3 Simple Tips for Title Closers Conducting 1031 Exchanges

Many title closers have questions about how to set up the closing statement and what transactional expenses are permitted to be shown on the closing statement.

Relinquished Property Equity

First let's talk about the relinquished property that a taxpayer is selling. Remember that all of the equity (all of the net proceeds) needs to be moved into that replacement property so we don't want to clutter up the closing statement with a bunch of transactional expenses that should really be paid out of the seller’s own pocket.

Security Deposits & Taxes

Next, security deposits, taxes, and things that the seller would normally pay out of their own operating account. To the extent that we can pay those out of closing and have the seller come in with their own funds for those transaction expenses, the better we're going to be.

Moving forward to the replacement property again there are certain expenses that should not be paid for out of the 1031 exchange. Unusual expenses for insurance for example, or even cost of the new loans such as loan origination fees, rate lock fees, and underwriting fees that the lender charges. In an ideal world those transaction expenses would be paid for out of closing by the seller or in this case the buyer.

1031 Exchanges

If you have questions about this or anything else relating to 1031 exchanges, reach out to our qualified intermediaries today! We have over two decades of experience in the 1031 exchange industry and can answer any questions you might have. Contact us today at our downtown Minneapolis office to learn more!

• 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

How Much Time Does a Title Company Need to Complete a 1031 Exchange?

There are numerous parties involved in any given 1031 exchange – from the taxpayer conducting the exchange to the qualified intermediary, to the title company. In this article, we are going to talk about how much lead time you need to give your title company going into the transaction.

Give Your Title Company Time

In a 1031 exchange, where you only have 180 days to complete your transaction, it’s always a good idea to get ahead of the ball. That goes for your title company as well. You do not want to first contact your title company the day before your closing. Waiting until the last minute to change up your transaction is going to create a lot of headaches for everyone involved – including your title company. If you wait too long, there may not be enough time to prepare the necessary documentation for a 1031 exchange.

Reach out to your qualified intermediary well in advance of your relinquished property closing date. This will give them enough time to prepare all of your required documents, and work with the title company to ensure a smooth transaction. A crazy closing process is nobody’s idea of a good time. Give yourself and your title company plenty of lead time (as much as possible) when doing a 1031 exchange.

Exchange Like-Kind Real Estate

Deferring capital gains taxes on the sale of real estate is easy under section 1031 of the Internal Revenue Code. It’s even easier with the help of a skilled 1031 exchange intermediary. At CPEC1031, LLC, our intermediaries have been facilitating exchanges for taxpayers across the United States for more than two decades. Give us a call today to get started with your 1031 exchange (the earlier you start – the better!). Our primary office is located in downtown Minneapolis, but we work with clients all over the state and country.

• 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 Guide for Title Closers Completing the Purchase of a 1031 Exchange Replacement Property

What do closers need to know about the replacement property closing statement and what closing costs are permitted on that statement?

Remember the Big Picture

Remember, our big picture here is that we're trying to reinvest all of the exchanger’s equity into the property. So if there's going to be a mortgage or deed of trust on the replacement property we may have to constrain the lender to tell them "don't loan this buyer more money than they actually need to make this purchase happen."

Even though the exchanger may qualify for a larger loan, we need to rein that lender in and not let them over-loan the purchase of this property such that at the bottom of the closing statement it shows cash to the buyer in the amount of x. We want that closing statement to zero-out at the bottom so that our buyer won't get any cash back at the time of closing.

Transactional Expenses

The next item to remember is that certain transactional expenses should not be paid for out of the exchange funds. In particular, any costs related to that new mortgage or deed of trust should typically be paid for by the exchanger out-of-pocket. Alternatively, the exchanger may ask the lender to give them a no-cost loan such that there are no origination fees or charges for the loan but that the exchanger pays a higher interest rate in return for the no cost loan.

Another technique that taxpayers sometimes use is to ask the seller for a concession to say “seller, will you pay up to $5,000 of my closing cost and prepaid expenses at the time of closing?” That way they're able to move some of these non-qualified transactions onto the seller side.

If there will be any reserve accounts established (for example to pay property taxes or insurance premiums), those reserves should be funded with monies other than the 1031 funds, so that all of the 1031 funds are applied exclusively for the purchase of the like-kind replacement property. A reserve account full for cash may be deemed ‘boot’ by the IRS, so oftentimes buyers will fund the reserves out-of-pocket.

• 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

Title Closers – Don’t Forget These Tips for Closing a 1031 Exchange

Title closers deal with settlement statements day in and day out, but there are additional precautions required when the closing involves a 1031 exchange. There are three essential items that title closers need to be cognizant of so the 1031 exchange goes off without a hitch – taxes, security deposits, and rent prorations. In this article, we’ll discuss how title closers should handle each of these items on the settlement statement to avoid any issues with a 1031 exchange. Our primary goal when the seller of a property is doing a 1031 exchange, is to roll all of the net-sales proceeds over into the 1031 escrow account so that they can be re-invested into like-kind replacement property. Not all transactional costs and fees should be paid for from the sale proceeds on the closing statement.

Taxes

The seller of the relinquished property needs to pay the real estate taxes owed for the time period that they owned the property during the year. When there’s no 1031 exchange involved, the seller typically pays these taxes out of their sale proceeds on the closing statement. But when the seller is conducting a 1031 exchange, we need to keep these payments separate from the sales proceeds. In an ideal world, the seller would pay their prorated real estate taxes in out-of-pocket cash at the closing. This can avoid a big headache later on in the exchange.

Security Deposits

If the closing involves a property that has been or is currently being rented out to tenants, we also have to be careful about security deposits. The seller of the property should be holding all security deposits for their tenants in a bank account separate from their operating account. If that’s the case, then the seller can simply take the money out of that separate account and pay the security deposits over to the buyer at the time of closing. However, if the seller has been keeping these deposits in their general operating account and the seller is feeling cash-poor, things get more complicated. If this is the case, it’s time to talk to a 1031 professional to determine the best way to proceed so you don’t jeopardize the exchange.  Ideally, the seller will come up with the money to transfer the security deposits over to the buyer out-of-pocket rather than dipping into the sales proceeds (which could diminish the value of the 1031 exchange).

Rent Prorations

At closing, the seller should also pay the buyer the portion of the rents they have collected for the month. Since the seller has likely already collected the rents for the month and deposited them into their operating account, it’s best to have the seller wire this money out of their operating account and pay it out of pocket at closing to the buyer.  This is the preferred way to handle rents, as opposed to dipping into the sales proceeds (which could diminish the value of the 1031 exchange).

The Big Picture

The big picture when closing a 1031 property is that you want to move all of the equity (the net proceeds) over to the qualified intermediary. If you’re ever in doubt, it’s always best practice to have the seller pay closing expenses out of pocket at closing.

• 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

How Title Closers & Qualified Intermediaries can Work Together on 1031 Exchanges

Many title closers run into clients who ask about 1031 exchanges. It’s important for closers to have some knowledge of the 1031 exchange process so that they can better help their clients prepare for the closing table. In this article, we’re going to talk about how title closers and qualified intermediaries can work together on 1031 exchanges.

Understand the Ultimate Goal of a 1031 Exchange

Remember that the ultimate goal of a 1031 exchange is to reinvest all of the sales proceeds from the relinquished property into the replacement property. The taxpayer should not pocket any of the net proceeds from the sale.

Pay Attention to 3 Specific Items

When it comes to 1031 exchanges, there are three specific items you want to keep an eye out for on the closing sheet – taxes, rent prorations, and security deposits. It’s important that the seller pay these items out of pocket in order to keep things clean from a 1031 perspective.

Work with a Qualified Intermediary

It’s best to consult with a qualified intermediary when dealing with a 1031 exchange to avoid any potential issues. At CPEC1031, we make the 1031 exchange process as easy as possible for you by taking care of everything. Our qualified intermediaries have been facilitating exchanges for over two decades and have the knowledge and experience to ensure the success of your exchange. Contact our team today to discuss your next 1031 exchange. You can find us at our primary office located in downtown Minneapolis, or at one of our satellite offices around the United 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.

© 2020 Copyright Jeffrey R. Peterson All Rights Reserved