Video – Passive, Management-Free Investment Options that You can 1031 Exchange Into

A lot of people are asking about replacement property investments that are more securitized in nature – passive, management-free investments that you can exchange into, not with your real estate agent but with a financial planner. These products are often referred to as DSTs (Delaware Statutory Trusts). These investments are very attractive because they allow you to redeploy all of your equity into a passive, management-free investment that’s designed for wealth preservation and to derive a steady stream of income as you age.

Further, some of these investments have unique features. One has a refinance feature that allows you to extract 85% of your equity 35 days after getting into the DST. This allows you to lock in the tax deferral by acquiring these securities of equivalent value. Then later in a separate transaction, you borrow out 85% of your equity – allowing you access to your excess capital to do other things such as buy other real estate or pay off debt.

Find Out if a 1031 Exchange is Right for You

Find out if a 1031 exchange is right for you by talking with one of the qualified intermediaries at CPEC1031, LLC. Our team of skilled 1031 exchange professionals is available to help you through the entire like-kind exchange process from start to finish. Take the first step in the 1031 exchange process by contacting an intermediary at CPEC1031, LLC. Our office is located in downtown Minneapolis but we work with clients throughout the state of Minnesota as well as the entire country.

• 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

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

Tips for 1031 Exchanging Rental Property

In a 1031 exchange, both the relinquished property that's sold, as well as the replacement property have to be held for a qualifying purpose of investment or business use.

Renting to Related Persons

Many people that are acquiring replacement properties in a 1031 exchange may be inclined to rent them out to related persons such as a son or a daughter. The concern with this situation is that this rental arrangement with your related-party may be perceived by the IRS as just a sham. That you're really intending to put a roof over your kid’s head instead of using the property for investment or business purposes.

Tips for Upholding your Qualifying Purpose

If you are actually acquiring the property with business intent to rent it out and you're renting it out to a son or daughter, you want to make sure that you are legitimately using the property for business purposes and you're able to substantiate that. Make sure you have all of the following:

• A real written lease between the taxpayer and the tenant at market rate.

• Rent checks coming in incrementally and regularly according to the terms of the lease.

• Finally, you want to report your rental activity on your tax return just like you would with any other investment or business property that's not rented out to a related party.

If you intend to move into the replacement property after some years of renting it out you need to be cautious that it doesn't appear that this whole rental arrangement was just a sham to make the replacement property fit into an investment or business paradigm when in fact you never really intended to rent it out. Getting too cute with the IRS and jumping through a charade of renting it out may backfire for taxpayers.

• Start Your Exchange: If you have questions about 1031 exchanges of rental properties, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2017 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