How Long to Hold Your Replacement Property in a 1031 Exchange

A lot of real estate investors have questions about the replacement property holding period in a 1031 exchange. In this article, we are going to clarify the tax implications of holding the replacement property in a 1031 exchange.

Holding the Replacement Property

When conducting a 1031 exchange, you have to “Hold” the Replacement Property for investment or business purposes in order to satisfy the requirements of IRC Section 1031.

How long you must hold the property is an open question, but the safe answer is probably two years, particularly if you are considering eventually doing something inconsistent with using for investment or business purposes…like moving into the property as a residence or gifting it away.

The IRS has not issued a bright line holding period, but there is a safe-harbor for rental pool properties that tests each of the two years after an exchange to see if it is primarily used for rental-pool purposes as opposed to personal use.

• 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.

© 2022 Copyright Jeffrey R. Peterson All Rights Reserved

3 Essential Rules for Identifying Your 1031 Exchange Replacement Property

There are many rules and regulations that govern 1031 exchanges of real estate. In this article, we are going to discuss the rules for identifying 1031 exchange replacement property.

How to Identify Your 1031 Replacement Property

In a 1031 exchange, you must re-invest the sales proceeds from your relinquished property into a like-kind replacement property. There are certain restrictions surrounding the number of replacement properties that you can identify. Oftentimes, a taxpayer only wants to identify a single replacement property. But if you want to identify multiple properties, you must satisfy one of the following rules:

• The 3-Property Rule – You can identify up to three replacement properties regardless of their market values.

• The 200% Rule – You can identify any number of replacement properties as long as the aggregate fair market value of all replacement properties does not exceed 200% of the aggregate Fair Market Value (FMV) of all of the relinquished properties as of the initial transfer date.

• The 95% Exception – You can identify any number of replacement properties if the fair market value of the properties actually received by the end of the exchange period is at least 95% of the aggregate FMV of all the potential replacement properties identifiedNOTE: The replacement property received must be substantially the same as property identified within the 45-day limit described above.

Contact a Qualified Intermediary

Contact a qualified intermediary to learn more about section 1031 of the Internal Revenue Code and how it can help you save taxes when selling real estate. The qualified intermediaries at CPEC1031 have over twenty years of experience facilitating 1031 exchanges in Minnesota and across the country! We have all the tools necessary to walk you through your 1031 exchange and ensure you feel comfortable every step of the way. Contact us at our Minneapolis office today to get your exchange started!

• 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.

© 2022 Copyright Jeffrey R. Peterson All Rights Reserved

Buying 1031 Exchange Replacement Property from a Related Person

There are a lot of rules and regulations that you need to keep straight in order to complete a successful 1031 exchange. One issue that taxpayers often worry about in the course of a 1031 exchange is buying property from a related person. In this article, we are going to talk about some things to keep in mind when you’re buying 1031 exchange replacement property form a related person.

Buying 1031 Exchange Property from a Related Party

When you buy your replacement property you’d probably prefer to buy from the devil you know rather than the devil you don’t know. However, the IRS has created rules that make it more difficult to buy 1031 exchange property from a related person. This is particularly true if you’re buying your replacement property from a related person.

Many farmers want to buy the property that’s adjacent to their home farm but the owner of the adjacent farm may be a family member. It often doesn’t make sense for a farmer to buy new property miles away, so they may have no choice but to purchase property form a related party.

1031 Exchange Team of Professionals

It’s important to surround yourself with the best and brightest professionals when embarking on a 1031 exchange. Make sure your accountant, lawyer, and qualified intermediary are in communication with each other so they can help guide you in the right direction throughout the course of your 1031 exchange. Contact CPEC1031, LLC today for help with your next 1031 exchange involving related parties. We have the skills and experience needed to guide you through the entire process.

• 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.

© 2022 Copyright Jeffrey R. Peterson All Rights Reserved

1031 Exchanges Involving Property Owned by Multiple Taxpayers

1031 exchanges involving more than one property owner can get complicated quickly. In this article, we are going to answer some FAQs about 1031 exchanges involving property owned by multiple taxpayers

The Benefits of Tenancy-in-Common

When you purchase real property with other co-purchasers, it’s often a good idea to reconfigure your asset ownership into tenancy-in-common so that each tenant can accumulate time in separate ownership capacities and have the option of doing a 1031 exchange when it comes time to sell.

Techniques to Try

There are some techniques for doing 1031 exchanges involving property owned by more than one taxpayer. Some of these techniques are rather crude, such as breaking up a property as tenants-in-common and crossing your fingers in the hope that you’ve held the property long enough to satisfy the 1031 exchange requirements.

Other techniques are more refined, such as “spin-offs.” This technique works great if you’ve got an LLC or partnership because you can spin-off subsidiaries, and they are considered continuations of the predecessor for tax purposes. 

The Problem with Corporations

The nut that I’ve never seen anyone crack is how do you reconfigure the ownership with the property is owned by an S-corp or C-corp? In these cases, distributing the asset out of the entity can trigger gains. It’s much more difficult to reconfigure a corporation than an entity that’s taxed as a partnership.

CPEC1031, LLC

1031 exchanges involving multiple property owners can get very complicated so it’s a good idea to work with a qualified intermediary who knows how to deal with these situations. At CPEC1031, we have been facilitating exchanges of all kinds for more than two decades. Contact us today to start your 1031 real estate 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.

© 2022 Copyright Jeffrey R. Peterson All Rights Reserved

Can You do a 1031 Exchange with Replacement Real Property You Already Own?

The word “exchange” is an important part of the Internal Revenue Code section regarding 1031 exchanges. If you’re going to do a 1031 exchange, that generally means you have to acquire something new that you didn’t already own prior to starting the like-kind exchange.

Property Ownership

The easiest and safest way to conduct a 1031 exchange is to buy property that you do not already own from an unrelated third party. It’s not a good idea to take the sales proceeds from the disposition of your relinquished property and pay off debt on property that you already own. The IRS likely will not view that as an exchange under section 1031.

For many years the IRS took the position that building improvements on land that you already owned did not qualify for 1031 exchange treatment. There have since been a few private letter rulings that soften this position a little bit, but even so, this is a very tricky category of 1031 exchange. As such, if you find yourself in this position, it’s important to work with the best and the brightest – your qualified intermediary, accountant, attorney, banker, and more.

1031 Exchange Company in Minnesota

CPEC1031, LLC is a Minnesota-based 1031 exchange company providing like-kind exchange services to taxpayers throughout the United States. Our qualified intermediaries have over twenty years of experience working on exchanges of all shapes and sizes. We are fully equipped to help you through the details of your next 1031 exchange transaction. Contact us today at our Minneapolis office to learn more about how we can help.

• 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.

© 2022 Copyright Jeffrey R. Peterson All Rights Reserved