1031 Exchange Rental Pool Property Rules

Here’s a common 1031 exchange question we get from time to time – how much personal use can you take on a replacement property put into a rental pool? In other words, if a taxpayer sells a Minnesota rental property in Minnesota and buys a rental condo in Florida, how much can they live in that Florida “investment” property without violating tax laws?

Rental Pool Property Rules

If the taxpayer puts the Florida property in a rental pool, they can have some limited mixed personal use: up to 14 days a year, or up to 10% of the time it is actually rented in a year. The IRS can test each of the two separate years after the exchange under the safe harbor.

Contact a Qualified Intermediary

It’s always a good idea to contact a skilled qualified intermediary if you have questions about any details surrounding your 1031 exchange. Contact the intermediaries at CPEC1031, LLC today to discuss 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.

© 2023 Copyright Jeffrey R. Peterson All Rights Reserved

2 Tips for 1031 Exchanging a Home with Reduced Debt

When you sell a home that had the debt reduced due to a loan forgiveness program such as the Mortgage Forgiveness Debt Relief Act of 2007, you may have a lower basis in your property (than what you paid for it). In this situation, there are some additional precautions that you have to take in order to ensure the success of your 1031 exchange.

IRS Regulations

IRC Section 121 gives a $250K exclusion of income ($500K for married couples filing jointly) on the sale of a principal residence. This may cover all of your gains, but you need to check with your own CPA or tax accountant to be sure.

IRC Section 108 {Part H} is an exclusion of income from “discharge of indebtedness”. The debt forgiveness could have triggered an offsetting reduction in you basis. Gain is determined by subtracting your current basis from your net-sale price (after subtracting selling expenses like commissions and title/closing fees and recording charges). The amount of debt relief that is excluded generally reduces the owner’s cost basis in the property.

Work with Your CPA

As always, you need to work with your own CPA or tax accountant to see what your current basis is (after any subtraction for the debt relief) to see if you GAIN or profit for tax purposes is more than the exclusion amount under 121.

• 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

Can You Pay Off a Mortgage with 1031 Exchange Funds?

Can a taxpayer do a 1031 exchange of real estate and use the sales proceeds to pay down or pay off a current investment property mortgage?

1031 Exchange Rule #1

First and foremost, in a 1031 exchange the taxpayer conducting the transaction needs to relinquish an old property and receive a new like-kind replacement property. If the taxpayer uses the proceeds from the disposition of the old relinquished property for anything other than the purchase of new replacement property then the exchange may fail.

Paying Off Debt

Paying off debt on land that you already own is not (in the eyes of the IRS) a valid use of the exchange funds. They do not view the receipt of this debt relief as being a replacement property. Bottom line, you need to move your exchange proceeds into your new property. Using these funds for any other purpose – such as paying off a mortgage – will jeopardize your 1031 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

How to Guarantee Title in a 1031 Exchange

Title insurance companies provide the assurance that you have purchased a property, that you are the owner of that property, and that you have marketable title. But how do you guarantee your title in a 1031 exchange?

Transactional Expenses

When acquiring replacement property oftentimes people are worried about the transactional expenses and they’re looking to cut expenses anywhere they can.

One place that you don’t want to cut back on is title insurance. When you go to sell your property in the future you’re going to want to have some proof that you’re the owner of the property and that it is free of liens, encumbrances, and title flaws that may have existed before you acquired the property.

Title Insurance Commitment

We highly recommend that in conjunction with the purchase of any replacement property you get a title insurance commitment that shows any adverse claims, any liens, any judgments that may encumber the property, and that you have those all cleaned off as part of the process of closing on your new replacement property.

CPEC1031, LLC

At CPEC1031, we have decades of experience facilitating 1031 exchanges across the country. You can find us at our main offices located in downtown Minneapolis. Don’t hesitate to reach out today to discuss the details of your next 1031 exchange transaction!

• 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

Investment or Business Properties Qualify for 1031 Exchange, But Be Careful with House Flips

One question a lot of taxpayers have when it comes to 1031 exchanges is “can I do a 1031 exchange on flipped property?” The short answer is no, but you there are other ways to structure your exchange in order to qualify.

Don’t Hold for Resale

You don’t want to be seen as holding primarily for “resale” because that will NOT qualify for 1031. The question becomes, are you holding the property for investment or business purposes or are you holding it for inventory for sale to the public?

The length of time a property is owned is but one of the many factors looked at to determine if you have held the relinquished property for the qualified purpose of investment or business purposes, as opposed to holding primarily for resale (flipping). One good year of rental is a good rule of thumb but the longer the better.

Having an unsolicited offer may be a good detail in this facts and circumstances analysis…if you go for a shorter hold period…but that’s perhaps more risky.

• 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