Is the Two Year Rental Period Sufficient in a 1031 Exchange?

Let’s say you sell all of your real estate assets and purchase a home in Florida that you then rent out for two years. After that two year period, you then move into that property and it becomes your primary residence. Is that an acceptable way to conduct a 1031 exchange?

The IRS has said in at least one ruling that holding a property for two years is sufficient time to make it eligible for 1031 exchange. In the IRS safe harbor that they have for analyzing rental pool properties they test each of the two 12-month periods after you acquire it to see if you have in fact been renting the property out.

Unfortunately, we have to infer a lot of this from private letter rulings. The IRS hides the ball and makes it difficult for taxpayers to play by the rules. They could give an objective bright-line rule that says 2 years is sufficient holding time but you can’t find that in the treasury regulations. Be sure to talk with a qualified intermediary about your situation to make sure you have all your bases covered.

Hire a Like-Kind Exchange Company

Hire a like-kind exchange company to help with your next 1031 exchange of real estate. Doing a like-kind exchange under section 1031 of the Internal Revenue Code can save you a bundle in capital gains taxes and keep your hard-earned money working for you in a continued investment. CPEC1031, LLC can act as the qualified intermediary for your exchange. We are a third party administrator that can safely handle your money and insulate you from receiving taxable boot during the like-kind exchange process. Contact us today to get started with your next 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.

© 2025 Copyright Jeffrey R. Peterson All Rights Reserved

Exploring the Drop and Swap 1031 Exchange

As with most real estate transactions, 1031 exchanges can be relatively simple, or extremely complex depending on the various factors involved. This is especially true when you’re dealing with property owned by a business entity. The drop and swap is a common 1031 exchange tactic used when there are multiple co-owners of a property. In this article, we are going to talk about drop and swap exchanges of like-kind property.

What is a Drop & Swap Exchange?

Real estate can often be held collectively by multiple owners in a partnership, trust, or LLC. This type of set up can make things tricky if some of the owners want to sell the property while others want to do a 1031 exchange. This is where a drop and swap can come in handy. Essentially, this involved reconfiguring the ownership of the property to tenancy-in-common. That allows each individual owner to do a 1031 exchange on their interest in the property.

It’s important to get ahead of the curve with a situation like this and get planning well before the sale of the property. If you scramble at the last minute (right before closing) to set up a tenancy-in-common, the IRS may not treat the exchange as legitimate. Early planning is key.

Commercial Real Estate 1031 Exchange

Are you looking to sell commercial real estate, but don’t want to be saddled with a capital gains tax bill? A 1031 exchange may be the best option for your situation. Working with a qualified intermediary can ensure that your exchange of real property goes off without any issues. Reach out to our qualified intermediaries today to discuss the details of your like-kind exchange. Our offices are located in downtown Minneapolis but we work with clients all over the state and across the 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.

© 2025 Copyright Jeffrey R. Peterson All Rights Reserved

Section 1033 is the Kissing Cousin to Section 1031

IRC Section 1033 is similar in nature to Section 1031, but 1033 exchanges are specifically for involuntary condemnation sales.

Section 1033(a)(2)(B) provides, in general, that the replacement period begins on the earlier of the date of disposition of the converted property or the earliest date of the threat or imminence of requisition or condemnation of the converted property, and ends two years after the close of the first taxable year in which any part of the gain on the conversion is realized.

Section 1.1033(a)-2(c)(1) of the Income Tax Regulations provides:

If property (as a result of its destruction in whole or in part, theft, seizure, or requisition or condemnation or threat or imminence thereof) is compulsorily or involuntarily converted into money or into property not similar or related in service or use to the converted property, the gain, if any, shall be recognized, at the election of the taxpayer, only to the extent that the amount realized upon such conversion exceeds the cost of other property purchased by the taxpayer which is similar or related in service or use to the property so converted . . . if the taxpayer purchased such other property . . . for the purpose of replacing the property so converted and during the period specified in subparagraph (3) of this paragraph.

Conclusion – you can purchase your replacement property even before you have sold and conveyed your relinquished property in a Section 1033 exchange if you have received a credible threat of seizure, or requisition or condemnation.

Defer Your Gains with a 1031 Transaction

Take advantage of section 1031 of the Internal Revenue Code and defer your gains today with a like-kind exchange of real estate. When you sell a piece of investment real property, typically you need to pay capital gains taxes on the sales proceeds. Depending on your situation, this can be a sizeable tax bill. Many tax-savvy investors use the 1031 exchange to defer this capital gains tax bill and continue to build their wealth in a replacement property. If this piques your interest, contact a qualified intermediary 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.

© 2024 Copyright Jeffrey R. Peterson All Rights Reserved

1031 Exchanges of Partnership & LLC Member Interest

Many people own property in LLCs or partnerships and they want to do a 1031 exchange on their specific interest in the partnership. That causes a lot of problems because partnership and LLC ownership interests are excluded from 1031 treatment.

Tenancy in Common

If you have a time machine you might want to go back in time and change the ownership of your relinquished property to a tenancy in common so you could own your piece of the pie as a co-tenant rather than a partner.

Some people want to convert their partnerships to a tenancy in common right before they close on the sale of their relinquished property. That can sometimes work, especially if the person that’s jumping out of the partnership isn’t the one that wants to do the 1031 exchange.

An LLC Example

For example, let’s say that 55% of the partners want to stay inside of the partnership and they’re going to conduct an exchange under the name of the old surviving partnership. But 45% of the partners want to jump out of the LLC and become tenants in common and they just want to take their cash and pay their taxes. That’s a safer way to construct a drop-and-swap because the old taxpayer (the partnership that’s owned the property all these years) is the entity that does the exchange.

The more problematic situation occurs when everyone wants to break up and the partnership is going to terminate because more than 50% of the ownership leaves in a 12 month period.

Planning and advanced thinking is the name of the game. If you’ve got clients that are in partnerships or LLCs that have property they may be selling in the near future, it’s best to get ahead of this issue. Break up the partnership way in advance. Even before you have a tacit agreement to sell, reconfigure the partnership or LLC to a tenancy in common.

• Start Your Exchange: If you have questions about 1031 exchanges of partnership or LLC membership interests, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2025 Copyright Jeffrey R. Peterson All Rights Reserved

Explaining the Swap & Drop 1031 Exchange

We have talked before about the drop and swap exchange and how it can be beneficial in certain like-kind exchange situations. In this article, we are going to explain the inverse of the drop and swap exchange – the swap and drop 1031 exchange.

What is a Swap & Drop 1031 Exchange?

A swap and drop 1031 exchange is essentially the inverse of a drop and swap exchange.

To quickly review – a drop and swap exchange is a 1031 exchange tactic often used by taxpayers in a partnership. If there are 3 partners who own a piece of real property, but only 2 of them wants to do a 1031 exchange on the property, the partners can convert their interests in the property to tenancy-in-common interests. This allows the odd partner out to cash out their share, while the remaining 2 partners conduct a 1031 exchange.

In a swap and drop exchange, the partners would conduct the 1031 exchange of their property. Then at some point down the line, the partner who wants out would exit the partnership and cash out. Both the drop and swap and swap and drop techniques need to be carefully constructed in order to be successful.

Qualified Intermediary Services

At CPEC1031, our intermediaries have the skills and experience to help you through the details of your 1031 exchange. We have over two decades of experience helping taxpayers throughout the state and around the country with their 1031 exchanges of real estate. If you are looking for a way to defer taxes on the sale of real estate, we can help you! Contact our qualified intermediaries today to discuss the details of your exchange. Our office is located in downtown Minneapolis but we work with clients 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.

© 2025 Copyright Jeffrey R. Peterson All Rights Reserved