Video - Consolidating Ownership During a Trust Distribution

There are two favorable private letter rulings that deal with consolidating ownership. Let’s say a trust distributes one fifth interest in a farm to you and your other four siblings. You could tell your siblings that you’d like to retain the south quarter of the land. You could say that you’re willing to trade your interest in the remainder of the land to the siblings if the siblings give you their interest in the south quarter of the land so that you own that particular spot in its entirety.

Post-distribution from a trust, there’s an opportunity to consolidate a portion of the property in question, solely in your name by doing simultaneous related party transfers. The IRS and treasury seem to think those are OK because you’re trying to consolidate a parcel wholly in your name. In this situation there’s really no intention to trick the system because the other parties that are going to receive your fractional interest in the other parcels if they sell, they’re going to be paying the same taxes that you would’ve paid.

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

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Video - The 2 Litmus Tests of a 1031 Exchange

When it comes to 1031 exchanges, there are really two essential litmus tests. The properties involved in the exchange need to be held for investment or business purposes, and you have to exchange for like-kind property.

The two areas we often see properties not qualifying for 1031 exchange. If you own a lake cabin you may have a property that’s used for your own personal edification. That property isn’t an investment or business property. Even though you may want it to go up in value, your personal use of the property trumps the purported investment intent. There have been many cases in which people have fought with the IRS about their appreciated personal property. The IRS has been making a point of winning those cases.

In the area of VRBO and AirBnB properties, the IRS has granted a pretty broad safe harbor for properties used primarily for rental programs. In that safe harbor, the IRS will look at the first two 12-month periods after you buy the property to decide if you have used the property primarily for investment or business purposes. So they’re going to test those periods to see that a) you’ve rented it at least 14 days a year, and b) you haven’t used it more than 14 days a year or more than 10% of the time the property has been rented out. So on your use side you could use it for 14 days. Or let’s say the property was rented out for 300 days. You could use It for 29 days personally because that would be under the 10% threshold.

It’s always a good idea to be very safe with these types of properties. Keep the property rented out as much as possible for the first two years.

The other property that doesn’t qualify for 1031 is property that’s been held primarily for resale. If you buy an apartment building and you convert it to condos and you sell each of those individual units to the public, then you’re a dealer. That real estate is your product, your stock in trade. You can’t do a 1031 exchange on your dealer property – property that you intend to hold for resale. The same goes for land developers.

In order to get around this, you can change the way you do business. Rather than buy a property and do a quick flip, you could instead buy the property and rent it out for a year or more. After that time, then you can do the improvements and sell the property in a 1031 exchange.

• 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.

© 2023 Copyright Jeffrey R. Peterson All Rights Reserved

Video - The Predecessor to Section 1031

When Congress enacted the first predecessor to the 1031 exchange, they allowed for the exchange of property tax deferred. It was a law that came about after World War I, in which the United States had just spent a lot of money fighting a war in Europe and they had increased taxes during the war to fund the war effort. When the war was over, they needed to find a way to stimulate the economy to dig themselves out of the debt they had incurred. The first iteration of 1031 allowed the swapping of properties to occur. That provision didn’t just relate to real estate at the time. That provision allowed for the exchange of properties but it was anticipated to be a simultaneous swap. So in 1921 people were doing old fashioned horse swaps with actual horses as the property in question.

This provision was really intended to promote transfers. The government didn’t want people to be locked in. They wanted capital to flow to the most advantageous investment, thus stimulating the economy and creating jobs.

• 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.

© 2023 Copyright Jeffrey R. Peterson All Rights Reserved

Video - 1031 Exchange Deadlines & Extensions

I get a lot of calls from accountants who say: “I didn’t know my client was doing a 1031 exchange and I filed their tax return on time before the closing of the replacement property, effectively shutting down their exchange early. They want to know if they can amend the tax return to include the replacement property.”

If you’re an accountant or a CPA, make it part of your process to ask the client if they’re in the midst of an exchange. At CPEC1031, we send out a written letter to the taxpayer that gives them their estimated 45 day deadline and 180 day deadline. If those deadlines fall after their tax filing deadline, we encourage taxpayers to consult with their tax preparers.

Some people wonder whether or not there could be an extension of the 1031 exchange deadlines if the exchange ends on a weekend or a federal holiday. The practice in the 1031 exchange industry is to not anticipate that there will be any extensions. That’s the general rule. However, there is a small minority of thinkers who argue that there is an extension permitted under the code. In the initial proposed regulations for 1031, they specifically said that these extensions do not apply. They then pulled that out because they thought it was unnecessary. So there is a small minority of people who think you can extend your identification period to day 46 if it lands on a holiday or a weekend. Until we see a case litigating this matter that gives us a more definitive answer to this question, I would err on the side of caution and assume you cannot extend your 1031 exchange deadlines.

The only exception to that is if you’re in a federally declared disaster area. If you’re impacted directly by a hurricane, forest fire, earthquake, or some other federally declared disaster, then you may have some provisions that allow you to complete your exchange at a later date.

• 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.

© 2023 Copyright Jeffrey R. Peterson All Rights Reserved

Video - How to Identify to Somebody Other than the Qualified Intermediary

In a 1031 exchange, is it possible to identify to someone other than the qualified intermediary? Let’s say you are a syndicator and you have a client who said they were going to buy into one of your DSTs, but forgot to identify, and now they want to close into your DST.

To answer this question, let’s talk about the basic rules for identifying property in a 1031 exchange. First, your identification needs to be in writing. The writing also needs to clearly describe the property. That identification also needs to be signed by the taxpayer.

So yes, you can potentially identify to the seller of the replacement property.

Another prudent reason that we like to see a strong cooperation clause in the replacement property contract is that the purchase agreement itself could constitute an identification. It’s in writing, it’s signed by the purchaser, it clearly identifies the property. If you put a very strong cooperation clause in that agreement then you’ve pretty much got it made.

If an identification is submitted in the body of an email, does the email signature constitute a signature? In 1944, if you were serving in the Army and you wrote a letter back to your friends or family, often people would sign the letters. That was the custom of the time. Nowadays, the custom is to have an email signature block for such communications, so I think it might constitute a signature for identification purposes. All that said, we can’t be 100% sure on this because there hasn’t been a case to litigate this issue.

• 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.

© 2023 Copyright Jeffrey R. Peterson All Rights Reserved