1031 Exchange Holding Periods for Replacement Property

Here’s a common question we get asked by a lot of clients: “How long do we need to hold the new replacement properties until we can 1031 again out of them?” Unfortunately, there is no clear cut answer to this question, but we hope to clarify things at least a little bit in this article.

Holding Period According to Section 1031

Holding period requirements do not have a clear answer. Section 1031(a)(1) states that:

• “No gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like kind which is to be held either for productive use in a trade or business or for investment.”

There is no minimum required period of time that the Replacement Property must be owned that we can point to in the IRC or the Regulations. However, for the IRC 1031 to qualify, a taxpayer must have had the intention (or mental state) of holding property for investment or for use in a trade or business.  The longer the better may be the safest answer.  Holding primarily for re-sale (as inventory or house flips) will not qualify.

• 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.

© 2023 Copyright Jeffrey R. Peterson All Rights Reserved

1099 Reporting When Conducting a 1031 Exchange

In the beginning of a 1031 deferred exchange, when the closing of the relinquished property occurs, the title company or escrow closing company typically has the responsibility to report the seller/exchangor’s disposition to the IRS on a IRS Form 1099-S. This is to ensure that the IRS will have a record of the transaction.

Reporting the Transaction on Form 1099

This often brings raises several questions among the title company or escrow closing company, such as:

·         How do we report the seller/exchangor’s transaction on the 1099?

·         Should we indicate that the seller will receive property as part of an “exchange” in box #4, since the seller/exchangor’s will likely be exchanging into another property?

Box #4

According to the IRS instructions, Box #4 is for when the seller receives something other than cash or cash-equivalent as part of the consideration paid for the relinquished property.

Generally, in a 1031 exchange the only consideration paid is “cash,” and that goes to the seller/exchangor’s qualified intermediary, so Box #4 would typically not be applicable. However, if the transaction involves other non-cash payments from the buyer, such as a promissory note, property or services rendered as partial consideration/payment for the purchased property, then Box #4 would be have to be checked.

• 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.

© 2023 Copyright Jeffrey R. Peterson All Rights Reserved

What is the Definition of “One Property” in a 1031 Exchange?

There are several guidelines that determine property rules in a 1031 exchange of real estate. In this article, we are going to discuss what determines “one property” for the purposes of a 1031 exchange.

3 Property Rule

In a 1031 exchange, you are restricted by the number of properties you can exchange into. You can either exchange into a maximum of three properties (under the three property rule), or you can exchange into any number of properties so long as they are not in excess of 200% of the value of your relinquished property.

The question then becomes, what exactly is one property for the purposes of a 1031 exchange. For example, would two parcels of contiguous land be considered one property or two properties in a 1031 exchange? In this example, the two parcels would likely be considered one property if they were sold collectively under a single purchase agreement by one seller.

Each 1031 exchange is different and you should always consult with a qualified intermediary about your specific situation before proceeding.

Capital Gains Tax Deferral

If you are considering deferring your taxes with a 1031 exchange, the best thing you can do is work with a qualified intermediary who understands the ins and outs of the like-kind exchange process. The qualified intermediaries at CPEC1031, LLC have more than twenty years of experience facilitating exchanges for clients in many different industries. We can help prepare your 1031 exchange documentation and advise you throughout the exchange process. Contact us today at our downtown Minneapolis office to set up a time to chat with one of our qualified intermediaries.

• 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.

© 2023 Copyright Jeffrey R. Peterson All Rights Reserved

What you Need to Know About 1031 Exchanges & Disregarded Entities

Can I buy a 1031 exchange property in a trust, LLC, or other entity that is considered to be a disregarded entity?

Disregarded Entities

The nice thing about disregarded entities is that they are pass-through, flow-through entities. It’s as if the taxpayer that wholly owns the LLC or other entity is the actual owner of the property for tax purposes.

That means that if you own the relinquished property in a trust or LLC or other entity that is wholly owned by you and effectively you are the owner of it for tax purposes, you as an individual can acquire the replacement property to complete your 1031 exchange, either in your own individual name or a new disregarded entity owned by you.

Revocable Living Trusts & LLCs

Here are some situations where you may have a disregarded entity. In a revocable or living trust that operates under your social security number, you are considered the owner of that property. Another situation is LLCs that are wholly owned by you. These are situations in which you should talk with your tax adviser to make sure that these entities are disregarded, flow-through entities and essentially just extensions of yourself.

• 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.

© 2023 Copyright Jeffrey R. Peterson All Rights Reserved

A Few Tips for Revoking Identified Property in a 1031 Exchange

Can a taxpayer revoke his or her 1031 exchange property identification at any point during the exchange period? That’s the topic for today’s article.

How to Revoke Identified Property

The short answer is yes (if you are within the first 45 days of the exchange period). During the first 45 days you can identify your replacement properties in writing and you can also revoke your replacement properties.

But the revocation also needs to be in writing and signed by the taxpayer and sent to the intermediary (or other party that you previously identified to) within that 45 day period. After the 45th day has elapsed, it’s too late to revoke, amend, or otherwise change your identification, and you’re locked into whatever you identified during the first 45 days.

Save Taxes with a 1031 Exchange

If you’re looking to save taxes on the sale of real estate, look no further than the 1031 exchange! A like-kind exchange can help you defer taxes and keep your hard-earned money working for you over time. At CPEC1031, our intermediaries have been facilitating exchanges for taxpayers throughout Minnesota and around the country for decades. Give us a call today to learn more about 1031 exchanges, and how you can use them to save money when selling 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.

© 2023 Copyright Jeffrey R. Peterson All Rights Reserved