The 1031 Strike Zone - Does My Property Qualify?

Whether or not your property qualifies for a 1031 exchange is determined by whether or not it fits in the IRS’s strike zone for a 1031. Inside this strike zone are properties held for investment or business purposes. We have talked at length about the various types of property that fall within this strike zone, but what exists outside the strike zone for 1031 exchanges?

Outside the Strike Zone

Outside the 1031 strike zone are 2 major categories:

1. Properties used primarily for personal use like a lake cabin or a ski chalet, or the car you use to drive to the grocery store. You are not holding these for investment or business purposes. They are for personal use.

2. Inventory or property you hold primarily for resale. Let’s say a taxpayer buys a big tract of land and chops it up into parcels that they then sell to the public to build homes on. Is that taxpayer holding that property for investment or business purposes or are they holding it for inventory for sale to the public? A surly IRS agent would say the latter and deny a 1031 exchange.

So condo converters, developers, and even house rehabbers or flippers don’t fit neatly into the 1031 strike zone. If you fall into one of these categories and are considering a 1031 exchange, contact a qualified intermediary to discuss your options.

• Start Your Exchange: If you have questions about whether or not your Minnesota property qualifies for a 1031 exchange, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2025 Copyright Jeffrey R. Peterson All Rights Reserved

What is a Drop & Swap in a 1031 Exchange?

1031 exchanges sound simple on the surface, but can actually be quite intricate in many cases. In this article, we are going to discuss a strategy for tenants-in-common carrying out a 1031 exchange - the drop and swap.

Real Estate with Multiple Owners

Often, people will own real estate collectively in a trust, partnership, or other business entity, and maybe one or some of those owners in the entity really want to do a 1031 exchange on the sale of the entity’s property.

Well before the closing - maybe even before the listing agreement is signed - those owners of the entity have a planning opportunity in which they can reconfigure the ownership of the property to make it most advantageous and flexible for those owners to do separate 1031 exchanges.

The Drop & Swap

A drop and swap can occur where the entity transfers out some or all of the property to the various co-owners as tenants-in-common. So rather than having the business entity own the property, the owners of the entity become the tenant-in-common co-owners of the real estate.

Remember that section 1031 states that you must have held the property for investment or business purposes. So these individual owners are going to want to satisfy the holding requirement and receive ownership well prior to any sale or disposition of the relinquished property.

Plan Early

If you do the drop and swap at the eleventh hour right before the sale is to occur the IRS may not respect that transfer to the various co-owners. Furthermore, they may say that those co-owners have not satisfied the holding requirement because they only held it for a brief period of time before immediately selling it. And if they did hold it for such a short period of time, their argument would be that they held it primarily for resale and not for investment or business purposes.

• Start Your 1031 Exchange: If you have questions about drop and swaps in a 1031 exchange, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2025 Copyright Jeffrey R. Peterson All Rights Reserved

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