Personal Use Rules in a 1031 Exchange of Real Estate

Recently, we worked with a client who wanted to 1031 exchange into a replacement property that was ideal for their exchange but had a purchase contract which stipulated that the home may be purchased for primary or secondary use but not income. The client wanted to ensure that there was nothing indicated in the 1031 requirements that might cause trouble down the road. In this scenario, is the replacement property acceptable as long as the client maintains his primary residence and uses the "secondary" residence less than six months out of the year?

Personal Use Requirements

In short, no. Your personal use should be minimal and your primary use should be for rental purposes. There is a safe harbor for properties in a rental pool that permits up to either:

• 14 days a year; or

• Up to 10% of the time it is actually rented out.

This tests only the first two tax years after the exchange is completed. See: https://www.irs.gov/pub/irs-drop/rp-08-16.pdf

It is best to purchase a replacement property that will be held primarily for business rental purposes in order to comply with the requirements of Section 1031.

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

Defer the tax. Maximize your gain.

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved

3 Advantages of Section 1031

1031 exchanges can benefit any US taxpayer who owns real estate that qualifies for like-kind exchange treatment. In this article, we are going to discuss a few of the many advantages of utilizing section 1031 of the Internal Revenue Code.

Tax Deferral

The biggest advantage of doing a 1031 exchange is the tax deferral that comes with it. By delaying your instant gratification of receiving net proceeds from the sale, a 1031 exchange allows you to defer your capital gains taxes and compound your wealth over time in a larger replacement property.

Asset Movement

A 1031 exchange also allows you to move real estate assets around into different business sectors or geographic areas. If you’re nearing retirement age and you want to sell a management intensive property (an apartment complex perhaps) and exchange into a more passive investment, a 1031 exchange is a great option.

Continuation of Investment

When you sell an investment property in a straight forward sale you pay a good chunk of change in capital gains taxes. In a 1031 exchange, that money continues to grow over time in a continued replacement property investment. This keeps your hard-earned money working for you.

Take Advantage of the Tax Deferral Offered by Section 1031

If you own investment or business real estate in the United States you can take advantage of the tax deferral offered by section 1031. A like-kind exchange can provide significant tax savings when selling qualifying real estate, so long as you hit certain benchmarks. To make sure you are abiding by all the rules and requirements, it’s important to work with a qualified intermediary who has experience in the 1031 exchange industry. Contact CPEC1031, LLC today for help with your 1031 exchange of real estate.

• 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

Video – Passive, Management-Free Investment Options that You can 1031 Exchange Into

A lot of people are asking about replacement property investments that are more securitized in nature – passive, management-free investments that you can exchange into, not with your real estate agent but with a financial planner. These products are often referred to as DSTs (Delaware Statutory Trusts). These investments are very attractive because they allow you to redeploy all of your equity into a passive, management-free investment that’s designed for wealth preservation and to derive a steady stream of income as you age.

Further, some of these investments have unique features. One has a refinance feature that allows you to extract 85% of your equity 35 days after getting into the DST. This allows you to lock in the tax deferral by acquiring these securities of equivalent value. Then later in a separate transaction, you borrow out 85% of your equity – allowing you access to your excess capital to do other things such as buy other real estate or pay off debt.

Find Out if a 1031 Exchange is Right for You

Find out if a 1031 exchange is right for you by talking with one of the qualified intermediaries at CPEC1031, LLC. Our team of skilled 1031 exchange professionals is available to help you through the entire like-kind exchange process from start to finish. Take the first step in the 1031 exchange process by contacting an intermediary at CPEC1031, LLC. Our office is located in downtown Minneapolis but we work with clients throughout the 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.

© 2025 Copyright Jeffrey R. Peterson All Rights Reserved

Property Identification Options for 1031 Exchanges

There are three general options for identifying property in any type of 1031 exchange. You only need to satisfy one of these rules to conduct your 1031 exchange:

1. 3-Property Rule. Identify three or fewer replacement properties. Most taxpayers conducting a 1031 exchange stick to the 3-property rule because it’s the simplest and easiest method. You can identify up to three properties without regard to their value. You could identify the IDS Center, Foshay Tower, and Empire State Building. It doesn’t matter that they’re extremely expensive – just that they are three or fewer properties.

2. 200% Rule. Identify any number of replacements; however, the total value of those properties identified may not exceed 200% of the value of your relinquished property. Some clients want to identify more than three properties. This often comes up in the context of securitized real estate that’s packaged in DSTs. What if the DST is an amalgamation of 5-6 properties, like a mini-portfolio? The DST itself may exceed three properties right out of the gate. So you have to be careful when purchasing DSTs to talk to the sponsor and get all the details so it doesn’t inadvertently jeopardize your exchange.

3. 95% Rule. Identify any number of replacements as long as you end up receiving at least 95% of the value of all properties identified. This rule is not used very often and is basically only used for big portfolio purchases. If you want to exchange into 100 oil and gas wells you can identify them all so long as you actually receive 95% of them at the end of the transaction.

Savvy investors make sure that they acquire their replacement property within the 45 day identification period. That’s because you’re deemed to have identified that which you receive within the 45 day identification period. If you acquire the property within the 45 day identification period, you won’t risk messing up your identification.

Keep Your Money Working for You with a 1031 Exchange

When you conduct a 1031 exchange you keep your money working for you in a continued, tax-deferred investment, rather than paying out a large sum in capital gains taxes. If you’re interested in doing a 1031 exchange, your best bet it to reach out to a qualified intermediary who can help you through the process and make sure you have all of your bases covered. CPEC1031, LLC provides qualified intermediary services to 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

Tips for 1031 Exchanging Rental Property

In a 1031 exchange, both the relinquished property that's sold, as well as the replacement property have to be held for a qualifying purpose of investment or business use.

Renting to Related Persons

Many people that are acquiring replacement properties in a 1031 exchange may be inclined to rent them out to related persons such as a son or a daughter. The concern with this situation is that this rental arrangement with your related-party may be perceived by the IRS as just a sham. That you're really intending to put a roof over your kid’s head instead of using the property for investment or business purposes.

Tips for Upholding your Qualifying Purpose

If you are actually acquiring the property with business intent to rent it out and you're renting it out to a son or daughter, you want to make sure that you are legitimately using the property for business purposes and you're able to substantiate that. Make sure you have all of the following:

• A real written lease between the taxpayer and the tenant at market rate.

• Rent checks coming in incrementally and regularly according to the terms of the lease.

• Finally, you want to report your rental activity on your tax return just like you would with any other investment or business property that's not rented out to a related party.

If you intend to move into the replacement property after some years of renting it out you need to be cautious that it doesn't appear that this whole rental arrangement was just a sham to make the replacement property fit into an investment or business paradigm when in fact you never really intended to rent it out. Getting too cute with the IRS and jumping through a charade of renting it out may backfire for taxpayers.

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

Defer the tax. Maximize your gain.

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved