Video - 1031 Exchanges Involving Contracts for Deed & Seller-Backed Financing

If you sell your property under a contract for deed with a percentage down and the balance paid in a balloon in five years, can you do a 1031 exchange?

First of all, a disclaimer: every contract is written differently. In general, when you enter into a contract for deed you’re effectively conveying equitable title to the buyer. You’re giving them possession of the property. Typically, the vendee on a contract has to pay the property taxes, insurance, and more. They’re the owner for tax purposes. Think about who takes the depreciation deductions on the property that was purchased on a contract for deed. The vendee does (generally speaking) because they have the rights to utilize the property.

When you’re a vendor on a contract for deed you’re selling the property with an installment sale. You’re retaining the bare legal title as an enforcement mechanism to compel the vendee to make their required payments. You’re retaining the bare legal title, but you’ve effectively given the vendee equitable title for tax purposes.

So you’ve basically sold the farm when you entered into the contract for deed. Five years from now when you get paid off on the balloon payment you probably cannot do a 1031 exchange when you’re giving the legal title to the buyer.

How do you work around the fact that you’ve conveyed equitable title in this situation? The first option is to not do seller-backed financing because it complicates 1031 exchanges. That’s not a satisfying answer for many, particularly when interest rates are rising.

Here’s another option: let’s say you’re selling a duplex for $500,000, the buyer is giving you $100,000 down at closing and you’re financing $400,000 for five years. One way to fix this problem is to have the vendee bring their $100,000 in and have the vendor bring in $400,000 out of their own pocket. If you bring in your own cash to loan to the buyer, that means amount of funds in the exchange account will be the same as you’d normally get if there wasn’t seller-backed financing. Having the exchangor finance the buyer out of pocket is a great way to fix the problem, but it requires some liquidity.

In the Uptown area there’s a real estate broker that acts as a sort of problem solver for sellers. If you want a clean break from your property – you don’t want to do seller-backed financing and you don’t want to bring capital to the deal, this broker interposes himself and agrees to buy the property with cash and then sells it to the vendee on a contract for deed. This might be another option.

• 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

The Details of a Build-to-Suit Like-Kind Exchange

Let’s say that you own a retail business in Minneapolis and the local municipal regulations have changed around you, and the location just isn’t right for you any longer. However, you’ve got a lot of appreciation in the property. Maybe you’d be better off repositioning your property into an outer lying suburb. In a build-to-suit exchange, you sell the relinquished property, place the money with the intermediary, and then the intermediary (acting through an exchange accommodation titleholder) purchases the replacement land. You are not only identifying the replacement land, you’re also identifying the real property improvements to be constructed. The intermediary insulates you from receiving that land prematurely. During the remainder of your 180 days you arrange for the construction of new property improvements to build your new facility.

This may be the best way to take your business to the next level, but you don’t want to get slapped on the wrist with taxes in the midst of that transition.

The 180 Day Exchange Period

In a 1031 exchange, your exchange period is 180 days. Is 180 days enough time to complete such an exchange? You need to receive a replacement property of equal or greater value, equity, and debt. If you sell your Minneapolis location for $1 million and the new land in the suburbs costs $500,000 then your bogey for constructing improvements is $500,000. You don’t need to have the construction fully completed. You just need to have enough construction completed so that the land and buildings are worth $1 million or more.

The Benefits of Section 1031

There are many rules and regulations that you need to satisfy in order to ensure your 1031 exchange is a success and you defer 100% of your capital gains taxes. A qualified intermediary can help inform you of these guidelines so you can set your exchange up for success. The team of intermediaries at CPEC1031, LLC has been working on like-kind exchanges of real property for over twenty years. We understand the ins and outs of the like-kind exchange process and can help bring your exchange across the finish line. Reach out to us today at our downtown Minneapolis office to learn more about the benefits of section 1031 and how we can help!

• 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 Furniture & Fixtures in the Replacement Property Be Included in Your 1031 Exchange?

Remember – the IRS has restricted 1031 exchanges to only real estate. Defining what real estate actually is can get a little tricky when it comes to build to suit exchanges.

• Is a dining room table real estate? No.

• Is a new 4K TV that’s attached to the wall real estate? No.

• Is a two by four that’s lying on the job site (not affixed to anything) real estate? No.

• Is the plumber’s invoice for work not yet complete real estate? No. Pre-paid materials and contractors don’t count.

However, built-in fixtures (a water heater that’s permanently plumbed in, for example) may be included. These are items that were personal property until they were incorporated into the structure of the replacement property. So some things may count because they are permanently affixed to the property. Other moveable items of tangible personal property, such as a table, cannot be included for 1031 exchange purposes.

In a construction exchange, you have to do a like-kind exchange meaning you need to build enough real property improvements that exist as real estate. How do you prove that? The title company may be disbursing for your mortgage lender and they keep very accurate records. Your general contractor could provide a written statement. You could even go out with your camera and take video and pictures of the site. It’s on your shoulders to prove that you received real estate of equivalent value and equity.

CPEC1031, LLC – Located in Minneapolis, MN

At CPEC1031, LLC we are your go-to professionals for facilitating 1031 exchanges of like-kind real estate. Our team of 1031 exchange intermediaries have over two decades of experience working with clients throughout the United States on tax-deferred exchanges of real property. Let us put our expertise to work on your next 1031 exchange. We can walk you through the exchange process from beginning to end and make sure you have a full understanding of the various rules and requirements. Contact us today at our Minneapolis location to learn more about the tax-saving benefits of section 1031 and how you can start your next like-kind 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

What is the Last Step in a 1031 Exchange?

We talk a lot about the initial steps involved in a 1031 exchange of real estate. We don’t talk nearly as much about the final steps in a like-kind exchange. In this article, we are going to discuss the last step in a 1031 exchange of real property.

The Final Stages of a 1031 Exchange

Technically, your 1031 exchange will end on the last day of your 180 day exchange period. The specific final step of your exchange will depend greatly on the type of exchange you are conducting and various other factors unique to your situation. In a typical forward exchange, the final steps will include closing on your replacement property, during which your net proceeds from the sale of your relinquished property will be reinvested in your replacement property.

Continued Deferral

Of course, once you’ve closed on your property and your exchange period has ended, the benefits of your 1031 exchange continue. You can now watch your net proceeds (which would otherwise have been paid out in capital gains taxes) compound and build wealth in your replacement property. Looking even further into the future, you may even decide to continue deferring your gains by doing another 1031 exchange.

Contact a Qualified Intermediary to Start Your Exchange

If you are looking for a qualified intermediary to start your 1031 exchange of real estate, you’ve come to the right place! CPEC1031, LLC has decades of experience facilitating exchanges of real property in Minnesota and across the country. Contact us today to learn more about the cost-saving benefits of section 1031 and see if your property is a good candidate. Our main office is located in Minneapolis. Set up an appointment with one of our qualified intermediaries to discuss the details of 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

Video - A Question About 1245 Property

In the event that you go from chicken coop to raw land and there’s a percentage that’s 1245 property, are you liable for the tax on the entire deal or just the tax on the depreciation on that 1245 property.

This might be a planning opportunity because before you sell your chicken coop to the buyer, you may want to say in the purchase agreement: “let’s agree on the allocation of price between the land that I’m selling you and this worn out chicken coop.” You as the seller probably want to minimize the value allocated to the chicken coop building improvement that you’ve written off and you want to maximize the value attributed to the dirt.

The buyer is going to have the opposite intention because as soon as they buy it they’re going to want to take bonus depreciation on that used improvement. So there’s a tension between buyer and purchaser, but generally the IRS will respect an arms length allocated negotiation of value. If you truly did write down that chicken coop, it’s remaining basis should bear some resemblance to its remaining worn out value.

• 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