1031 Exchanges Involving Property Owned by Multiple Taxpayers

1031 exchanges involving more than one property owner can get complicated quickly. In this article, we are going to answer some FAQs about 1031 exchanges involving property owned by multiple taxpayers

The Benefits of Tenancy-in-Common

When you purchase real property with other co-purchasers, it’s often a good idea to reconfigure your asset ownership into tenancy-in-common so that each tenant can accumulate time in separate ownership capacities and have the option of doing a 1031 exchange when it comes time to sell.

Techniques to Try

There are some techniques for doing 1031 exchanges involving property owned by more than one taxpayer. Some of these techniques are rather crude, such as breaking up a property as tenants-in-common and crossing your fingers in the hope that you’ve held the property long enough to satisfy the 1031 exchange requirements.

Other techniques are more refined, such as “spin-offs.” This technique works great if you’ve got an LLC or partnership because you can spin-off subsidiaries, and they are considered continuations of the predecessor for tax purposes. 

The Problem with Corporations

The nut that I’ve never seen anyone crack is how do you reconfigure the ownership with the property is owned by an S-corp or C-corp? In these cases, distributing the asset out of the entity can trigger gains. It’s much more difficult to reconfigure a corporation than an entity that’s taxed as a partnership.

CPEC1031, LLC

1031 exchanges involving multiple property owners can get very complicated so it’s a good idea to work with a qualified intermediary who knows how to deal with these situations. At CPEC1031, we have been facilitating exchanges of all kinds for more than two decades. Contact us today to start your 1031 real estate 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.

© 2022 Copyright Jeffrey R. Peterson All Rights Reserved

Can You do a 1031 Exchange with Replacement Real Property You Already Own?

The word “exchange” is an important part of the Internal Revenue Code section regarding 1031 exchanges. If you’re going to do a 1031 exchange, that generally means you have to acquire something new that you didn’t already own prior to starting the like-kind exchange.

Property Ownership

The easiest and safest way to conduct a 1031 exchange is to buy property that you do not already own from an unrelated third party. It’s not a good idea to take the sales proceeds from the disposition of your relinquished property and pay off debt on property that you already own. The IRS likely will not view that as an exchange under section 1031.

For many years the IRS took the position that building improvements on land that you already owned did not qualify for 1031 exchange treatment. There have since been a few private letter rulings that soften this position a little bit, but even so, this is a very tricky category of 1031 exchange. As such, if you find yourself in this position, it’s important to work with the best and the brightest – your qualified intermediary, accountant, attorney, banker, and more.

1031 Exchange Company in Minnesota

CPEC1031, LLC is a Minnesota-based 1031 exchange company providing like-kind exchange services to taxpayers throughout the United States. Our qualified intermediaries have over twenty years of experience working on exchanges of all shapes and sizes. We are fully equipped to help you through the details of your next 1031 exchange transaction. Contact us today at our Minneapolis office to learn more about 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.

© 2022 Copyright Jeffrey R. Peterson All Rights Reserved

Remember to 1031 Exchange into Replacement Property of Equal or Greater Value

1031 Exchange Question: should you consider exchanging into one or more properties so you have continued investment into properties of equal or more VALUE?

Getting the Most Tax-Efficient Outcome

To get the most tax-efficient outcome, you may want to take on some more debt and buy more than you ordinarily would. One trick is to go into investments with non-recourse debt (that you are not personally liable for) to get to the requisite value, but without the personal liability.

3 Rules of Thumb for 1031 Exchanges

There are three general rules of thumb (also known as the napkin test) to quickly see if you will defer ALL of the recognition of gain.

1. Typically you will acquire replacement property that is “up or equal” in Value* (price); {*net of sales commissions and customary transactional expenses}

2. You will roll over all of your Equity (net proceeds) from the relinquished property into your replacement property.

3. And to the extent that you were relieved of liabilities and DEBT, such as mortgages on your old relinquished property, the debt relief is offset by (1) new liabilities or mortgages taken on in conjunction with your purchase of the replacement property; OR (2) by investing additional cash in the replacement property equal to the amount of liabilities and debts that were discharged.

You can have a partial tax deferral if you miss these general benchmarks. A 1031 exchange is not an all or nothing deal, and you can complete a partially tax deferred exchange; but you will probably recognize gain to the extent that you buy down in value.

Be sure to check with your CPA about these general rules of thumb, to make sure they apply to your specific situation.

• 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.

© 2021 Copyright Jeffrey R. Peterson All Rights Reserved

1031 Exchange Replacement Property Titles: LLCs, Married Couples, & Trusts

Can a Taxpayer Purchase a Replacement Property in a single-member limited liability company that is disregard for federal tax purposes?

Yes. If the same taxpayer that held title to the old Relinquished Property also owns 100% of the membership interest in the LLC, then you may take title to your new replacement property through a single member LLC that is disregarded as an entity separate from its owner (unless it elects to be taxed as an association / corporation). Reg Section 301.7701-2 and 3. The sole owner of a limited liability company which is disregarded for tax purposes is in the same position economically as if he/she had taken title in his/her own individual name.

Revocable Living Trust or Grantor Trust

For estate planning purposes a taxpayer may wish to take title to the replacement property in the name of his, her, or their revocable living trust. Or they may hold the relinquished property in a revocable living trust or other grantor trust and wish to hold the replacement property outside the trust. In either case, exchange tax deferment under IRC Section 1031 will be permitted. The trust is a disregarded entity and the taxpayer will file a single return using his own tax identification number, and not file a separate return for the trust.

1031 Exchanges in Minnesota

If you have questions about this or anything else relating to 1031 exchanges, reach out to our qualified intermediaries today! We have over two decades of experience in the 1031 exchange industry and can answer any questions you might have. Contact us today at our downtown Minneapolis office to learn more!

• 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.

© 2021 Copyright Jeffrey R. Peterson All Rights Reserved

How Long Can You Wait to Identify Your 1031 Exchange Property?

In a 1031 exchange, is it possible to sell your relinquished property first and then identify your new replacement property? The short answer is yes. You can fly by the seat of your pants and wait until day 44 in your identification period to really hone in on what you want to identify.

Do Your Homework Early

However, if you do your homework early, even before you sold your relinquished property and started to think about your replacement property options, you will benefit from that homework because it is a very tight market. If you want to go back into traditional brick-and-mortar property, it is a very competitive market and wouldn't it be nice to have a purchase agreement already in place on your replacement asset?

That way when you identify you have the certainty that you're going to be able to acquire it. It can't be sold out from underneath you because you have it under contract.

Many people get locked up with paralysis and they can't decide what to identify. Meanwhile all the other buyers in that Marketplace are gobbling up the available inventory. In places with very competitive real estate marketplaces people are making offers sight unseen at full price.

Think Like a Chess Player

You really need to think ahead like a chess player if you want to be able to navigate these issues. That said, you can wait until the 45th day do identify and designate your official 1031 exchange replacement property. But a pro tip is to plan ahead so that this is a less stressful process.

• 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.

© 2021 Copyright Jeffrey R. Peterson All Rights Reserved