Replacement Property Identification Requirements

When you’re conducting a 1031 exchange, you have 180 days total after the sale of your relinquished property to complete your exchange. The first 45 of those days are designated as your identification period. This is when you identify in writing all of your replacement properties. In this article, we are going to walk through some of the requirements for identifying replacement property in your 1031 exchange.

Identification in Writing

The most important requirement in the identification process is documenting your identification. Your replacement property identification needs to be made in writing. This means you need to compile the basic information about your replacement property (address, name, legal description, etc.) and send it to your qualified intermediary. It’s very important to document this process and confirm receipt with your qualified intermediary.

Start Early

Starting the identification process early is essential. Mistakes happen, and you want to make sure any errors that arise are addressed and resolved before the final day of your identification period. Working with your qualified intermediary before you even sell your relinquished property can give you a head start on the identification process.

1031 Exchange Company in MN

If you are searching for a company to facilitate your 1031 exchange of real property, look no further than CPEC1031. Our team of qualified intermediaries has been working with taxpayers throughout the country on their like-kind exchanges for decades. We have the knowledge and experience to ensure your exchange completes successfully. Contact us today at our downtown Minneapolis office to set up a time to chat with one of our 1031 exchange specialists.

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

Defer the tax. Maximize your gain.

© 2018 Copyright Jeffrey R. Peterson All Rights Reserved

What is “One Property” Under the 1031 Three Property Rule?

As a general guideline in any 1031 exchange, you want to identify three or fewer properties to exchange into. But what determines "one property" under this rule? Are two contiguous parcels considered separate? Will two contiguous properties take up two slots under the three property rule?

Identifying 2 Contiguous Parcels

If you identify two parcels which are contiguous, does that count as one property or two? In other words, can you still determine two other properties as part of a 1031 exchange?

Answer

Two contiguous parcels will probably be considered to be one parcel for 1031 identification purposes, if sold by one seller under one PA and conveyed under one deed at the same closing.

• Start Your 1031 Exchange: If you have questions about contiguous parcels 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

Can a Married Couple Purchase their Replacement Property with a Family Member as Tenants-in-Common?

Sometimes a couple will be doing a 1031 exchange where the relinquished property was owned by them as husband and wife, but they want to purchase the new replacement property with another family member as co-owners or tenants-in-common. In this article, we'll explain some key requirements to keep in mind while doing such an exchange.

1. Size Matters

In order to defer all of the gains, the ownership interest in the replacement property received by our exchanging husband and wife must be or equal or greater value than the net value of the sold relinquished property. So if a co-owning relative takes too large of a percentage ownership portion of the replacement property, our exchangors may not receive sufficient value to defer all of their gains.

2. Follow the Money

All of the exchange funds from the sale of the husband and wife’s sold relinquished property must be used exclusively for the purchase of their ownership interest in the replacement property, and may not be used to purchase the co-owning relative’s ownership interest. Each co-owner should contribute and pay for their proportionate share of the new replacement property with their own money.

3. Be Careful ~ Partnership Interests are Excluded from 1031

Once you own the new property, you may be tempted to file a partnership tax return (Form 1065) for the co-ownership of the property (like a joint venture). However, that would be inconsistent with the requirements for a 1031 exchange. Avoiding classification as a partnership for federal income tax purposes will be important for our exchangors to preserve their 1031 exchange. Generally, one cannot exchange into a partnership interest, even if partnership’s only asset is the subject real estate [subject to a narrow exception for partnerships with a valid 761(a) election in place; and rare situations where receipt of 100% of a partnership, results in consolidating ownership in one taxpayer such that it is equivalent to an acquisition of a "disregarded entity"].

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

Defer the tax. Maximize your gain.

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved

1031 Exchange Tips for Competing for Replacement Property

What if you're punching above your weight class on the purchase of your replacement property in a 1031 exchange? In other words, what if you're acquiring a replacement property that's much bigger than you can afford on your own. Can you bring in partners to help purchase the property?

Partnership Interest

If you're doing a 1031 exchange you want to avoid acquiring the replacement property in a partnership because partnership interests are excluded from 1031 treatment. But that doesn't mean that you can't bring in other co-owners or purchasers with you that will acquire the property as tenants-in-common.

Tenancy-in-Common

One of the facets of a tenancy-in-common is that each purchaser will receive a proportionate share of the property in portion to the amount of cash that they contribute. So if you need $10 million as the down payment on a replacement property and you're able to put up $5 million of that down payment, you'd be eligible and should be allocated an undivided 50% tenant in common interest in the property. If any other co-purchasers want to come in with you and help with the down payment, they too would receive a portion of the common interest allocated to them based on how much of the down payment they pony up.

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

Defer the tax. Maximize your gain.

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved

Tips for Buying Replacement Property on a Contract for Deed

Some taxpayers considering a 1031 exchange wonder whether or not they can buy replacement property on a contract for deed. That's our topic for this article.

Factors to Examine

The quick answer is yes. If the contract for deed gives you equitable title such that you've received enough of the benefits and burdens of ownership that for federal tax purposes you’re deemed the owner of the property.

Some factors to look at are:

• Did the vendee receive exclusive possession of the property?

• Does the vendee bear the risk of loss if the property is destroyed?

• Does the vendee have the obligation to pay the property taxes and insurance?

The more these benefits and burdens rest on the vendee’s shoulders the more likely the IRS will concur that you are the owner of the property.

Push & Pull

If you’re doing a 1031 exchange bear in mind that you need to reinvest all of your equity, all of your net proceeds from the sale of your relinquished property into your replacement property.

That may mean that your downstroke or down payment on your contract for deed may be more substantial than the vendor wants to take. This is because the vendor is often entering into the contract for deed with the idea that they're wanting to delay the receipt of proceeds and take that money in small increments over a long period to take it in more efficiently.

So there is a little bit of push and pull between you and the seller as to how much down payment the seller is willing to accept in a contract for deed.

• Start Your Exchange: If you have questions about contract for deeds 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