Jeff Peterson, Author at Commercial Partners Title

September 2, 2021 by Jeff Peterson

What to Know About 1031 Exchange Purchase Prices

In a 1031 exchange, can a person purchase several smaller properties/units (less that the purchase price of the original investment) as long as they add up to or greater than the sale price of the relinquished property? This is a great question and the topic of today’s blog.

The short answer is yes – as long as all of the multiple replacement properties add up to or are greater in Value and Equity than the sale price of the relinquished property.

The Napkin Test (with Multiple Replacement Properties)

There are three general rules of thumb to quickly see if you will defer ALL of the recognition of gain:

Typically you will acquire replacement property that is “up or equal” in Value* (price); {*net of sales commissions and customary transactional expenses}
You will roll over all of your Equity (net proceeds) from the relinquished property into your replacement property.
And to the extent that you were relieved of liabilities and Debt, such as mortgages on your old relinquished property, the debt relief is offset by
1. new liabilities or mortgages taken on in conjunction with your purchase of the replacement property; OR
2. by investing additional cash in the replacement property equal to the amount of liabilities and debts that were discharged.

You can have a partial tax deferral if you miss these general benchmarks.

Be sure to check with your CPA about these general rules of thumb, to make sure they apply to your specific situation.

August 24, 2021 by Jeff Peterson

Do You Need to Assign Your Purchase Agreement to Your Qualified Intermediary in a 1031 Exchange?

When perusing your replacement property assignment agreements, you may come across a commonly included section that reads something like the following: “Exchangor intends to assign its rights but not its obligations in the Replacement Property.” What exactly does this mean?

Replacement Property Purchase Agreement

Basically, this gives the Exchangor the right to receive the replacement property from the seller, but does not make the Exchangor responsible for fulfilling any of the things the seller is required to do.

In the “old days,” 1031 exchanges had to be done by conveying the subject properties from the seller to the Intermediary, then from the Intermediary to the buyer. The regulations still require that we initially structure it that way even though we later go on to instruct the Exchangor to receive the replacement property directly from the seller (which is now allowed, provided the Exchangor still assigns its rights to the Intermediary). This is simply a nominal assignment for tax purposes.

August 12, 2021 by Jeff Peterson

Can I Do a 1031 Exchange with Business Property?

Many taxpayers are entrepreneurial. They might be in one business segment and want to 1031 exchange into a new business segment. For example, a restaurant owner might want to sell their restaurant and buy a hotel. How can this be an exchange? Isn’t a restaurant fundamentally different than a hotel?

Real Estate

In the realm of 1031 pretty much all real estate is considered like-kind. So if we’re dealing with only the real estate, it’s really easy to do an exchange from a restaurant building to a hotel building. As long as they’re both in the US and used for investment or business purposes, they’re like-kind.

Other Elements or Components

Other types of assets (other than real property) that may be involved in the sale, like the restaurant equipment or hotel furnishings – those types of property are not eligible for 1031 exchange treatment and should be left out of the 1031 transaction.

August 3, 2021 by Jeff Peterson

1031 Exchange Rental Pool Property Rules

Here’s a common 1031 exchange question we get from time to time – how much personal use can you take on a replacement property put into a rental pool? In other words, if a taxpayer sells a Minnesota rental property in Minnesota and buys a rental condo in Florida, how much can they live in that Florida “investment” property without violating tax laws?

Rental Pool Property Rules

If the taxpayer puts the Florida property in a rental pool, they can have some limited mixed personal use: up to 14 days a year, or up to 10% of the time it is actually rented in a year. The IRS can test each of the two separate years after the exchange under the safe harbor.

Contact a Qualified Intermediary

It’s always a good idea to contact a skilled qualified intermediary if you have questions about any details surrounding your 1031 exchange.