Video - An Explanation of the 3 Identification Rules Under Section 1031

There are several identification rules in a 1031 exchange. Most mom and pop investors keep it simple by identifying three or fewer properties. When you identify three or fewer properties, you’re not constrained by a value cap. You could identify the Sears Tower in Chicago, the Empire State Building in New York, and the IDS Center in Minneapolis. These are three properties.

If, however, you’re going to identify more than three properties, the total aggregate value of all your identified properties cannot exceed twice the value of what you relinquished. If you sold a property for $10 million, you can list up to $20 million as replacement property. However, if you sold a property at $100,000, then your cap is $200,000. Is that enough bandwidth? In that instance, probably not and you might be better off with one of the other identification rules.

The third rule (the 95% rule) isn’t used very often. It’s typically used in big portfolio purchases involving oil, gas, and mineral purchases. If you’re buying a huge portfolio, and one of the wells runs dry and you decide not to purchase it, that’s fine as long as you’re getting 95% of the total value of everything you identified.

Here’s where it gets crazy. Some DSTs are comprised of a multitude of components. You may blow yourself out of three property contention just by identifying one multi-property DST. Nobody really knows for certain whether a DST is one property or the sum of its parts for identification purposes. Let’s say you want to identify a DST. You should ask your advisor how many component parts are in that DST. If it’s comprised of a multitude of properties, you may need to get into value specifics to see what identification rule is best for you. You should also ask your advisor about how debt from the DST will be allocated to you based on the amount of money you put into it.

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

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© 2024 Copyright Jeffrey R. Peterson All Rights Reserved

Video - How Many Days Does a Person Have to Identify Their 1031 Property?

In a 1031 exchange, you’ve got 45 days after the close of escrow to identify your properties and 180 days total to complete your exchange. The day of closing is day zero. By midnight of the 45th day you need to have sent in the identification. Technically you can send in your identification to persons other than the intermediary. That’s a little irregular, but it does happen. You may identify to the seller of the replacement property or the title officer who closed the transaction. You can identify to people that were involved in the transaction but were not your agent.

Most of the time when we receive property identifications we countersign and date them, scan them into the system, and then send them back to the taxpayer so that everybody knows the identification was completed in a timely manner.

• 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.

© 2024 Copyright Jeffrey R. Peterson All Rights Reserved

Video - How did the 1031 Exchange Come to Be?

Let’s talk about the history of 1031 exchanges. Often considered the godfather of the 1031 exchange, T.J. Starker was a lumber baron in Oregon. He had lots of appreciated real estate that people wanted to buy, but he didn’t want to pay taxes. So he said “I’ll sell you these lands but you need to give me back some real estate in exchange.” This blew everyone’s mind because it was a non-simultaneous exchange. Starker was giving up his old land for new land that he would designate in the future.

The case went all the way to the Supreme Court and Starker won on a procedural argument. That case because the precedent of opening the floodgates of non-simultaneous exchanges. This made the IRS and treasury very nervous because there were no guardrails on 1031 to constrain the process. So Congress gave the IRS and treasure the authority to write their own regulations.

In 1984 they excluded partnerships from 1031 treatment, and they added the 45 day identification period and the 180 day exchange period. So now when you do a 1031 exchange you have to identify by midnight of the 45th day what properties you want to purchase. That rule was not written with the taxpayer’s success in mind. One strategy is to act like a chess player and think two moves ahead. Before you even sell your relinquished property, find what you want to buy as your replacement property.

The syndicators of real estate have products that are sold and regulated as securities. These products are typically referred to as DSTs (Delaware Statutory Trusts). When you own a beneficial interest in a DST you are deemed to own your proportionate share of the underlying real estate of the DST, and you’re deemed to take subject to the underlying debt that’s allocable to you. Using a DST could be a good backup option for your 1031 exchange if you need it.

• 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 - What Does it Mean to Be in a Federally Declared Disaster Zone for 1031 Exchange Purposes?

As we’ve discussed before, your 1031 exchange deadlines (which are typically hard and fast) may be extended in very rare circumstances such as being in a federally declared disaster zone. But what exactly does that mean? What constitutes being in the federally declared disaster zone for 1031 exchange purposes?

If your replacement property is flooded with 10 feet of water because the area was hit by a hurricane, you don’t necessarily have to be physically in the disaster area. But if the property you designated in your 1031 exchange was in the disaster area, or the title company you’re working with was in the disaster area you may still be eligible for the extension.

It’s important for everyone to take a close look at each of these extensions as they’re issued to figure out how you may be eligible. It may be that the property you were intending to buy was in the disaster zone, or your bank that’s financing your loan was delayed because of the disaster. It’s usually pretty broadly interpreted but you need to look at each specific declaration to make sure you qualify.

• 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 Exchanges Involving Contracts for Deed & Seller-Backed Financing

If you sell your property under a contract for deed with a percentage down and the balance paid in a balloon in five years, can you do a 1031 exchange?

First of all, a disclaimer: every contract is written differently. In general, when you enter into a contract for deed you’re effectively conveying equitable title to the buyer. You’re giving them possession of the property. Typically, the vendee on a contract has to pay the property taxes, insurance, and more. They’re the owner for tax purposes. Think about who takes the depreciation deductions on the property that was purchased on a contract for deed. The vendee does (generally speaking) because they have the rights to utilize the property.

When you’re a vendor on a contract for deed you’re selling the property with an installment sale. You’re retaining the bare legal title as an enforcement mechanism to compel the vendee to make their required payments. You’re retaining the bare legal title, but you’ve effectively given the vendee equitable title for tax purposes.

So you’ve basically sold the farm when you entered into the contract for deed. Five years from now when you get paid off on the balloon payment you probably cannot do a 1031 exchange when you’re giving the legal title to the buyer.

How do you work around the fact that you’ve conveyed equitable title in this situation? The first option is to not do seller-backed financing because it complicates 1031 exchanges. That’s not a satisfying answer for many, particularly when interest rates are rising.

Here’s another option: let’s say you’re selling a duplex for $500,000, the buyer is giving you $100,000 down at closing and you’re financing $400,000 for five years. One way to fix this problem is to have the vendee bring their $100,000 in and have the vendor bring in $400,000 out of their own pocket. If you bring in your own cash to loan to the buyer, that means amount of funds in the exchange account will be the same as you’d normally get if there wasn’t seller-backed financing. Having the exchangor finance the buyer out of pocket is a great way to fix the problem, but it requires some liquidity.

In the Uptown area there’s a real estate broker that acts as a sort of problem solver for sellers. If you want a clean break from your property – you don’t want to do seller-backed financing and you don’t want to bring capital to the deal, this broker interposes himself and agrees to buy the property with cash and then sells it to the vendee on a contract for deed. This might be another option.

• 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