Tax Deferral vs. Tax Avoidance – What’s the Difference?

When some people discuss the benefits of 1031 exchanges, they highlight how a 1031 exchange can help you “avoid” taxes. What they really mean is that 1031 exchanges can help you “defer” taxes. In this article, we are going to talk about the difference between tax deferral and tax avoidance.

Tax Avoidance

Put simply, avoiding taxes is illegal. The term “tax avoidance” implies that the taxpayer is actively working to avoid paying the taxes that they owe. This is different from the tax deferral benefits of a 1031 exchange. With tax deferral, you are simply postponing your tax payment until a later point in time – in this case, whenever you decide to sell your replacement property.

Tax Deferral

Tax deferral, on the other hand, is perfectly legal under the right circumstances – such as a 1031 exchange. A like-kind exchange allows you to defer (not avoid) your capital gains taxes when selling real estate. The difference is that you are deferring your taxes until a later date (if/when you decide to sell your replacement property), rather than avoiding them completely.

Start a Like-Kind Exchange Now

If you’re looking to start a like-kind exchange, reach out to our qualified intermediaries today! At CPEC1031, we have decades of experience helping clients through their 1031 exchanges. Our primary office is located in downtown Minneapolis, but we work with clients throughout the state of Minnesota and all around the United States. Contact us today to learn more about our 1031 exchange services and start your like-kind exchange now!

• 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

4 Documents to Provide Your CPA for Reporting a 1031 Exchange

Many taxpayers conducting 1031 exchanges want to know what information they need to provide to their CPA or tax accountant when reporting a 1031 exchange transaction. In this article, we will outline four essential documents to provide your CPA when reporting your 1031 exchange.

Information to Provide Your CPA

Every 1031 exchange situation is different, so you should talk to your CPA or tax accountant about your specific situation to see what documents they will need. That being said, typically they will want to see the following documents in order to complete the IRS Form 8824:

1. Relinquished Property Closing Statement and may want to review the signed 1031 Exchange Agreement and Relinquished Property Assignment Agreement

2. Replacement Property Identification Form (if any)

3. Replacement Property Closing Statement and may want to review the Replacement Property Assignment Agreement

4. Close-out Letter from the Qualified Intermediary

Your qualified intermediary can provide scanned PDF copies of any documents related to your 1031 exchange that your CPA or tax accountant may need.

Contact a Qualified Intermediary

If you need any assistance with your 1031 exchange, look no further than CPEC1031, LLC. Our qualified intermediaries have been facilitating exchanges of all shapes and sizes for more than two decades. We have the knowledge and experience needed to ensure your exchange is a success. Reach out to us today to learn more about the full extent of our services and see how we can help with your next 1031 exchange of real estate.

• 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 the Death of a Buyer or Seller

Let's assume that we've got an elderly taxpayer. They sell their relinquished property and unfortunately they die in the midst of the 1031 exchange. They may have had a replacement property teed up to purchase. The personal representative of the decedent's estate is going to have to make a decision. Do we continue on with the 1031 exchange and buy the teed up replacement property? Or do we just pull up the tent and take our money back on day 181?

Stepped-Up Basis

It may be most advantageous for the heirs to have the intermediary acquire the replacement property. The reason is that under Section 1014 when you receive property as an inheritance you don't receive it with the decedent’s old basis. You instead receive the property with a stepped-up basis. Upon receipt of that replacement property, you get the fair market value of that property as your basis - not the old basis of the relinquished property.

If the 1031 exchange were not completed by the personal representative of the decedent's estate, then on the decedent's final tax return, all income and gains recognized up to the date of death would have to be reported…including the income from the failed exchange.

Consider Your Estate Plan

Many people conducting exchanges particularly when they're older and elderly need to perhaps contemplate in their estate planning documents and give direction to the personal representative to complete the exchange if they, unfortunately, pass away during the middle of the 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

Why Like-Kind Exchanges of Real Estate are not a Tax Loophole

1031 exchanges are used by many taxpayers to defer their capital gains taxes when selling real property. But many people think of the 1031 exchange as some sort of tax loophole and that those who perform 1031 exchanges are somehow “gaming” the system. In this article, we will talk about whether or not like-kind exchanges of real estate should be considered tax loopholes.

Section 1031 of the IRC

The short answer is no – 1031 exchanges of real estate are not tax loopholes. Section 1031 has been a part of the Internal Revenue Code for many decades. It was established by Congress to encourage investment and stimulate growth in the economy. Instead of paying capital gains taxes when selling real estate, 1031 exchanges allow taxpayers to defer those taxes as long as they move their gains into new like-kind property.

A loophole implies that something is sneaky or underhanded in some way. That is not true of 1031 exchanges at all. 1031 exchanges are perfectly legal and above board. You could even say that like-kind exchanges are encouraged by the US government. They give taxpayers an incentive to continue investing in real estate and moving money around the market – thus stimulating growth.

1031 Real Estate Exchanges in MN

At CPEC1031, LLC, we work with clients in Minnesota and across the country. Our primary goal with each client is to help defer capital gains taxes on the sale of real estate via section 1031 of the Internal Revenue Code. With decades of experience, our 1031 intermediaries are well versed in the exchange process, and can answer any of your questions. Contact us today to discuss your situation and whether a 1031 exchange is right for you. Our primary office is located in Minneapolis, but we work with clients in all fifty states.

• 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

When Does a 1031 Exchange Get Taxed?

A lot of taxpayers conducting like-kind exchanges wonder how to report a 1031 exchange to the IRS. Another common tax-related question we get is “how is my exchange taxed if it straddles two years?” In this article, we are going to dive into that topic and talk about how to handle a 1031 exchange that crosses over into a new year.

Like-Kind Exchange Periods

The standard time period for a like-kind exchange is 180 days. That means you need to sell your relinquished property and acquire your replacement property within 180 days or your exchange will fail. However, there are a few rare exceptions to that rule. For example, if your federal tax filing deadline lands within your 180 day exchange period, the filing deadline is your new 1031 exchange deadline. This is because the IRS wants to see your relinquished property and your replacement property reported on the same tax return.

As always, preparation is the key ingredient here. If you begin planning your 1031 exchange early, and involve a qualified intermediary, you will have all of your bases covered and you won’t be scrambling at the last minute. You should also involve your CPA in the process to make sure things go smoothly.

1031 Exchange Tax Help

If you’re confused about how to report your 1031 exchange on your upcoming tax return, reach out to a qualified intermediary for help. At CPEC1031, LLC, our intermediaries have more than two decades of experience working on like-kind exchanges of all shapes and sizes. We can put that experience to work for you! Our intermediaries can help navigate you through the 1031 exchange process, making sure you meet all the deadlines and requirements along the way. Contact us today to learn more about our 1031 exchange services.

• 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