Tips for Handling Items on the HUD Statement in a 1031 Exchange

Many taxpayers who are engaging in a like-kind exchange have questions about how certain items on the closing statement should be handled. In this article, we’re going to take a look at some of those common closing items and how they should be addressed from a 1031 exchange point of view.

Items on the HUD Statement

Here are a few items that generally appear on the HUD statement and how they should be handled in a 1031 exchange transaction:

• Earnest Money– The original earnest money funds should come from the exchange as part of the purchase price and be paid back.

• Broker’s Creditshould be returned at closing.

• Accrued Rental Incomeshould be returned at closing.

• Property Tax Credit should be paid back for a property tax escrow account or prepaid to the County.

A Note on Earnest Money

It is OK to return the earnest money, but it is important to take steps to make sure it can’t be misunderstood as exchange funds coming into the taxpayer’s hands (boot). The best way to do this is to show a debit line item on the settlement statement as “Return of Earnest Money Deposit.”

• 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

A Brief Explanation of the Starker 1031 Exchange

Many people ask “who is this Starker character and why are like-kind exchanges often called Starker 1031 exchanges?”

Starker Exchanges

There was a lumber baron in Oregon who was named Starker who had this novel idea that 1031 exchanges did not have to be simultaneous horse swaps, where the taxpayer gave up his relinquished property and immediately and simultaneously received his new replacement property.

Changing the Paradigm

Instead, Starker had this idea: “hey I think I’ll give up my relinquished property in exchange for some replacement properties that I’ll receive some time in the future.”

In doing so, Starker created a new paradigm in the real of 1031 exchanges. The IRS challenged his exchange but the IRS lost on a procedural argument and Starker prevailed.

Starker opened up the door for this entire industry of delayed exchanges in which taxpayers give up relinquished property and later at some future date received their new replacement property. In 1991 the IRS constrained this process by issuing treasury regulations that limited The Exchange period Down to 180 days and further required taxpayers to identify the replacement property within the first 45 days. so it’s no longer the Wild West that Starker opened up for us back in the 1970s.

Work with a Qualified Intermediary on Your Next Starker Exchange

No matter what you call it – starker exchange, 1031 exchange, like-kind exchange, etc. – we can help you through the process. At CPEC1031, our qualified intermediaries have been helping taxpayers throughout the United States defer capital gains taxes on the sale of real estate. Contact our team of professionals today to learn more about how we can help with your next exchange. Our primary office is located in downtown Minneapolis.

• 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

Don’t Forget to Consider Mortgages and Other Debt When Conducting a 1031 Exchange

As we’ve discussed many times before, there are quite a few rules and regulations that govern the 1031 exchange of property. One piece that commonly gets taxpayers into trouble with their 1031 exchange is failing to consider loans on the relinquished and replacement properties. In this article, we are going to explain why it’s essential to consider mortgages and other debt in your 1031 exchange.

Mortgages & Debt

Failing to take loans into account is one of the primary reasons why exchanges fail. In any 1031 exchange, you have to consider your mortgage or other debt on your relinquished property, as well as any existing debt on your replacement property.

In any 1031 exchange, you are not allowed to receive any cash (also known as “boot”) from the sale of your relinquished property. Any boot received is subject to tax. However, even if you don’t receive any cash but your liability decreases, that will also be treated as taxable boot.

Let’s look at an example to illustrate this point. Say your relinquished property had a mortgage of $1 million, but your replacement property is only $900,000. In this situation, you would have $100,000 of taxable boot.

Minnesota 1031 Exchange

The qualified intermediaries at CPEC1031 have been helping taxpayers facilitate 1031 exchanges of property for decades. Our team has the knowledge and professionalize to handle your 1031 exchange. We can advise you on the 1031 exchange rules and regulations, prepare your 1031 documents, and make sure your exchange goes off without a hitch. Contact us today to get started with your 1031 exchange or 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

What to Know About 1031 Exchanges of Land

Like-kind exchange rules can get tricky and confusing quickly. In this article, we are going to talk about the like-kind requirement as it relates to exchanges of land.

Real Property Like-Kind Rules

At the root of this question is the definition of like-kind property and how that impacts 1031 exchanges. As you may know, all property involved in a 1031 exchange needs to be like-kind in order to qualify. Thankfully, the definition of like-kind when it comes to real property is very broad. In general, you can exchange any real property for any other real property (so long as it meets the other requirements of an exchange). That means you can sell a piece of land and exchange into an apartment building (or vice versa). You do not need to exchange into another piece of land if you are exchanging out of a piece of land. You certainly can, but it’s not a requirement.

Consult with a Qualified Intermediary

At CPEC1031, we put an emphasis on relationships. We work closely with all of our clients to make sure they understand the 1031 exchange process at each stage. With twenty years of experience in the like-kind exchange industry, our team can prepare all of your documents for closing, advise you on replacement properties, and answer all of your lingering questions. Contact us today at our office in downtown Minneapolis to set up a time to chat with one of our qualified intermediaries about your 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

How to Calculate Your Basis in a 1031 Exchange

Calculating your cost basis in a property is an important step in a 1031 exchange. In this article, we are going to briefly explain how to calculate your basis in a 1031 exchange of real estate.

How to Determine Your Basis

To get a rough estimate of your basis, follow these steps:

• Add the purchase price of your relinquished property to the closing costs you paid when you originally purchased it.

• To that number, add the cost of all the improvements you have made to the property over the years.

• Next, subtract the depreciation that you actually claimed (or that you could have claimed) – whichever number is greater. This is your depreciated basis.

• To find your amount realized, subtract the closing costs and commission from the sale price of your relinquished property.

• Next, add the replacement property purchase price to the closing costs for the replacement property.

• Finally, subtract the amount realized from the cost basis of the replacement property and add the depreciated basis back in.

Calculating your basis can get complicated quickly. If you have any questions, don’t hesitate to contact a qualified intermediary for answers.

1031 Qualified Intermediary

Hiring a qualified intermediary is an essential first step in a 1031 exchange. A skilled intermediary can help you through the entire exchange by preparing your documentation for closing and answering all of your questions. Give our qualified intermediaries a call today to get your 1031 exchange off the ground. Our intermediaries help clients throughout the state of Minnesota and around the 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.

© 2022 Copyright Jeffrey R. Peterson All Rights Reserved