buyer is often more desirable than trying to sell both the real estate and the business to one buyer, who may already be stretching their finances just to purchase the business.

Getting Top Dollar By Splitting the Sales

In order to get the top price on the sale of a business, it is not uncommon to have seller-back financing with the seller getting their proceeds over a long period of time.  That’s fine of the sale of the business; however, because of the requirements for 1031 exchanges (see Napkin Test), seller-back financing of the real estate is a much less attractive option for a taxpayer looking to defer all of the gains from the real estate. It’s often better to split the sale of the business from the sale of the underlying real estate in order to maximize both the financial returns and tax efficiency for the seller.

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

Defer the tax. Maximize your gain.

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved

Taking Advantage of Downturns in the Real Estate Market

Real estate values go up, and as you may recall from recent the Great Recession, they also go down.  Some commentators are speculating that the current good times will be coming to end, bringing opportunities for investors to buy some bargains.

What is a Downward Market?

A downward market is where real estate values are declining and opportunities are rising - opportunities to buy real estate at a cheap price. Remember, “price” is set by the market which can fluctuate based on emotions, while “value” is established by the cash flow in an economic analysis. So, it is possible to buy a property at a cheap price below its value (based upon the income it produces) and in the marketplace. If you find such an opportunity you want to seize on it immediately. 

Well, you say, I can’t buy it now because if I do a 1031 exchange, the typical structure is that I sell and close on my old relinquished property FIRST, and then SECONDLY, I buy my replacement property. If this great opportunity comes up, how can I take advantage of it and still avail myself of a 1031 exchange? Here's an example: a bank takes back a property, but they don’t want to have it on their books. They have to reserve for it, they have to pay for expenses related to the property; they just want to get rid of it. So they’ll sell it at a deep discount - a discount below its actual value just to get it off their books. If you want to acquire that property, you have to move fast before another investor moves in and takes it away from you.  A strong cash offer will ensure you are the successful bidder.

CPEC1031, LLC

If you’re looking for help with your next 1031 exchange, contact CPEC1031, LLC today. Our team of qualified intermediaries can help you through all aspects of your 1031 exchange. You can reach us at our primary office located in downtown Minneapolis.

• Start Your Exchange: If you have questions about taking advantage of downturns in the Minnesota real estate market, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved