How to Divide the 1031 Proceeds after the Sale of the Relinquished Property

Recently, a client came to us with the following 1031 exchange situation. The client wanted to purchase a property solely in their name. Here's where it gets complicated: the client wanted to divide the proceeds between two people after the sale. Is this possible to do this and still keep everything within the 1031 strike zone?

Determining How You're Vested in Title

That is a very good question. Everything depends on how the client is vested in title on the old relinquished property. In order to figure that out we can pull a copy of the last vesting deed to confirm how they are currently in title.

For example, do they own the old relinquished property in a trust, an entity (such as a partnership), or do they hold title as tenants-in-common? Once we know how they hold title, then we can look at all of the available options for taking title to the new replacement property.

If you have additional questions about this or other 1031 exchange questions, contact a qualified intermediary today. At CPEC1031, LLC, we have over two decades of experience facilitating exchanges of real estate. Contact us today at our downtown Minneapolis office for help with your next 1031 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.

© 2021 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

Can you do a 1031 Exchange on a Property with a Mortgage & HELOC?

Here’s a relatively common 1031 situation that many people have questions about. Imagine you have two mortgages on the property you’re selling - one is the primary mortgage for 250K and the other is a 90K HELOC. Let’s say you want to do a 1031 exchange on this property and the purchase price on the new replacement property is a lot higher than that of the relinquished property. Can you count the HELOC against the equity? In other words, can you wait and pay the HELOC at closing so you have less money than required in order to maximize the 1031 benefit?

Questions to Consider

These are all great questions and there is a lot to consider before making a decision, such as:

• Are both mortgages liens against the Relinquished Property?

• In order to give the buyer clear and marketable title, wont both mortgages liens need to be satisfied by the title company?

• Are these debts encumbering the Relinquished Property?  If they are, then they will probably have to be full paid-off and released from the Relinquished Property.

Running Up Debt Before an Exchange

In general, it is NOT advisable to run-up the debt on the Relinquished Property in anticipation of the exchange.  The IRS has challenged such transactions.

Form the IRS perspective, if you extract the equity out of the Relinquished Property just prior to disposing of it in a 1031 exchange, it is effectively the same a s taking out the boot at the time of closing.

Check out this video for additional information: 

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

Defer the tax. Maximize your gain.

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved

1031 Case Study: Doing a Partial Reverse Exchange

A client recently came to us with the following 1031 exchange situation and question: We are currently in the middle of our 1031 identification period. If we buy something now and sell another property after that in the same area is it possible to put the revenues from that toward the mortgage of that same property, or do we need to buy another individual property? The property we want is more than we wish to spend, but if we sold our other holding it would be more doable.

Doing a 2nd Potential Exchange

As to the second potential exchange of another relinquished property, generally, the IRS would not view paying off debt on a property that you already own as being an ‘exchange’ because you have not received anything new that you do not already own.

If the timing works, you could split the replacement property into a part reverse exchange, and hold out a portion of the replacement property to complete another 1031. Read more about this possibility here. 

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

Defer the tax. Maximize your gain.

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved

The Importance of Keeping 1031 Exchange Funds Separate

Consider the following 1031 exchange scenario: A taxpayer is considering a 1031 exchange out of farmland and into a residential rental property. The replacement property may be of greater value than the relinquished property. Can the rental percentage be prorated according to the amount of the relinquished property and the remainder be used for personal use?

Keeping 1031 Funds Separate

The funds from the sale of the relinquished property should be used exclusively for the purchase of qualifying like-kind property that is held for investment or business purposes.

It may be possible to by a two or three unit rental property and to bifurcate it for part 1031 and part personal use. However, it is important to use non-1031 funds to pay for the personal use portion.

Further Reading

For further reading on this topic, please follow the links below:

• Step-by-Step Description of the Typical Exchange Process

• Copy of our 1031 Brochure

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

Defer the tax. Maximize your gain.

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved