How to Find a Replacement Property Before Selling Your Relinquished Property

Savvy investors like to think ahead when they’re doing a 1031 exchange. Ideally, you want to gain the advantage of locking up a replacement property before selling the old relinquished property. Here’s a common question people ask in this situation:

“Is it permissible for me to sign a purchase agreement or an option agreement to contractually find a seller to sell me a replacement property even before I close on my old relinquished property? Will that somehow foul up my 1031 exchange?”

Locking Up a Replacement Property

The answer is you can lock up a replacement property, you just can’t close on it before you’ve first disposed of the old relinquished property. So signing a purchase agreement, or an option agreement are proven practices. You just don’t want to inadvertently acquire them before you sell the old relinquished property.

Reverse 1031 Exchange

That being said, if you have to close on the replacement property first (before selling your relinquished property) there’s a solution for that too.

• 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

How Deed Tax & Transfer Tax Work in a Minnesota 1031 Exchange

In Minnesota, for the privilege of filing a deed or mortgage, the state of Minnesota charges a fee, sometimes called deed tax, transfer tax, or mortgage registration tax. Why is this important for people doing a 1031 exchange?

Reverse 1031 Exchange Considerations

This comes up primarily when we’re doing a reverse 1031 exchange in which an intermediary forms an LLC to acquire title to the replacement property. At the time that we receive title to that replacement property the seller typically pays the transfer tax. But once the exchange intermediary has title to the property we are going to eventually transfer that to our taxpayer. Will there be deed tax on that transfer?

The state of Minnesota really is quite flexible and accommodating in understanding that the deed tax has already been paid once by the seller of the replacement property to the intermediary. The subsequent transfer from the intermediary to the taxpayer is generally not taxed in Minnesota unless we’ve increased the value of the property by constructing improvements.

Other States

Now other states such as Wisconsin are much more aggressive in collecting the transfer tax and in those states you make it twice – once for the transfer to the intermediary and secondly from the intermediary to the taxpayer. Strategically we can talk about your situation and decide which property is most advantageous to park. Because of the reverse exchange rules we have the flexibility of parking either the relinquished property that will be sold or alternatively the new replacement property that will be received. Transfer tax can come into that equation and determine what’s the best property for you to park in your reverse 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.

© 2023 Copyright Jeffrey R. Peterson All Rights Reserved

When Should You Start Looking for 1031 Exchange Replacement Property

In a 1031 exchange, timing is everything and many investors have questions about when to take action during the exchange process. A lot of timing questions come up when dealing with replacement property. For example, when should you begin to look for replacement property? Can you begin before you sell your relinquished property? That’s our topic for this article.

Replacement Property Timing

When you begin a 1031 exchange by selling your relinquished property, the clock immediately starts ticking. At that point, you’ve only got 180 days to finish up your exchange. The first 45 of those days are set aside as your exchange period. This is the time during which you need to identify in writing the replacement property that you wish to exchange into.

That being said, it’s never a bad idea to start early and lay the groundwork for a successful exchange. You can certainly start looking for replacement property before you begin your exchange. In fact, doing so is a good strategy to ensure that your exchange runs smoothly.

1031 Exchange Services in MN

If you are searching for 1031 exchange services in Minnesota, you’ve come to the right place! CPEC1031 has been facilitating exchanges of real property for more than two decades. Our intermediaries can help you navigate the 1031 exchange process and, ultimately, save money in capital gains taxes. Contact our team today to learn more about our services and discuss the specifics of your like-kind exchange. You can find us at our primary office located in downtown Minneapolis. In addition to that, we have satellite offices 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.

© 2023 Copyright Jeffrey R. Peterson All Rights Reserved

When Should You Schedule Your Closing After Selling Your 1031 Exchange Property

When conducting a 1031 exchange, clients often ask “how soon can I schedule the closing of my new replacement property after the completion of the closing of my old relinquished property?” That’s a great question. It’s important to leave a little buffer time between the two closing dates. We explain why in this article.

2-3 Business Days

The safe answer is to schedule two or three business days between the two closings.

On reason for this buffer time is there may be an unexpected delay with the purchaser’s closing of the old relinquished property that slows the process down and is outside of your control.

Another reason is that the closing agent for the old relinquished property may not immediately wire out the 1031 funds (net proceeds) if the closing occurs late in the day, and they miss the cut off with the federal reserve (or their bank) to transfer the funds on the same day as the closing of the relinquished property. If the closing of the old relinquished property occurs late on a Friday, the qualified intermediary may not actually receive the 1031 funds until mid-day on Monday.

Payment via Check

Finally, some closings (particularly on the East Coast) are still conducted with payment made by checks rather than by wire transfer. If a check is used to pay for the relinquished property, the qualified intermediary may not have “good funds” for a few days, because the check must be physically mailed or sent by overnight delivery to the qualified intermediary, then physically deposited into the bank. The check has to clear the bank before they are actually available for use to purchase the replacement property. The process of a check clearing through to the depository bank may take a few days, or in some situations up to ten (10) days.

• 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

The Difference Between Realized Gain and Recognized Gain

Many taxpayers mistakenly confused realized gain and recognized gain as one in the same, but the truth is that these two terms mean separate and distinct things. In this article, we are going to talk about the difference between realized and recognized gain in a 1031 exchange.

Realized Gain

In simple terms, realized gain is the benefit you receive when you sell a piece of property. This is true whenever you sell real estate – whether it’s in a traditional sale or as part of a 1031 exchange. Calculating your realized gain is done by taking the sale price of the property, subtracting closing costs, and subtracting your adjusted tax basis in the property.

Recognized Gain

Recognized gain is different than realized gain in that it represents the taxable portion of your realized gain. When selling property in a traditional sale, your recognized gain and realized gain are often the same because you are incurring a tax liability via the transaction. But in a 1031 exchange, this works a bit differently. The benefit of a 1031 exchange is that it allows you to defer this tax liability. So it’s important to distinguish between your realized and recognized gain.

Get Your 1031 Exchange Going Today!

A qualified intermediary can help you get your documents together, advise you of your options, and answer all of your questions throughout the entirety of your exchange. At CPEC1031, we have twenty years of experience helping clients with their exchanges. Get your exchange of real property going today by giving our qualified intermediaries a call. Our main office is located in downtown Minneapolis but we help clients throughout 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.

© 2023 Copyright Jeffrey R. Peterson All Rights Reserved