Why the 1031 Exchange is a Powerful Tool

Internal Revenue Code (“IRC”) Section 1031 is a power tool that allows investors to reinvest their capital in the most advantageous like-kind investment while deferring the capital gains, depreciation recapture and state income tax consequences. The rationale behind Section 1031 is to not penalize exchangors when they are not cashing out, but are reinvesting all of their equity in like-kind property. This stimulates the economy and moves capital, increasing property values and encouraging more investments.

1031 exchanges are a fantastic way to keep your money working for you in continued investments, rather than taking a capital gains tax hit with the sale of real property.

Minnesota Qualified Intermediaries

If you’re considering a 1031 exchange of real estate, the best thing you can do is consult with a qualified intermediary. There are a lot of rules and regulations that come with a 1031 exchange, and you want to make sure you’re covering all of your bases. That’s where a qualified intermediary can help – by answering your questions, advising you throughout your exchange, and preparing the necessary documents for your closing. Contact the qualified intermediaries at CPEC1031 today to get 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

1031 Exchange Identification of Replacement Property

In a 1031 exchange, it is very important to identify property in a written document signed by you, and delivered to the party assisting you with the exchange on or before 45 days from the date you sold the original rental property.

Identifying Replacement Property

It’s important to note that you can identify more than one property as the replacement property. The maximum number of replacement properties that you may identify without regard to fair market value is three. You may identify any number of properties provided that the total value of these properties is not more than 200% of the value of the original property you are selling. You don’t necessarily have to close all the properties you identify but you can name several if you’re not sure what will close and to observe the rules in technical note in terms of the value of properties you identify.

Start your 1031 Exchange

If you’re thinking about conducting a 1031 exchange, it’s a good idea to talk with a qualified intermediary. There are many requirements that govern a 1031 exchange, and you want to make sure you’re covering all your bases. We can answer questions, advise you throughout the exchange, and prepare the necessary documents in advance of closing. Contact the qualified intermediaries at CPEC1031 today to get 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

Important Information About 1031 Exchanges of Property Outside the United States

Recently, we had a client ask if it was possible to perform a 1031 exchange from a property located outside the United States to a replacement property in the United States. Exchanging properties between the US and foreign countries adds an extra layer of complexity to a 1031 exchange. Here are a few takeaways when it comes to non-US property and 1031 exchanges.

1031 Exchanges with Foreign or Non-US Property

Under the rules for 1031 exchanges “foreign or non-US property” is not considered like-kind to property in the US. IRC Section 1031 (h) has special rules for foreign real and personal property. It states that:

• “Real property located in the United States and real property located outside the United States are not property of a like kind.”

So the short answer to our initial question is no, you cannot 1031 a piece of property in another foreign country into a new property in the United States. The properties are not considered like-kind, and are thus not eligible for the tax-saving benefits of a 1031 exchange.

Gross Income Made Outside the US

IRC Section 61 governs taxes on gross income.

US taxpayers can be taxed on income, gains and profits made outside the US. Under Section 61 of the Internal Revenue Code, “gross income” includes “all income from whatever source derived,” even foreign income.

So you could 1031 exchange foreign property for other foreign property to defer your US tax, or US property for other US property, but cannot mix them.

• 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

Determining What Items Can be Reimbursed in a Like-Kind Exchange

Many taxpayers conducting a 1031 exchange have questions about what can and cannot be reimbursed at closing. Can the following items be reimbursed to the seller at closing for a 1031 transaction?

• Staging

• Light Timer

• Cleaning Supplies

• Handyman Work

• Painting

• Changing locks

• Repair to Boiler

The short answer is no. None of these items may be reimbursed to the seller in a 1031 exchange. All of the proceeds should be sent to the 1031 account.

Generally, only “transactional items” that are “customary” may be paid out of the proceeds. These seem more like operational repairs and ownership/maintenance expenses and not customary. These do not seem transactional or routinely on closing statements. From the IRC:

• (ii) Transactional items that relate to the disposition of the relinquished property or to the acquisition of the replacement property and appear under local standards in the typical closing statements as the responsibility of a buyer or seller (e.g., commissions, prorated taxes, recording or transfer taxes, and title company fees).

It’s a good idea to consult with your accountant or CPA about this matter as well.

1031 Exchange Professionals

At CPEC1031, LLC we have been working in the 1031 exchange industry for the past two decades. Our team of qualified intermediaries can help you through any type of like-kind exchange under section 1031 of the Internal Revenue Code. Contact us today to learn more about our services and see how we can help you defer capital gains taxes on the sale of qualifying real property.

• 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 Less Frequently Asked Questions About 1031 Exchanges

We have answered many frequently asked questions about 1031 exchanges. Today we’d like to look at some less common questions. Here are a handful of uncommon questions we’ve recently been asked about 1031 exchanges.

Is it possible for my ex-wife to quitclaim her interest in the relinquished property to me prior to closing so that I can 1031 exchange 100% of the proceeds?

In this situation, you arguably have not “held” your ex-wife’s 50% interest for investment or business purposes. In order to qualify, the property must have been held by you, so this is likely not a good idea.

I’m considering doing improvements to my replacement property. Does the work have to be done before I close or can the contractor do the work after closing? 

The improvements will need to exist before you receive them, so either the seller will need to make the improvements before the replacement property closing, or the qualified intermediary will have to take title and hold the replacement property until the improvements are constructed, and then transfer the replacement property to you (within the 180 exchange period).

How do I allocate the proceeds from the relinquished property if I’m buying 2 replacement properties? Can I put most of the money into one property or does it need to be a specific percentage?

You can allocate the funds in any proportion that you want. The basis on the multiple replacement properties will be in proportion to the values (not the equity).

• 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