Who Should Sign the Purchase Agreement for the Replacement Property?

Taxpayers doing a 1031 exchange, especially a reverse exchange, often ask “who should sign the purchase agreement for the replacement property?” That’s our topic for this 1031 education article.

1031 Purchase Agreement

The easiest way to tackle this issue is to have the name of the taxpayer that owned the old relinquished property enter into the new replacement property purchase agreement.

That way when we need to switch the name of the purchaser right before the closing of the replacement property to an exchange accommodation title holder, which is typically an LLC owned directly by the qualified intermediary, we have the right under the purchase agreement to assign the purchase agreement to that actual purchaser.

Modifications & Amendments

However, all of that time before closing it will be the taxpayer who is on the purchase agreement, so if there needs to be a modification to the purchase agreement or some amendment needs to be made, the taxpayer that originally signed the purchase agreement is in the driver's seat to make modifications and to make negotiations that change the purchase agreement right up until the moment before closing.

• Start Your 1031 Exchange: If you have questions about the 1031 purchase agreement, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved

Dealing with 1245 Property in a 1031 Exchange

Recently I put on a 1031 continuing education class in Rochester, MN that was sponsored by Capstone Financial. One of the participants in the class asked some interesting questions that I  want to expand on in this article.

1245 Property

Here was the participant's question:

"How do you deal with accelerated depreciation that is taken on the relinquished property from a cost segregation study or from other components for example that might be on a farm - what we would call 1245 property?"

If there is a significant amount of 1245 property, you need to work with your tax adviser to make sure that you have, on the replacement side, components that are 1250 property to satisfy your traditional 1031 exchange. But you may also have to acquire components of the replacement property that match up with the old 1245 that you had on the relinquished property.

A Farm Example

So in the context of a farm, there may be pig pens, sheds, silos, and other items that are 1245 property. You may need to make sure that you're buying a replacement property that has similar 1245 components like fiber optic cabling, for example.

• Start Your 1031 Exchange: If you have questions about exchanges of 1245 property, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved

Practice Tip for Identifying 1031 Replacement Property

In this 1031 FAQ video, Jeff Peterson offers up a practice tip for identifying your replacement property in a 1031 exchange. Watch more 1031 educational videos here.

• Start Your 1031 Exchange: If you have questions about replacement property identification in a 1031 exchange, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved

Property that Doesn’t Qualify for 1031 Exchange Treatment

The first question many taxpayers have when they're considering a 1031 exchange is: "does my property qualify?" Here is a quick breakdown of property that does not qualify for 1031 deferred exchange treatment.

Disqualified 1031 Property

Anything that's not used for investment or business purposes or used in one's trade does not qualify for 1031 treatment because section 1031 is only for that which is used in investment, business, or trade. Certain assets are also excluded specifically such as stocks, bonds, and evidences of indebtedness. Partnership interests are also excluded, although there are some exceptions. If you want to do a 1031 exchange, you need to stay inside of the strike zone for 1031 exchanges. For more information check out: The 1031 Strike Zone - Does My Property Qualify?

Troublesome Property Types

Some of the troublesome issues and types of properties to look out for are:

• § 1031s with lake cabins or second homes that may have been used for personal use.

• § Flip and rehab properties that may have been held primarily for re-sale.

• § Buying sheriff certificates and foreclosed properties subject to long redemption right.

• § Partnership interests, stock in corporations and cooperatives.

Finally, bear in mind that foreign property is not-like kind to US property.

• Start Your 1031 Exchange: If you have questions about what types of property qualifies for 1031 treatment, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2016 Copyright Jeffrey R. Peterson All Rights Reserved

Are REITs Eligible for 1031 Exchanges?

Many people have questions about what to do for their replacement property. Some people ask if they can sell their relinquished property and put the money into a REIT (Real Estate Investment Trust) with no tax consequences.

DSTs & Single Tenant Property

Generally, I prefer to see people invest into DSTs (Delaware Statutory Trusts) because there is more certainty that they qualify as like-kind real estate.

Another alternative is to exchange into a single tenant Net Net Net leased property such as a CVS or Walgreens that you own by yourself, because you maintain more control, but still have a less management-intensive property to deal with.

UPREIT

If you want to go the REIT direction, then an UPREIT (Umbrella Partnership Real Estate Investment Trust) may qualify, but be mindful you must first purchase and hold your like-kind fractional interest (tenant-in-common interest) in the replacement property real estate for a period of time before contributing it to the UPREIT partnership pursuant to Section 721 of the Internal Revenue Code.

My concern has been that people do NOT hold their fractional interests in the replacement property real estate for a sufficient period of time doing the §721 contribution and that partnership interests are specifically excluded from 1031 treatment. So if you immediately convert your replacement property into a non-qualifying partnership interest you may jeopardize the tax deferral under §1031.

Delaware Statutory Trust Alternative

A direct purchase of a REIT won't qualify for 1031 because they're either a beneficial interest in a trust or they’re some kind of other excluded property (stock or some kind of interest in a business entity). But the close cousin to the REIT, a Delaware Statutory Trust (DST), will qualify. A Delaware Statutory Trust is a smaller portfolio of real estate and the IRS says that when you buy an interest in a properly set-up Delaware Statutory Trust you are deemed to own the underlying real estate of the trust. So instead of thinking about REITs, change your thought pattern to Delaware Statutory Trusts to make sure that your replacement property is considered to be a like-kind interest in real property that qualifies under section 1031.

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

Defer the tax. Maximize your gain.

© 2016 Copyright Jeffrey R. Peterson All Rights Reserved