Potential Ramifications if Congress Repeals the 1031 Exchange

Congress Repeal of 1031 Exchange

When it comes to tax reform there are a lot of questions. What will the ramifications of a potential elimination of the 1031 exchange be?

Tax Reform

One thing I can tell you is if we have tax reform we're still going to have taxes, we just may not have a mechanism to defer those taxes through the wonderful vehicle of section 1031.

Some taxpayers are worried that if they start at 1031 exchange and then Congress changes the game on them midstream before they receive the replacement property that they could somehow be stuck in limbo with the provisions of 1031 being terminated before they've completed their exchange. That would, in effect, require them to recognize the gain on their now failed exchange because the provisions have ended.

Contact Your Legislator

Often times Congress will sunset a provision at a certain date in the future. The problem is if you haven't completed your exchange by that date you may be out of the benefits of a 1031 exchange. All of these questions highlight the importance of contacting your legislators and letting them know that eliminating 1031 will cause chaos and stagnation that we as taxpayers do not want to have happen. We want economic certainty and prosperity, and preserving 1031 is the best way to do that.

  • Start Your Exchange: If you have questions about the potential repeal of section 1031, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved

Benefits of a 1031 Exchange in a Hot Seller’s Market

1031 Exchange in a Hot Seller's Market

In a hot seller's market, people are making money and there is velocity in the marketplace. In this article, we'll talk about the benefits of conducting a 1031 land exchange in a hot seller's market.

What is a "Hot Seller's Market?"

A hot seller's market is where there are more buyers than there are sellers. When the demand is high, values go up. That's what we like to see - values going up, because it means we're all building equity and the economy is gaining strength.

Values, Profits & Taxes

When values go up that also means that potential profits or gains are going up. That's where the 1031 exchange is so valuable because when you have high profits or gains you have a lot to lose in potential taxes. By using a 1031 exchange to gain the deferral and defer that gain indefinitely by acquiring a replacement property of equal or greater value, equal or greater equity, and offsetting our debt relief, we can defer the gain and keep our hard-earned equity growing and compounding without the drag of taxation diminishing our net worth or slowing the building of our wealth.

  • Start Your 1031 Exchange: If you have questions about the benefits of a 1031 exchange in a hot seller’s market, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved

Tenancy-in-Common Distributions in a 1031 Exchange

Tenancy in Common Distributions

Many taxpayers who are looking to do a 1031 exchange on tenancy-in-common property have questions about distributions. In Giurbino v. Franchise Tax Board, the California Board of Equalization discusses many of the concepts that would be involved in an application of section 1031 to such a transaction.

Tenancy-in-Common Distributions

In general, the determination of whether the TIC (Tenancy-in-Common) distributions would be sustained as actual (vs. fictional) distributions would involve an assessment of the following:

  • Who negotiates the sale

  • Who enters into the purchase agreement

  • The amount of time that passes between negotiation and consummation of the sale

  • The motivation behind the distributions (whether the court thinks this was done solely to obtain a different tax outcome without changing the underlying nature of ownership)

"Substance Over Form"

In making this determination, courts apply a “substance over form” approach. Notably, some of the decisions referenced in Giurbino also took into consideration when the distribution deeds were recorded and whether there were restrictions under lending arrangements on a transfer of the property.

The IRS has also recently (in 2008) amended the partnership tax return by the addition of questions relating to the completion of like-kind exchanges and distribution of TIC interests in partnership property during the current or prior tax year. For this reason, some commentary on “drop and swap” transactions suggest waiting for a period of up to two years following distributions before completing a like-kind exchange. However, there is no particular holding period requirement, nor is there any particular holding period which would absolutely insulate the transaction from scrutiny.

  • Start Your 1031 Exchange: If you have questions about earnest money deposits or other items on the closing statement in a like-kind exchange, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved

Save the 1031 Exchange - Contact Your Representatives

Section 1031 Tax Reform

The 1031 exchange has been around for almost 100 years. But it may be on the chopping block as President Trump and Congress look at potential tax reform. Many people have called me and they're concerned about saving section 1031 and they want to know what they can do to help. 

How Your Can Help

There's a grassroots movement brewing up among real estate Investors and entrepreneurs that have real estate with substantial potential gains and they're thinking “What am I going to do? What is my exit strategy if Congress arbitrarily just eliminates section 1031 as part of an overall tax reform?”

Contact Your Representatives

Let your representatives know that you're concerned that if they eliminate this provision in the tax code that’s been around since 1921 it will adversely affect the economy, it will reduce economic growth, and real estate values will plummet. Let them know that you support a very surgical and thoughtful revision of the tax code that would save and preserve this very beneficial tax strategy.

  • Start Your 1031 Exchange: If you have questions about section 1031 and tax reform, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved

1031 Case Study: Bank Rules & 1031 Exchange Protocol

1031 Exchange Condo

Recently, a client came to us with the following 1031 exchange scenario. The client was looking to do a like-kind exchange on their condo. After crossing their t’s and dotting their i’s with 1031 exchange protocol, they discovered that the rules for 1031 did not coincide with the banking protocol.

The Importance of Qualified Purpose

In order to qualify for 1031 treatment, the client would have to rent the condo out for two years in order to satisfy the qualified purpose requirement. This did not gel with the banking protocol. The bank would not allow a regular loan if the client was to rent out their newly purchased property. This means that in order to qualify for 1031, the client must change it to an investment loan, have a different type of appraisal done, and acquire a higher interest rate for this new type of loan - all which is more than likely add time to the approaching 1031 deadline. 

Preparing for Your 1031 Exchange

The replacement property must be held for a qualified purpose of investment or business use; that may or may not necessitate an investment loan. To some degree the lender may be able to underwrite it as a regular loan. This is why it’s always a good idea to prepare for your 1031 exchange as early as possible to ensure it complies with all parties involved.

  • Start Your Exchange: If you have questions about bank rules and 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