Tips for Deferring Taxes with a 1031 Exchange

1031 exchanges can save you a lot of money in capital gains taxes when you sell a piece of property. Here are three tips for deferring taxes with a 1031 exchange.

Start Early

The first tip is to get your 1031 exchange set up with a qualified intermediary well before you close on the relinquished property. Sadly, we often receive calls from folks that have already closed on the sale of their relinquished property, received the proceeds, and then decided they wanted to do a like-kind exchange. The horse is out of the barn if you don't get your 1031 exchange set up in advance of the sale.

Think Like a Chess Player

The next tip is to think like a chess player - two to three moves ahead at any time. You want to be thinking about “where am I going to land for a replacement property?” Real estate is kind of like a game of musical chairs. If you don't act quickly you may find that you don't have a chair to land on when the music stops. You want to be thinking ahead and locking up a replacement property before you have to identify during the 45-day identification period. Ideally it would be nice to lock up a replacement property even before you close on the sale of your old relinquished property.

Work with Your Team of Professionals

The third tip is to work with your team of professionals. Bring your whole brain trust together. Involve your accountant, your lawyer, your real estate professional, and your financial planner in this process. This may be one of the most important financial decisions that you ever make and by using your resources you can get the best advice and information.

• Start Your 1031 Exchange: If you have questions about the best way to approach your 1031 exchange, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved

Can you 1031 Exchange Property you Already 'Sold' on a Contract for Deed?

A client of ours recently sold a house under a contract for deed with the balloon going due in 2019. The client wanted to know if it would be possible to do a 1031 exchange on the property after receiving finial payment for it in 2019? That's our topic for this article.

Contract for Deed

If you already 'sold' a property on a contract for deed, can you do a 1031 exchange once you get paid-off on the seller-backed financing? Possibly not because the IRS may no longer view you as the equitable owner for tax purposes. Here are some questions to consider:

• Are you the holder of a lender's interest now?

• Who has the risk of loss if the property is damaged or destroyed?

• Who has the obligation to pay taxes and insurance?

• Who has the ability to depreciate or deduct expenses related to the property?

• Is the contract for deed vendee in exclusive possession of the property?

• If the contract for deed vendee constructed improvements on the property, who would own the improvements?

The answers to these questions will help you determine your viability of a 1031 exchange. As always, it's important to consult with a qualified intermediary about your 1031 situation.

• Start Your 1031 Exchange: If you have questions about contracts for deed, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved

The Importance of Involving Your CPA in your 1031 Exchange

In a 1031 exchange, when you look at a HUD closing statement there a lot of confusing facts, figures, prorations, debits and credits, etc. These items can seem foreign and unfamiliar to many taxpayers. One of the concerns that many people have is “what if there are expenses on this closing statement that I'm not allowed to pay for with my exchange funds?”

Specifically, what about the following items:

• tax prorations

• security deposits

• rent prorations

• other lender related transaction expenses

The best course of action to take is to bring in your circle of advisers before you sign the closing statement. The way you can do that is to ask the title company to provide a preliminary closing statement and circulate it to your CPA or accountant for their review and comment. If you share the closing statement with them before closing you can adapt it and make some changes. But if you wait until April 15th of the next year to give them the completed signed closing statement there's nothing anyone can do after the transaction is closed.

• Start Your 1031 Exchange: If you have questions about involving your CPA in your 1031 exchange, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved

1031 Exchanges & Charitable Contributions

Many people want to exchange out of their current real property investments, and into like properties that may eventually be transferred to a charity. In this article, we will discuss how to do such a 1031 exchange successfully.

Motivation to Exchange Property

The initial reason for exchanging investment property may be motivated by a desire to:

1. get out of a toxic type of property that has potential environmental liability;

2. sell while the property values are high (at the top of the bubble);

3. get out of management intensive properties;

4. get out of low-income properties and into higher yielding properties;

5. diversify into different types of real estate, or into different geographic locations.

After completing the 1031 exchange, the taxpayer must continue to hold the replacement property for a qualified purpose of investment or business purposes for a substantial period of time (the longer the better). The Internal Revenue Service has successfully challenged 1031 exchanges where the taxpayers did not hold the replacement properties for a qualified purpose and made gifts shortly after completing the exchanges. See the Click v. Commissioner, 78 T. C. 225, 231 (1982) case. 

Gifting to Charity

Once they have held the replacement property for the requisite time period, they may later wish to make an inter vivos gift of the replacement property directly to a charity (while they are alive), put their replacement property into a charitable remainder trust, or provide for it to be transferred upon their death to a charity (through estate planning such as a revocable living trust).

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

Defer the tax. Maximize your gain.

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved

What Does it Cost to Record a Deed in a 1031 Exchange?

A common question we get from clients during a like-kind exchange is: “how much does it cost to record a deed in a 1031 exchange?” That's our topic for this 1031 exchange education article.

Minnesota County Recorder

In Minnesota, the charge to record a document in the county records is $46 per document. In addition to the recording fee there may also be a $5 conservation fee imposed as well.

On top of the recording fees, there can also be transfer tax or deed tax imposed. The rate of tax may depend on the value or consideration paid for, and the county in which you're located.

Hennepin & Ramsey Counties

In Hennepin and Ramsey counties the rate is .0034 multiplied by the total amount of net consideration. In out-state counties the rate is .0033 multiplied by the net consideration.

If you have questions about recording fees deed tax or other facets of 1031 exchanges give us a call.

• Start Your 1031 Exchange: If you have questions about real estate recording fees, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved