Dealing with the S-Corp Issue in 1031 Exchanges

The S-Corp issue is a problem in a drop and swap 1031 exchange. In this article, we are going to discuss some of the issues that can arise when it comes to 1031 exchanges and S-Corps.

The S-Corp Problem

Why do S-Corps present an issue when dealing with a 1031 exchange? It is much more difficult to reconfigure the ownership of the relinquished property by distributing out tenant-in-common interests from a corporation because generally the value of the property that is distributed (that is not considered a dividend) is applied first to reduce the shareholder’s basis in the corporation’s stock. Any remaining portion is treated as gain from the sale or exchange of distributed property. This does not lead to a good result from a 1031 perspective.

If the owners are in a partnership, we have much better options when it comes to 1031 exchanges of property. As always, it’s a good idea to start early if you want to explore your 1031 exchange options. Reach out to a qualified intermediary today to discuss your options.

• 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

Does Rental Property Qualify for 1031 Exchange Treatment?

How long does the property need to be rental property in order for the property to qualify under the 1031 exchange rules? Put simply, if a property is rental property this year only, will the 1031 exchange apply? One typical safe answer is the “longer the better”. However, that is not much help.

Another answer is that the taxpayer must have actually intended to hold the relinquished property for investment/business purposes (when it was disposed of) in order to qualify. Many tax professionals think that a year of qualified use for investment/business purposes is sufficient. I have always felt better with two years because of an old PLR that said two years was sufficient.

Curious About Section 1031?

If you want to learn more about section 1031 of the Internal Revenue Code and how it can help you save on taxes when selling investment real estate, reach out to CPEC1031 today! Our qualified intermediaries have more than two decades of experience facilitating real estate exchanges of all shapes and sizes. We can prepare all of your 1031 documents and ensure that you fully understand the 1031 exchange process. Contact us today to learn more about our full range of 1031 exchange services. You can find us at our main office 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.

© 2023 Copyright Jeffrey R. Peterson All Rights Reserved

What to Know About Perpetual Easements & 1031 Exchanges

Many people are doing 1031 exchanges of real estate. A subsection of real estate would be the granting of a perpetual easement, such as a conservation easement. Significant interests like a perpetual transfer of rights in your property that restrict your ability to use it and to fully exploit every aspect of it – those interests can be 1031 exchanged. More importantly, these interests can be exchanged into a fee title interest in other real estate.

For example, a farmer who is granting a 30-year encumbrance such as a conservation easement or watershed restriction may be able to 1031 exchange that interest into other property that is like-kind (i.e. real estate that’s in the United States that’s going to be held for investment or business purposes).

So not only can fee title be exchanged, lesser interests can also be exchanged. This is an important tax planning opportunity for anyone considering granting a conservation easement or a similar kind of restriction that affects their property either perpetually or for a period of 30 years or 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.

© 2023 Copyright Jeffrey R. Peterson All Rights Reserved

Do You Need to Assign Your Purchase Agreement to Your Qualified Intermediary in a 1031 Exchange?

When perusing your replacement property assignment agreements, you may come across a commonly included section that reads something like the following: “Exchangor intends to assign its rights but not its obligations in the Replacement Property.” What exactly does this mean?

Replacement Property Purchase Agreement

Basically, this gives the Exchangor the right to receive the replacement property from the seller, but does not make the Exchangor responsible for fulfilling any of the things the seller is required to do.

In the “old days,” 1031 exchanges had to be done by conveying the subject properties from the seller to the Intermediary, then from the Intermediary to the buyer. The regulations still require that we initially structure it that way even though we later go on to instruct the Exchangor to receive the replacement property directly from the seller (which is now allowed, provided the Exchangor still assigns its rights to the Intermediary). This is simply a nominal assignment for tax purposes.

• 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 Much Lead Time Should You Give Your Title Company in a 1031 Exchange?

If you’re thinking about doing a 1031 exchange, you don’t want to drop that bombshell on your title company the eve of the closing. How much lead time should you give your title company in a 1031 exchange?

Don’t Wait Until the Last Minute

By waiting until the eleventh hour when everyone’s already got their documents set up and prepared in a certain fashion, if you throw a curve ball and tell them that you want to do a 1031 exchange at the last second it’s going to create some drama and disruption for a lot of parties involved in the transaction.

The best advice is to get your 1031 exchange set up with the intermediary well in advance of the closing so that the closer is aware of what’s needed and can get the extra 1031 documents circulated and signed by all of the parties well before the closing.

Smooth Closing Process

We still get calls from the closing table from folks that didn’t know that they needed to get their 1031 exchange set up in advance. We can have a fire drill, prepare the documents quickly and get them out when needed, but my advice is to take the time and get it set up well in advance so that you have a smooth signing ceremony rather than a chaotic closing.

•  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