Safe Harbor vs. Non Safe Harbor Reverse Construction Exchanges

In a reverse construction exchange, can you use your 1031 exchange proceeds to buy raw land and then construct improvements on that land? That’s a great question that we’ll be tackling in this article.

In a 1031 exchange, a general rule of thumb is you can’t exchange into property you already own because it wouldn’t be an exchange. So the best course of action is to have the qualified intermediary buy the new land and hold title to it while the improvements are constructed. This allows the taxpayer to exchange into, not only the raw land, but also the improvements that are constructed on the land.

Safe Harbor Exchange

Now, there are a couple of ways to go about this. The first is a safe-harbor 1031 exchange. This is the safest and easiest method, but any improvements you want to construct on the land must be completed within 180 days. There are only so many improvements you can construct during that amount of time.

Non Safe Harbor 1031 Exchange

The more complex and sophisticated method would be to do a non-safe harbor reverse exchange. With this option, you would purchase your replacement property (the raw land) and construct improvements on it first. Then, when construction is complete, you can sell your relinquished property after the fact – hence the “reverse” 1031 exchange.

Start Your 1031 Exchange Today!

Start your 1031 exchange today with CPEC1031, LLC and start realizing the tax-saving benefits of a like-kind exchange. At CPEC1031, we have over twenty years of experience working on 1031 exchanges of real estate. Let us put that experience to work for you on your next like-kind exchange. We can walk you through the entire process and make sure you are fully prepared when it comes time to close you’re your property. Contact us at our Minneapolis offices today to see how we can help you 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.

© 2022 Copyright Jeffrey R. Peterson All Rights Reserved

Conducting Reverse 1031 Exchanges in a Seller’s Market

Right now, it’s a hot seller’s market. As a result, we’re seeing a lot of reverse 1031 exchanges. At the moment, it’s really easy to be the seller of a piece of real estate. It’s much harder to be the buyer because it’s so competitive. Inventories are tight and there’s a lot of competition for the same property. If you find a replacement property that you really want, the smartest move may be to put your energy into buying the replacement property first in a reverse 1031 exchange.

How a Reverse Exchange with a Qualified Intermediary Works

In a reverse exchange, most often a qualified intermediary forms an LLC and purchases the replacement property on the taxpayer’s behalf. Rather than having the taxpayer grant a mortgage to the lender, the intermediary’s LLC is the buyer of the replacement property and grants the mortgage to the lender. The taxpayer may funnel the down payment in, but the intermediary is the one who acquires the property and holds it for up to 180 days so that the taxpayer has time to sell their relinquished property. When that happens, the intermediary takes the replacement property that they’ve already purchased and passes it to the taxpayer to complete their 1031 exchange.

This is beneficial to the taxpayer because they don’t have to sweat the 45 day identification period as much because the replacement property is already locked in.

Reverse 1031 Exchange Company

If you’re thinking about doing a reverse 1031 exchange, don’t hesitate to reach out to the qualified intermediaries at CPEC1031 today to learn more about how we can help. We’ve got more than twenty years of experience facilitating exchanges and can help you defer your capital gains taxes. Contact us today at our Minneapolis office to seat up an appointment!

• 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

Essential Actions to Take After a 1031 Reverse Exchange

After a reverse exchange is completed and a replacement property that was parked by the intermediary has been conveyed to the taxpayer, the business may not be done. There may still be some administrative tidying up that needs to be done.

Change of Address

For example, the LLC that parked and held title to the replacement property may have been assigned to the taxpayer, but the records with the Secretary of State may still reflect the intermediary’s address as the business address of the LLC and as the registered agent. One administrative step after the reverse exchange is done is to file a new annual report with the Secretary of State reflecting the correct address and who is the new registered agent of the LLC.

If the address where the county tax statements are being sent to is showing as the intermediary’s address, the local county may continue to send the tax bills to the intermediary’s address rather than to the taxpayer. So another item to tidy up is to file or notify the local tax assessor where you want your tax statements and tax bills to be sent to in the future.

Notify the IRS

It may also be prudent to contact the IRS and notify them that the ownership of the LLC has substantially changed and request a new EIN number for the LLC.

These are little administrative items that are prudent to take immediately after the reverse exchange has been wrapped up. It's important not to delay too long because otherwise correspondence and important communication may be routed to the wrong address and the taxpayer may not receive that information for some time.

• 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

A Creative Alternative for Failing Reverse 1031 Exchanges

Reverse 1031 exchanges are a great option for taxpayers who wish to acquire replacement property before selling their relinquished property. But what happens if, for whatever reason, your reverse exchange is in jeopardy? In this article, we are going to offer up a creative alternative option for a failing reverse 1031 exchange.

A Creative Alternative

A creative option for a failing reverse exchange can be found in IRS Private Letter Ruling 200712103.

Assume that you are parking your new replacement property with the Exchange Accommodation Title Holder. In the event that an actual third-party purchaser can’t be found to purchase your relinquished property (the old property) within the 180 days, it may be possible to “manufacture” a “White Knight” buyer that is dissimilar to the taxpayer doing the 1031 exchange. In this arrangement, you could have a “white knight” purchase the old relinquished property from you to get it off your books within the 180 day reverse exchange period. The white knight will then act as temporary owner of the relinquished property until such time that the property is later sold to a third-party purchaser.

To be treated as the owner for tax purposes, the White Knight will need to have sufficient incidents of ownership of the relinquished property, so it will be conveyed the property by deed or contract for deed. In PLR 200712103, the Internal Revenue Service ruled that a taxpayer doing a safe-harbor reverse exchange (under Rev. Proc. 2000-37) could sell its relinquished property to a "related party" (but dissimilar taxpayer) and that this related party could also subsequently market and sell the relinquished property without having to hold the property for two (2) years. 

A Note on Private Letter Rulings

Private letter rulings are a written statements issued to specific taxpayers that interprets and applies tax laws to those taxpayer’s represented sets of facts. A PLR is issued in response to written requests submitted by taxpayers. A PLR may not be relied on as precedent by other taxpayers or by IRS personnel, but may give insights into how other taxpayers are dealing with similar situations.

• 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

What to Know About Deed & Transfer Tax In a Reverse 1031 Exchange

In a reverse 1031 exchange, the qualified intermediary forms an entity that acts as a straw man to acquire the replacement property.

Exchange Accommodation Title-Holder

That straw man is called an Exchange Accommodation Title-Holder (EAT). This EAT typically holds title to the replacement property until the old relinquished property is disposed of and then the EAT (or straw man) deeds the property to the exchangor to complete their like-kind exchange.

The sad situation is that the Exchange Accommodation Title-Holders already paid deed tax once when it received the parked property from the seller and now is being subjected to transfer tax again when the replacement property is deeded to the exchangor.

State Differences

Some states are very aggressive in taxing the transfer of the parked replacement property to the exchangor in what’s called deed tax or transfer tax. Not all states are as aggressive as say Pennsylvania or Wisconsin in collecting deed tax from the intermediaries entity to the exchangor.

In Minnesota, the Minnesota Department of Revenue has been much more accommodating in limiting the transfer tax to the value of the exchange services provided by the exchange accommodation title holder. Other states are imposing the transfer tax on the entire value of the property being conveyed.

• 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