How to Take Title to a 1031 Replacement Property

In a 1031 exchange, taxpayer “A” typically sells their relinquished property and receives the replacement property, and everything matches up identically. But sometimes taxpayers want to take title to the replacement property in a different fashion. Let’s talk about some of the different ways you can do that.

Form a Single Member LLC

One idea is to form a single member LLC that is wholly owned by taxpayer “A.” The new LLC (let’s call it NewCo) can purchase the replacement property and from the perspective of the IRS it’s still taxpayer “A” that’s receiving the replacement property through its ownership of NewCo.  This is because NewCo is disregarded and seen as transparent by the IRS.

Revocable Living Trust

Another possibility is that a taxpayer may want to take title to the replacement property in a revocable living trust. A revocable living trust operates under the taxpayer’s social security number and for tax purposes it’s a disregarded entity – no different from the taxpayer. As long as they’re in a revocable trust and the grantor of that trust is the taxpayer, then taxpayer “A” could buy the replacement property as trustee of their own revocable trust.

• 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

Video - When to Receive Boot in a Partial 1031 Exchange

If you want to take some boot during a 1031 exchange, you can do so. The time to take boot in a 1031 exchange is at the closing of the relinquished property or at the end of the exchange.

During the closing of the relinquished property, you can take some non-1031 proceeds and we would augment our 1031 documents and closing instructions to specify the closing agent is supposed to give you a certain amount of cash boot. You can also take boot at the end of the 1031 exchange period. After you’ve acquired all of your replacement properties, if there is unused funds left in the qualified intermediaries hands at the end of the exchange, we can release those unused funds to you.

But remember – these funds will be boot, or non-like-kind property that you receive during a 1031 exchange. Receiving boot triggers the recognition of gain on the cash you receive. It will create some inefficiency. But remember – 1031 exchanges are not a zero-sum game. You can do a partial 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

Video - 1031 Exchanges Are Authorized by the Internal Revenue Code

1031 exchanges are authorized in the Internal Revenue Code at 26 U.S.C. 1031 and the treasury regulations. There are also a number of cases, private letter rulings, technical advice memorandums, and other legal authorities that authorize 1031 exchanges. You could say that 1031 exchanges are pretty cut and dry and not very controversial because they’ve been happening for almost 100 years.

• 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

Video - Consider a 1031 Exchange Whenever You Want to Defer Your Capital Gains

You should consider a 1031 exchange whenever you have gains that you don’t want to recognize. Section 1031 allows you to defer the recognition of your gain indefinitely by redeploying that cash into another real property investment.

Wouldn’t it be nice if you could go through life deferring, deferring, deferring and never unnecessarily recognizing gains? Wouldn’t it be nice to use that money that would have otherwise gone to the government to compound and build your wealth?

There are many provisions in the tax code that encourage people to invest in real estate. One of the most important is section 1031 because it allows you to keep this cash that would have otherwise gone out the door in taxes and redeploy that cash into your next investment and build more wealth over time. That benefits not only you, but the entire United States economy, by creating higher values. It also gives you an incentive to get back on the treadmill, reinvest, and lever up into bigger and better properties every time you sell a relinquished 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

How to Implement a Build-to-Suit 1031 Exchange

Recently we’ve been seeing a lot of interest from people in build-to-suit 1031 exchanges. These people are often moving out of facilities in a more urban areas where land is more expensive, out to more exurban, suburban, or rural areas where the land is less expensive. They are building new facilities to their specifications that meet their business needs. The most tax efficient way to do this is to set it up as a build-to-suit 1031 exchange. In that situation, the qualified intermediary can acquire the new land, hold title to the land during the exchange period, and during that period of time expend the remainder of the exchange funds constructing improvements on that property.

Do These Improvements Need to Happen within the 180 Day Exchange Period?

If you want to do a safe-harbor exchange, the answer is yes. You’ve got 180 days, which starts with the earlier of the closing of the relinquished property or the acquisition of the replacement property in a reverse exchange, in which to complete your exchange. If you want to go outside of the safe-harbor, you can try going outside of that 180 day deadline but it comes with risk.

In a non safe-harbor exchange where the intermediary is acquiring the replacement property and constructing its improvements, there is no maximum time frame that the intermediary can hold the property. Going outside of the safe harbor has potentially significant advantages, but it also comes with some risk in that the IRS doesn’t love non safe-harbor exchanges (even though there is substantial case law saying they are legitimate).

• 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