A 1031 Exchange is the Best Way to Defer Capital Gains Tax when Selling Real Estate

Capital gains taxes are a big point of concern for any taxpayer considering a sale of real property. Section 1031 of the Internal Revenue Code offers a method for deferring capital gains taxes on the sale of real estate. In this article, we are going to explain how a 1031 exchange is the best way to defer capital gains taxes when selling real estate.

The 1031 Exchange Process

Let’s start with a brief breakdown of the 1031 exchange process. The idea behind section 1031 is that instead of selling property in an outright sale, you exchange your property for a newer, bigger replacement property. Here’s how the process typically works:

• You sell your relinquished property.

• You identify new replacement property.

• You redeploy your net proceeds from the relinquished property into the replacement property.

The Result? Capital Gains Tax Deferral

If you meet all the necessary requirements, you will be able to defer 100% of your capital gains tax burden on the sale. Depending on the property in question, this can result in a HUGE tax savings.

Defer Capital Gains Taxes

If you are looking to sell a piece of investment real estate, but are hesitating because of the potential capital gains taxes, then a 1031 exchange may be right for you! Contact one of the 1031 exchange professionals at CPEC1031 today to learn more about the process of exchanging property under section 1031 of the Internal Revenue Code. Our qualified intermediaries have over two decades of experience helping clients with their real estate exchanges. Contact us today at our Minneapolis office or one of our satellite offices around the country to set up a time to chat.

• 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

Remember These Potential Pitfalls When Selling Rental Property

If you own a rental property and you’re thinking of selling, there are some important factors to keep in mind. In this article, we are going to talk about a few things to keep in mind when selling rental property.

Be Aware of Capital Gains Taxes

Selling a rental property is a lot different than selling your primary residence. Since the rental property is considered an investment property, you are responsible for paying capital gains taxes on the sale. Depending on the property itself, this can be a hefty bill that the seller has to foot – often 20% or more of the sales proceeds.

How to Avoid a Huge Tax Hit

If you are hesitant to sell because of this potential capital gains tax bill (who can blame you?), a 1031 exchange can help you defer your capital gains taxes when selling rental property. With a 1031 exchange, you would take your proceeds from the sale of the relinquished property and reinvest them into a new replacement property (another rental property, or any other investment property that qualifies). This helps you avoid a tax bill and keeps your money working in a continued investment.

CPEC1031, LLC

At CPEC1031, we have more than twenty years of experience helping clients through the 1031 exchange process. Our qualified intermediaries will walk you through each and every step in the process – from planning to closing – and answer all of your questions along the way. If you are selling a rental property in a 1031 exchange transaction, contact our professionals today. Our primary office is located in downtown Minneapolis, but we have 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.

© 2022 Copyright Jeffrey R. Peterson All Rights Reserved

How to Deal with Earnest Funds & Closing Costs in a 1031 Exchange

Regarding earnest funds and closing costs, can you use 1031 exchange funds to pay for them? If you cut a check for earnest money, will the 1031 exchange funds credit you back? Many taxpayers have questions like this as they try to project out the down payment percentages with the lenders and also in preparation of writing offers. That’s our topic for this article.

Earnest Money & Transactional Costs

Yes, you can pay earnest money and transactional costs associated with the closing of the acquisition of the property out of exchange funds. If you advance earnest money out-of-pocket, we can have that deposit returned to you at the time of closing. If it’s non-refundable earnest money, though, which either leaves or bypasses the closing escrow, we would need the seller to be amenable to sending it back to the title company; we can’t reimburse you out of exchange funds during the exchange period.

Please note that costs related to obtaining loans – including good faith deposits and down payments – are generally treated as distinct from the costs of obtaining the property and should not be funded out of the exchange; doing so could trigger some recognition of gain.

• 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

Can you Exchange a Residential Property in a Like-Kind Exchange Transaction?

Some of the most common questions we get about 1031 exchanges involve the question of residential property. Can you use a residential property as one of your 1031 properties? Does it make a difference if it is entirely used for personal use, rented out some of the time, or if it is just a rental property and not used at all for personal use?

In order to qualify for 1031 treatment, the Replacement Property should be held for investment or business purposes. If you immediately start using the Replacement Property for extensive personal use that may jeopardize the 1031 exchange.

From the IRS

Both the relinquished property you sell and the replacement property you buy must meet certain requirements.

Both properties must be held for use in a trade or business or for investment. Property used primarily for personal use, like a primary residence or a second home or vacation home, does not qualify for like-kind exchange treatment.

CPEC1031, LLC

If you have questions about the specifics of your 1031 exchange, reach out to CPEC1031 today. Our qualified intermediaries have over two decades of experience helping clients facilitate 1031 exchanges of real estate. Contact us at our downtown Minneapolis office today 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.

© 2022 Copyright Jeffrey R. Peterson All Rights Reserved

1031 Exchange Tips for Conservation Easements

If you’re a farmer or land owner and you’re approached by a government entity to grant a permanent conservation easement in exchange for a huge amount of cash you may be scratching your head thinking “what am I going to do with this large amount of cash? I’m going to have to pay a lot of it out in taxes.”

1031 Permanent Conservation Easement

The interesting thing is that a permanent conservation easement is eligible as a 1031 relinquished property. Now the trick is that at the very beginning of these negotiations you want to tell the government entity that you’re doing a 1031 exchange and you want to make sure that the proceeds – the check that’s going to be issued – is not given to you, but instead is given to the qualified intermediary.

Whenever you’re working with a bureaucratic governmental entity it helps to start early and to say it often that you’re doing an exchange and that there’s going to be a little bit different payment method here. Often, if you try to raise this at the eleventh hour and change the plans it can be difficult to get the governmental entity to come into alignment with what you want to do for the exchange.

Start Early & Notify

So start early, notify them early, and let them know where you want your proceeds to be sent. The whole idea in a 1031 exchange is to insulate the seller from receiving the proceeds and to have those monies instead go to the qualified intermediary so they can be earmarked to purchase new replacement property that will qualify for your 1031 tax deferral.

• 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