3 Things to Remember When Identifying 1031 Replacement Property

There are many things to keep in mind when identifying your 1031 replacement property. In this article, we are going to discuss three important things to remember when identifying replacement property in your 1031 exchange.

Identification Deadline

First, it’s important to remember your deadlines and time periods for the exchange. You have 180 days to complete your exchange, beginning the day after you sell your relinquished property. The first 45 days of that period is your identification period. You have to identify in writing all of your intended replacement properties by this deadline.

3 Property & 200 Rules

In most 1031 exchanges, the exchangor can identify up to three replacement properties. If he or she wants to identify more than three properties, the exchangor can use the 200% rule. Using this rule, the taxpayer can identify any number of replacement properties so long as the total fair market value of those replacement properties in no greater than 200% of the relinquished property.

Acquiring Property in the Identification Period

If you actually acquire any of your replacement properties in the midst of your 45 day exchange period, those properties are deemed to have been identified.

MN Qualified Intermediary Services

CPEC1031 has over twenty years of experience helping taxpayers with their 1031 exchanges in Minnesota and across the country. Our qualified intermediaries will work with you through every stage of your 1031 exchange – from the sale of your relinquished property, to the purchase of your replacement property. Reach out to us today to chat about your 1031 exchange. Our primary office is located in downtown Minneapolis but we work with clients throughout the state of Minnesota and 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.

© 2018 Copyright Jeffrey R. Peterson All Rights Reserved

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

Personal Use Rules in a 1031 Exchange of Real Estate

Recently, we worked with a client who wanted to 1031 exchange into a replacement property that was ideal for their exchange but had a purchase contract which stipulated that the home may be purchased for primary or secondary use but not income. The client wanted to ensure that there was nothing indicated in the 1031 requirements that might cause trouble down the road. In this scenario, is the replacement property acceptable as long as the client maintains his primary residence and uses the "secondary" residence less than six months out of the year?

Personal Use Requirements

In short, no. Your personal use should be minimal and your primary use should be for rental purposes. There is a safe harbor for properties in a rental pool that permits up to either:

• 14 days a year; or

• Up to 10% of the time it is actually rented out.

This tests only the first two tax years after the exchange is completed. See: https://www.irs.gov/pub/irs-drop/rp-08-16.pdf

It is best to purchase a replacement property that will be held primarily for business rental purposes in order to comply with the requirements of Section 1031.

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

Defer the tax. Maximize your gain.

© 2017 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