In Minnesota, for the privilege of filing a deed or mortgage, the state of Minnesota charges a fee, sometimes called deed tax, transfer tax, or mortgage registration tax. Why is this important for people doing a 1031 exchange?
Reverse 1031 Exchange Considerations
This comes up primarily when we’re doing a reverse 1031 exchange in which an intermediary forms an LLC to acquire title to the replacement property. At the time that we receive title to that replacement property the seller typically pays the transfer tax. But once the exchange intermediary has title to the property we are going to eventually transfer that to our taxpayer. Will there be deed tax on that transfer?
The state of Minnesota really is quite flexible and accommodating in understanding that the deed tax has already been paid once by the seller of the replacement property to the intermediary. The subsequent transfer from the intermediary to the taxpayer is generally not taxed in Minnesota unless we’ve increased the value of the property by constructing improvements.
Now other states such as Wisconsin are much more aggressive in collecting the transfer tax and in those states you make it twice – once for the transfer to the intermediary and secondly from the intermediary to the taxpayer. Strategically we can talk about your situation and decide which property is most advantageous to park. Because of the reverse exchange rules we have the flexibility of parking either the relinquished property that will be sold or alternatively the new replacement property that will be received. Transfer tax can come into that equation and determine what’s the best property for you to park in your reverse exchange.