How to Change Ownership of a Property after 1031 Exchange

A 1031 exchange allows you to sell a piece of real property and move your sales proceeds into a new property without having to pay capital gains taxes. But what if you want to change ownership of your replacement property after you exchange into it? In this article, we are going to offer some tips for changing ownership of your property after conducting a 1031 exchange.

Changing Ownership

First off – is it possible to change ownership of your property after 1031 exchanging into it? In short, yes. However, there are numerous facts that you need to be aware of so you don’t endanger the validity of your exchange.

Section 1031 requires that the person who conducted the exchange must hold onto their replacement property for investment or business purposes. This is a fundamental rule of 1031 exchanges so it’s vital that you abide by this guideline. If you acquire a replacement property in a 1031 exchange and then turn around and transfer ownership to someone else, the IRS may consider this a violation of the 1031 rules and may void your exchange, leaving you with a big tax bill.

The best advice we can give you is to hold onto your replacement property for a substantial period of time before changing ownership. How long really depends on your situation and the property in question.

1031 Exchanges in Minnesota

The qualified intermediaries at CPEC1031 have twenty years of experience facilitating all types of 1031 exchanges. With our experience and track record, you can rest assured that your exchange is in great hands. Let us handle all the details of your exchange so you don’t have to. Reach out to our 1031 exchange professionals today to learn more about our services and to get your exchange started. We have offices around the country, but our primary location is in downtown Minneapolis.

• 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.

© 2020 Copyright Jeffrey R. Peterson All Rights Reserved

Can you do a 1031 on Property Previously Sold on a Contract for Deed, Installment Sale, or Executory Contract?

Recently, a client came to us with a unique 1031 exchange question. The client signed a contract for deed 6 years ago that was scheduled to last 20 years. Their borrower is electing to pay off early and the client is interested in a 1031 exchange. Does the clock for identification and closing start when the contract for deed was signed or when possession changes hands when the note is paid off?

Typically, the clock starts running when the contract for deed was signed.

For federal tax purposes, the vendee on the contract for deed generally is the owner, and the vendor is merely holding bare legal title as an enforcement mechanism to compel payments and full performance of the vendee. Contracts can differ depending on terms – but this is generally the case.

The vendee has exclusive possession and use of the property, bears the risk of loss for destruction, pays the real estate property taxes, takes the deprecation and tax deductions related to business expenses of the property = Vendee is the Owner.

Vendor is really a creditor now holding a security interest (his legal title under the CD is an enforceable claim or lien which gives the vendor the potential right to cancel the CD and repossess all or part of a property as collateral for the instalment loan) which will not qualify for 1031.

Under the pre-2017 version of 1031 exchanges, it more explicitly excluded “notes, other securities or evidence of indebtedness” from 1031.

• 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.

© 2019 Copyright Jeffrey R. Peterson All Rights Reserved

3 Signs that Your Property Does Not Qualify for 1031 Exchange Treatment

Before you even think about starting a 1031 exchange, you have to first determine whether or not your property even qualifies. The basic rule of thumb is that all 1031 exchange property must be held for investment or business purposes. Additionally, only real property may qualify for 1031 exchange – personal property need not apply. In this article, we are going to talk about a few signs that indicate that your property does not qualify for 1031 exchange treatment.

You Live in Your Property

If you are living in your property as a primary residence, it will likely not meet the qualified use requirement for 1031 treatment. The IRS limits 1031 exchanges to investment property only so your family home that you currently live in will not qualify.

Your Property is not Real Estate

As mentioned above, 1031 exchanges currently only apply to real estate. If you’re trying to exchange items of personal property, you will not be able to do so in a 1031 transaction. This is a fairly recent change brought on by the Tax Cuts and Jobs Act.

Your Property is Used as a Vacation Rental

Vacation rental properties may qualify for 1031 treatment, but they have to meet pretty strict barriers. Learn more about vacation property 1031 exchanges here.

Sell Your Investment Property in a 1031 Exchange

1031 exchanges offer great benefits to big and small investors alike. When structured correctly, a 1031 exchange offers you the ability to defer your capital gains taxes on the sale of real estate, so long as you reinvest your net proceeds into a bigger replacement property. There are a lot of requirements you have to meet in order to complete a successful exchange and working with a qualified intermediary is the best way to cover your bases. Contact us today to learn more about our 1031 exchange services and how we can help you achieve your investment goals.

• 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.

© 2019 Copyright Jeffrey R. Peterson All Rights Reserved

Section 1031 is a Very Powerful Provision!

It says, "no gain... is recognized" on the transfer of QUALIFIED 1031 PROPERTY, which is property that has been held for "use in a trade or business" or for "investment purposes" that is exchanged for new like-kind business or investment property.

This means you can structure your sale to be tax-free - by indefinitely deferring your capital gains tax!

Like-Kind Property

Notice that the regulation says that the exchange has to be of "Like-Kind" property. Properties are considered to be like-kind, if they are of the same nature or character, even if they differ in grade or quality. This is very broadly applied to nearly all real property in the United States.

For example, you can exchange a farm for an apartment building - and yes, they are both considered like-kind because they are both REAL ESTATE. Likewise, industrial or commercial real-property can be exchanged for residential real-property. Note that real property in the United States and real property outside the United States are not considered like-kind.

Vacation homes, second homes and property that is used primarily for personal-use, is also EXCLUDED from Section 1031.

As you can see - a 1031 exchange is extremely useful for the right type of property - but can be somewhat complicated - so be sure utilize a qualified intermediary to ensure the success of your tax-free transfer.

Contact a Qualified Intermediary About Your 1031 Exchange

Are you looking to exchange your investment real estate in a like-kind transaction in order to save money in capital gains taxes? If so, you’ve come to the right place. At CPEC1031 has over twenty years of experience facilitating exchanges of all kinds under section 1031 of the Internal Revenue Code. We have the resources and expertise to help you through the process. Contact us today to learn more about the 1031 exchange process and how we can help!

• 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.

© 2019 Copyright Jeffrey R. Peterson All Rights Reserved

Does Your Property Qualify for 1031 Exchange Treatment?

The first thing you need to do when considering a 1031 exchange is to figure out whether or not your property qualifies for 1031 exchange treatment. In this article, we are going to talk about how to determine whether or not your property qualifies for 1031 exchange treatment.

Is it Like-Kind Real Property?

1031 exchanges only apply to like-kind real property. With the implementation of the Tax Cuts and Jobs Act, personal property exchanges are no longer allowed.

Are You Holding it for a Qualifying Purpose?

You also need to hold your property for a qualifying purpose. Specifically, you need to hold your property for investment or business purposes. You cannot exchange property held primarily for personal use. That means your primary residence is excluded from 1031 treatment.

Does Your Property Pass the Napkin Test?

You need to make sure that the property you are exchanging into is greater than your relinquished property in terms of equity, value, and debt (this is called the napkin test).

Save Money on Taxes with a Like-Kind Exchange

A like-kind exchange is your ticket to owing fewer capital gains taxes when you sell investment real estate. At CPEC1031, we have more than two decades of experience facilitating 1031 exchanges of all shapes and sizes. We have the experience needed to ensure the success of your exchange. Contact us today to discuss your 1031 exchange options. We are located in the heart of downtown Minneapolis, and also serve the entire state of Minnesota as well as the entire country.

• 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.

© 2019 Copyright Jeffrey R. Peterson All Rights Reserved