612.337.2470 Title Application

 

Commercial Partners Title

by

3 Tips for Selling on a Contract for Deed & Managing a 1031 Exchange

Closing Time

While a selling on contract for deed is usually a good method of seller-back financing because of the harsh and expedient enforcement mechanisms; if the Seller wants to defer 100% of the gains through a 1031 exchange, then it may be more advantageous to convey the Relinquished Property by deed and to take back a Note and Mortgage made in favor of CPEC1031 – Commercial Partners Exchange Company, LLC (the Qualified Intermediary or “QI”).

That way, prior to the purchase of the Replacement Property, the Exchangor can send the QI the outstanding amount due on the Note to buy the Note form the QI.  Once the QI has all cash in the 1031 escrow account, all of the Exchangor’s equity (cash proceeds) from the disposition of the Relinquished Property may be applied to the purchase of the Replacement Property.

It is much more cumbersome to get the same result using a contract for deed because it requires the Exchangor to actually deed the Relinquished Property to QI, then the QI has to convey the Relinquished Property to Purchaser by Contract for Deed and later (just prior to the closing of the Replacement Property) the Exchangor has to purchase the contract back from the QI.

3 Rules of Thumb

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

  1. Typically you will acquire replacement property that is “up or equal” in Value (price);
  2. You will roll over all of your Equity (net proceeds) from the relinquished property into your replacement property;
  3. 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.

Generally, people prefer not to put the QI into the chain of title and want to avoid the extra costs and recording fees that may entail.  A Note and Mortgage are just an easier form of seller-back financing when you are loaning your buyer money on the sale of your Relinquished Property and also trying to juggle the requirements for 1031 exchange perspective.

by

Section 1033 & Involuntary Conversions Explained

Preliminary Title Report

Section 1033 (a close cousin to 1031) allows you to defer the gain when you lose your property due to an involuntary conversion such as theft, condemnation, conversion, eminent domain takings, etc. The benefits of a 1033 are that you get to defer that gain. In some ways, 1033 is better than 1031 because you have a longer period to reinvest your funds and you don’t need to use an intermediary to hold your funds.

The Downside of 1033

Here’s the downside of 1033. In order to do a 1033 you must have had an involuntary loss. Commonly this arises in the context of a condemnation proceeding started against you or knowledge of a credible threat of condemnation. The problem is that many municipalities are leery of starting an actual condemnation – they don’t want the litigation headaches. Instead they want to negotiate with the seller to come to an voluntary and mutually agreeable price. If you’re negotiating, it’s hard to say that you’re selling under threat of condemnation. So many people who are dealing with government bodies will set the transaction up under 1031 – and if it qualifies for 1031 great. As a backup they can have a 1033 to fall back on.

Get Something in Writing

Mere saber-rattling by the government authority (“well we could condemn if we wanted to…”) probably doesn’t qualify as a credible threat. So I advise people to do the 1031 exchange or get something substantive from the government entity that they will condemn. For example, if you can get them to put a representation and warranty in the purchase agreement that the government authority can and will condemn if this purchase agreement is not accepted then you’ve got something authoritative in writing that you can rely on for your 1033. Absent credible evidence that the governmental agency has the power to take the property and has in fact made an actual imminent threat to take the real property you’re better off structuring as a 1031.

Another consideration for owner-operators (owner-user), that run a business out of their condemned relinquished property is that the like-kind standard under 1033 may require them to purchase a replacement property that is “similar or related in service or use” to their old relinquished property.  This requirement under 1033 that the replacement property be functionally equivalent is a much more exacting standard than the broadly construed like-kind standard for real estate under 1031.  Rev. Rul. 64-237, 1964-2 C.B. 319, states that, with respect to an owner-user, property is not considered similar or related in service or use to the converted property unless the physical characteristics and end uses of the converted and replacement properties are closely similar.

by

Who Can Act as a Qualified Intermediary in a 1031 Exchange?

Qualified Intermediary

Sometimes people want to know who can act as a qualified intermediary in a 1031 exchange. The treasury regulations specify that the person that acts as your qualified intermediary cannot be a disqualified person.

Employees and Agents

For example, anyone that has been your employee or agent – your accountant, your attorney, etc. during the last two years cannot be your qualified intermediary. The idea is they’re looking for someone that is unbeholden and beyond the sway of the taxpayer.

People Related by Blood or Business Affiliation

Furthermore, people that are related to you by blood or by business affiliation are also disqualified. So your business partners, your son, your mother, your daughter – these people are also disqualified. Typically people go to a corporate 1031 company that’s business is to facilitate exchanges and have that neutral unbeholden and professional qualified intermediary company facilitate the exchange.

There is a certain amount of credibility that goes along with using a reputable 1031 company that’s been in business facilitating exchanges for a long time. Furthermore, 1031 exchange professionals typically know what they’re doing because that’s what they do and they can be a resource for you as you go through this process. So to summarize, anyone that’s been your employer, relative, or agent during the past two years is excluded from being eligible to be your qualified intermediary.

by

Do I Have to Assign My Purchase Agreement to My Qualified Intermediary?

ALTA Fairway Endorsement

Many people ask “Why do I have to assign my purchase agreement to my Qualified Intermediary in a 1031 exchange?” And furthermore, “Why do I have to give notice to all of the other persons involved in the purchase agreement that I am assigning my contract to my intermediary.” It seems intrusive to have to give everyone notice that you are doing an exchange. Why is it anyone’s business?

Old School Requirements

Let’s go back in time before the current treasury regulations were in place. Back then we would actually deed or transfer our property to the qualified intermediary. The Intermediary acted as a straw man, so that they became the seller of the relinquished property and the purchaser of the replacement property. In other words, your Intermediary actually went into title and then participated in the transfer or the purchase of the property.

Modern 1031 Tax Techniques Allow Mere Assignment

Today, qualified intermediaries do not have to legally take title. We can accomplish the same function by simply assigning to the Intermediary our rights in the relinquished property purchase agreement, or our rights in the replacement property purchase agreement. That is deemed to be the same as if the Intermediary actually took our property from us, or received the replacement property for our benefit.

Faster, Cheaper Direct Deeding for 1031 Exchanges

The benefit here is that we do not have to deed a property. We do not have to pay for extra recording fees, and we do not have to go through all of that extra hassle of actually deeding the intermediary into the chain of title. However, the treasury regulations say that if you are going to have direct deeding, (that is, the exchangor deeds the relinquished property to the buyer, and the seller of the replacement property deeds the replacement property to the exchangor) then we have to give written notice of this assignment to the Intermediary to all of the other parties to the purchase agreement. Remember, in old common law, an assignment was never considered effective unless all of the parties to that agreement were given notice.

Why Would the IRS Adopt an Old Common Law Assignment Rule?

So why would the treasury regulations have adopted this old rule? I think it is to prevent unscrupulous folks from fabricating a 1031 exchange. They can’t say, “You know that deal that we did back last year? That was a 1031 exchange.” The way to catch them in that lie would be to say, “Well, show us where you gave written notice to the other parties of the purchase agreement.” If they can’t show, well then maybe it wasn’t a 1031 from the outset.

Contact

Phone: 612.337.2470
Fax: 612.337.2471
Info: info@cptitle.com
Sales: sales@cptitle.com
Support: support@cptitle.com

200 South Sixth Street
Suite 1300
Minneapolis, MN 55402

Service Area

Commercial Partners Title provides commercial title services throughout the state of Minnesota and the United States, including: Minneapolis, Rochester, St. Cloud, St. Paul, Bemidji, Bloomington, Golden Valley, Duluth, Edina, Minnetonka, Chaska, Mankato, Fargo, Sioux Falls, Madison, Milwaukee, Miami, North Dakota, South Dakota, Florida, Iowa, and more!

Call Now
Title Application

25 years ago, we opened our doors and became your partners in commercial real estate transactions.

Today, we promise that we will continue that partnership.

Stay safe and know that we are here for you.

For any of your local and national transactions, please call 612.337.2470