Video - Can You 1031 Exchange Between Residential & Commercial Property?

If you’re selling a commercial property, can you also do a 1031 exchange and purchase a residential property? The answer is almost all real estate in the United States is considered like-kind. Commercial, residential, retail, agricultural – it’s all real estate. So you can sell a commercial building and buy a residential property in a 1031 exchange. Remember, both the relinquished property and the replacement property must be held for investment or business purposes. So if you buy a vacation condo on the coast of Sanibel Island, you need to use it for investment or business purposes if you want to qualify for a 1031 exchange on that property. In a 1031 exchange you have to hold the property primarily for investment or business purposes in order to garner the lucrative tax deferral offered by section 1031.

• 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

Is There a 5-Year Ownership Period Required for 1031 Exchanges?

There is oftentimes confusion between the various rules and code sections applicable to different types of real property sale transactions. One of the more common questions we get is about a supposed 5-year ownership requirement. That’s our topic for this article.

Section 1031 Rules

There is no such 5-year rule under Section 1031 of the IRC. Section 1031 is for investment and business real property, and it states that:

• No gain or loss shall be recognized on the exchange of real property held for productive use in a trade or business or for investment if such real property is exchanged solely for real property of like kind which is to be held either for productive use in a trade or business or for investment.

So for Section 1031, one must have held the real property for the qualified purpose of “productive use in a trade or business or for investment,” and the length of time is somewhat undefined in the IRC. For more information, see this video.

Principal Residence Exclusion

Under another, different and unrelated rule, for personal-use property such as one’s home, the Principal Residence Exclusion under Section 121(a) states that:

• Gross income shall not include gain from the sale or exchange of property if, during the 5-year period ending on the date of the sale or exchange, such property has been owned and used by the taxpayer as the taxpayer’s principal residence for periods aggregating 2 years or more.

Under the In Principal Residence Exclusion for one’s home, there is a five year look back period; and in order to qualify for the exclusion, one must pass both ownership and usage tests: The two-out-of-five-year rule states that one must have: (1) Owned the property; and (2) Used as ones domicile (home) the property that is being sold for at least two years (24 months) in the five years prior to the sale closing. One can meet the ownership and use tests during different 2-year periods. However, one must meet both tests during the same 5-year look-back period ending on the date of the sale closing (when the benefits and burdens of ownership shift). Generally, one is not eligible to take the Principal Residence Exclusion if one has already excluded the gain from the sale of another home during the two-year period prior to the sale of your home. So one can only take advantage of the Principal Residence Exclusion every two years or more.

For more information See IRS Topic 701, and IRS Publication 523.

• 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

Have you Taken Accelerated Deprecation on Your Agricultural Building?

Like-kind exchanges (post 2017) are limited to only real property. You can have both I.R.C. §1245 real property components (inherently permanent structures and the structural components of inherently permanent structures) and I.R.C. §1250 real property components (e.g. raw land).

3 Categories of Property Components

Under the new regulations, three categories of property components may qualify as real property for Section 1031:

1. Property specifically listed as real property in the IRS regulations

2. Property classified as real property under state or local law

3. Property that satisfies an IRS facts-and-circumstances test

Sometimes there are agricultural structures that are designated as I.R.C. §1245 property (shorter depreciation life) such as irrigation systems, drainage tile, and other specialty improvements to farm real estate. If property with an I.R.C. §1245 depreciation recapture attribute is sold in an I.R.C. §1031 exchange, the I.R.C. §1245 depreciation recapture must be recognized to the extent that the new replacement property has insufficient I.R.C. §1245 property.

You can match up I.R.C. §1245 relinquished real property with new I.R.C. §1245 replacement real property, it just takes a little more planning and persistence in a 1031 exchange.

The IRS regulations broadly construe like-kind real property to include all business and investment real property in the United States, whether improved or unimproved. Reg. Section 1.1031(a)-3(a)(4).

The term inherently permanent structure means any “building.” The term “buildings” include the following distinct assets if permanently affixed: houses, apartments, hotels, motels, enclosed stadiums and arenas, enclosed shopping malls, factories and office buildings, warehouses, barns, enclosed garages, enclosed transportation stations and terminals, and stores. Also the list of “other inherently permanent structures” is extensive and broad and includes “grain storage bins and silos”.

• 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 are the Most Commonly Utilized Identification Rules in a Reverse 1031 Exchange?

There are several ways of approaching property identification in a reverse exchange of real estate. In this article, we are going to discuss the two most commonly utilized identification rules in a reverse 1031 exchange.

Reverse Exchange Identification Rules

Here are the two most frequently used identification methods when dealing with a reverse 1031 exchange:

• Three Property Rule: List three or fewer relinquished properties.

•  200% Rule: List any number of properties but the total aggregate value of all the identified relinquished properties cannot exceed 200% of the value of the replacement property.

Either of these identification rules will work in a reverse 1031 exchange. It’s just important that you abide by one of them in order to ensure the success of your like-kind exchange.

CPEC1031, LLC

If you are looking to start a reverse exchange of real estate, you’ve come to the right place. At CPEC1031, LLC we have decades of experience working with clients on reverse exchanges. Let us put our experience to work on your next like-kind exchange. Contact us today at our Minneapolis office to learn more. We work with clients throughout the state of Minnesota and across 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

Why Eliminating or Restricting the 1031 Exchange Would Not Raise Taxable Revenue

For decades, some have argued for the repeal of section 1031 of the Internal Revenue Code. According to those who advocate for its repeal, by eliminating the tax deferral of section 1031, the coffers of the government will be increased dramatically because all of these sales will now become immediately taxable. But would this tactic actually work to raise taxable revenue?

The Reality of the Situation

The reality of the situation is that rather than selling properties in taxable transactions, most people will hunker down and simply refuse to sell their property if they have the immediate disincentive of taxation looming.

If the 1031 exchange is eliminated, the volume of sales will not continue at the same pace. The reality is if you don’t have a vehicle (such as a 1031 exchange) to defer gains people will simply not sell. As a result, there will be less revenue, less velocity in the marketplace, and less capital flowing where it needs to go in the economy.

Preserving the 1031 Exchange

If tax reform is needed and simplification is sought let’s keep this old code section that’s been around since 1921 that works great to organically grow and stimulate the economy. Keep the 1031 exchange, which serves a vital function both in the tax code and in the economy.

•  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