Property Identification Options for 1031 Exchanges

There are three general options for identifying property in any type of 1031 exchange. You only need to satisfy one of these rules to conduct your 1031 exchange:

1. 3-Property Rule. Identify three or fewer replacement properties. Most taxpayers conducting a 1031 exchange stick to the 3-property rule because it’s the simplest and easiest method. You can identify up to three properties without regard to their value. You could identify the IDS Center, Foshay Tower, and Empire State Building. It doesn’t matter that they’re extremely expensive – just that they are three or fewer properties.

2. 200% Rule. Identify any number of replacements; however, the total value of those properties identified may not exceed 200% of the value of your relinquished property. Some clients want to identify more than three properties. This often comes up in the context of securitized real estate that’s packaged in DSTs. What if the DST is an amalgamation of 5-6 properties, like a mini-portfolio? The DST itself may exceed three properties right out of the gate. So you have to be careful when purchasing DSTs to talk to the sponsor and get all the details so it doesn’t inadvertently jeopardize your exchange.

3. 95% Rule. Identify any number of replacements as long as you end up receiving at least 95% of the value of all properties identified. This rule is not used very often and is basically only used for big portfolio purchases. If you want to exchange into 100 oil and gas wells you can identify them all so long as you actually receive 95% of them at the end of the transaction.

Savvy investors make sure that they acquire their replacement property within the 45 day identification period. That’s because you’re deemed to have identified that which you receive within the 45 day identification period. If you acquire the property within the 45 day identification period, you won’t risk messing up your identification.

Keep Your Money Working for You with a 1031 Exchange

When you conduct a 1031 exchange you keep your money working for you in a continued, tax-deferred investment, rather than paying out a large sum in capital gains taxes. If you’re interested in doing a 1031 exchange, your best bet it to reach out to a qualified intermediary who can help you through the process and make sure you have all of your bases covered. CPEC1031, LLC provides qualified intermediary services to clients 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.

© 2025 Copyright Jeffrey R. Peterson All Rights Reserved

An Example of a Non-Safe Harbor Construction Exchange

Let’s say you have a 60 unit apartment complex in Minnesota that you’ve owned for a long time and depreciated down over the years. Let’s also assume that the complex has a lot of deferred maintenance and it’s located in a neighborhood that doesn’t seem like it will grow in the future. You might decide that you’d rather be in Florida with a 120 unit complex. So you tell your intermediary to buy a piece of raw land in Florida and hold it for 25 months while you build the new unit. Towards the end of the construction, you decide to list your 60 unit property for sale. As long as you acquire your new completed replacement property within 180 days of the sale of your relinquished property, you should have a valid 1031 construction exchange.

However, it’s important to note that this type of exchange would fall outside of the Rev. Proc. 237 safe harbor and would be considered a bit riskier than a safe harbor exchange. It’s always a good idea to work with a qualified intermediary on any like-kind exchange but it’s especially important in non-safe harbor exchanges like the one outlined here.

Get the Help You Need with Your Next Like-Kind Exchange

Get the help you need with your next like-kind exchange by contacting the professionals at CPEC1031, LLC. With more than twenty years of experience, we have the skills necessary to make your 1031 exchange dream a reality. From document preparation, to fielding any questions you might have, we’ve got you covered throughout the entire 1031 exchange process. Reach out to our team of qualified intermediaries today to talk about the details of your next 1031 exchange of real estate.

• 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.

© 2025 Copyright Jeffrey R. Peterson All Rights Reserved

Basis Shifting & Related Party Transactions

Lately, the IRS has been trying to stop abusive basis shifting gains under partnership law. However, abusive basis shifting originated with section 1031.

Consider the following example. Let’s say that you have owned a business property in Roseville, MN for 40 years. Your basis is low but the value is high. On top of that, you recently built another business property in San Diego for the same price (but with a much higher basis). Now let’s say you swap these two business properties between your own wholly owned subsidiaries, effectively moving that high basis you have in the San Diego entity and flip-flop it so that it moves to the Minnesota property. When you ultimately sell that Minnesota property, now you’ve got a high basis and you have to pay a lot less tax. To stop that type of abusive basis shifting from occurring, section 1031(f) was introduced to the code.

One of the precepts for section 1031(f) is that if the motivation for doing the related party transaction is to avoid the imposition of the tax, then the exchange is invalid.

Get Your 1031 Exchange Moving Today

Get your 1031 exchange moving today by reaching out to a qualified intermediary who can help you navigate the like-kind exchange process. CPEC1031, LLC works with taxpayers throughout the United States on real estate exchanges under section 1031 of the Internal Revenue Code. These exchanges, when set up correctly, can allow you to defer 100% of your capital gains tax burden when you sell qualifying investment real estate. Contact the skilled intermediaries at CPEC1031, LLC today to learn more about our process and see how we can help you!

• 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.

© 2025 Copyright Jeffrey R. Peterson All Rights Reserved

Related Party 1031 Exchanges of Farmland

In the Midwest, we do a lot of family related party 1031 transactions. That’s because we have a lot of farmers in the region. If you’re a farmer and you want to buy a productive farm right next to your home farm, oftentimes you’ll be buying that property from a family member. These farmers have synergistic economic reasons for buying property as well as emotional connections to the land itself.

Accountants in rural Minnesota are accustomed to filing form 8824 that specifically asks you to disclose if you bought or sold directly or indirectly from a related party. If you do a related party transaction, you’re required to provide a narrative explanation of why this transaction is legitimate and not part of a scheme to avoid the imposition of tax. It’s important to work with your 1031 intermediary to craft this narrative statement to ensure your exchange doesn’t run afoul of IRS guidelines.

Contact a 1031 Intermediary

Contact a 1031 intermediary at CPEC1031, LLC today for help with your next 1031 exchange. Our team is standing at the ready to walk you through all the details of the 1031 exchange process, from the sale of your relinquished property to the acquisition of your replacement property. We’ll make sure you set yourself up to defer as much of your capital gains tax burden as possible. Set up a time to chat with one of our Minnesota qualified intermediaries today.

• 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.

© 2025 Copyright Jeffrey R. Peterson All Rights Reserved

Estate of Bartell & Non-Safe Harbor Construction Exchanges

You can do a build-to-suit exchange under the safe harbor of Rev. Proc. 237, but that caps you at 180 days to complete all your construction. Another, slightly riskier, option is to do a non-safe harbor construction exchange. In a case called “Estate of Bartell” in Florida, there was a business owner who had a drug store that was built into a strip mall. They were contained inside of a bigger structure and they wanted to have their own stand alone building. So they hired a qualified intermediary to procure a new out lot and to hold the property while the new building was constructed. This process took 17 months to complete, after which the taxpayer sold the old property and exchanged into their newly constructed property.

Everything seemed fine until they got audited and went to tax court. The tax court judge sat on the decision for a long time but eventually held in favor of the taxpayer. The IRS subsequently chose not to appeal the decision, but they did file a Notice of Non-Acquiescence, stating that they disagreed with the court’s decision.

As a result, non-safe harbor construction exchanges are a little bit riskier than safe harbor exchanges, but some taxpayers still choose to do them.

Hire a Qualified Intermediary

Hire a qualified intermediary to help with your next like-kind exchange of investment real estate today. The qualified intermediaries at CPEC1031, LLC have decades of experience working with taxpayers on their 1031 exchanges. We can guide you through the exchange process and make sure you are making informed decisions every step of the way. Contact us today to learn more about the 1031 exchange process and see how we can help. Our office is located in downtown Minneapolis but we serve clients throughout state of Minnesota and the entire 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.

© 2025 Copyright Jeffrey R. Peterson All Rights Reserved