2 FAQs About 1031 Exchanges in Minneapolis

We recently assisted a real estate broker with a 1031 exchange for their client who was selling a duplex in the Twin Cities. They intended to move the proceeds from the sale into a fourplex property in a 1031 exchange. Here are some pertinent questions relating to this particular 1031 exchange that may be applicable to other exchanges.

Commercial Plus Residential Space

Is there a problem with one of the properties having commercial rental space as well as residential? One place, in particular, has three apartments with 2800 sq ft of commercial space below.

The replacement property must be held for investment or business purposes and may be residential or commercial rentals (or a combination of both).

Rolling Proceeds into More than One Property

Is it possible to roll the sales proceeds from the relinquished property into more than one replacement property?

You are allowed to purchase multiple replacement properties (provided that they are designated / Identified in writing within 45 days of the closing of the 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

Partial 1031 Exchange Consequences

From an accounting point of view when you’re doing a 1031 exchange, if you want to defer every cent of tax in a 1031 exchange you need to kind of juggle three balls in the air at the same time – value, equity, and debt. In this article, we are going to talk about the consequences of dropping one of these balls and only qualifying for a partial 1031 exchange.

Value

First, you need to continue your investment into like-kind property that is equal or greater value than what you relinquished. If I sell a property for 1 million dollars and I only buy a replacement property for $10,000 the IRS is going to say “hey where is your continuation of investment? We only see this paltry $10,000 replacement property.”

So to the extent you buy down in value you’re going to recognize the gain dollar for dollar to the extent that you have a gain.

Equity

The next ball that we’re juggling is the equity. Whatever net proceeds you have from the sale of your relinquished property, that equity needs to be redeployed into the new replacement property. If you put some of that cash proceeds into your pocket instead of into the replacement property the IRS is going to tax you dollar for dollar to the extent that you put that cash in your pocket. So during the exchange process you don’t want to touch any cash, you want to reinvest all of the proceeds into the new property.

Debt Relief

The last ball we’re juggling is debt relief. To the extent that you pay off mortgages, deeds of trust, liens and debt associated with the relinquished property we need to offset that debt relief with new debt on the replacement property or cash. If you win the Powerball lottery on the way to your replacement property closing and you can pay cash for the replacement property that cash in out-of-pocket will also offset the debt relief.

• 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 Title Closers Should Know About Closing Costs & 1031 Exchanges

Many closers are put in an uncomfortable position because taxpayers have all kinds of credits and debits on their closing statements and the closer is asked if these expenses are permitted transactional expenses that may appear on a closing statement. The closer doesn’t have the tools to answer these questions.

Big Picture

Let’s talk really big picture. On the sale of the relinquished property the taxpayer wants to move all of their equity into their new replacement property. The taxpayer is allowed to pay out of the net proceeds certain transactional expenses like:

• Realtor commissions

• Attorney fees related to the exchange

• Recording fees

• State deed tax

But sometimes the taxpayer wants to put an oddball expense on the closing statement like a bill from home depot or other expenses unrelated to the transaction. Those oddball expenses that wouldn’t normally appear on a closing statement should ring an alarm bell.

The other expenses that might need to be addressed are debits for security deposits, rent proration, and property taxes.

• 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 - Can You 1031 Exchange Foreign Property?

Interestingly, foreign property cannot be 1031 exchanged for US property. The code specifically says that foreign property is not like-kind to US property. But remember, US taxpayers are taxed on their gains from wherever they’re derived, including foreign transactions. So if you’re a US taxpayer selling foreign real estate you can still do a 1031 exchange on your foreign real estate, but you can’t exchange into the US. So you would have to do a foreign property to foreign property exchange. For example, if you sold a property in the UK you could buy your replacement property in Canada or Mexico, but you could not buy the replacement property in Minnesota because the US property would not be considered like-kind to the UK 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

Essential Things to Keep in Mind When Doing a 1031 Exchange with a Contract for Deed

Some taxpayers completing 1031 exchanges are buying replacement properties from sellers with “seller-backed financing,” such as a contract for deed. Furthermore, this contract may be inconvenient to record because this conveyance of equitable title by contract for deed may violate the sellers existing bank financing agreements which is sometimes referred to as the “due on sale clause.” These provisions in the loan agreement and mortgage, often prohibit any convenience or transfer of the banks collateral without first paying off the debt owed to the bank. 

Minnesota requires that the contracts for deed be recorded in a timely fashion, and imposes both potential criminal and civil penalties for failure to record.

• 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