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November 29, 2018 by Jeff Peterson Leave a Comment

Falsifying or Inflating the Value of your 1031 Replacement Property

Inflating Value in a 1031 Exchange

When you are doing a 1031 Exchange, you generally want to hit three benchmarks called the napkin test. These are generalities that typically bear out to be good indicators of whether or not all of the gains will be deferred in a 1031 Exchange. Here are the benchmarks.

Step One – Equal or Greater Value

One, you typically want to buy a replacement property of equal or greater value than the relinquished property that you gave up. So, we want to go up in value, and get a bigger, better property.

Step Two – Equal or Greater Equity

Secondly, we want to take all of our net equity, all of our proceeds from the disposition, the sale of our relinquished property. Imagine a big stack of poker chips in front of your relinquished property. I want to slide all of those poker chips over into the replacement property. So, I am moving all of my equity from A to B. So, the second rule of thumb is I want to move all of my equity into the replacement property rather than taking any cash or chips off the table, which would be treated as taxable boot.

Step Three – Off-set Your Debt Relief

The last benchmark, the third thing that I am trying to juggle, is that to the extent that I am paying off mortgages and debt on the relinquished property, I need to offset that debt relief with either new debt taken out in conjunction with the replacement property. So, I could take out a new purchase money mortgage, or I could assume the seller’s existing mortgage that would satisfy my debt relief if I acquired a replacement property with at least an equivalent amount of debt. Or, alternatively, I can offset my debt relief by putting more of my own cash into the replacement property. Cash in will also offset debt relief.

Coming Up Short on Sufficient Value

Well, here is where things get a little bit crazy. What if a person wants to acquire a replacement property that is not of sufficient value, but they are willing to gross up that price, fabricate, inflate the value of the price and report the transaction as if they acquired a replacement property of greater value. Let’s say that the real value of the property is $100,000, but the taxpayer grosses up the sale price to $150,000, so that they acquiring a replacement property of sufficient value. Suppose that they are buying from a friend who is willing to go along with it. Perhaps the friend is even willing to split the difference and to send back some of that inflated proceeds to the purchaser. They will give it back under the table. This is not acceptable. Filing a false or fraudulent tax return is a criminal offense. Knowing and willful attempts to evade or defeat income tax due is a crime.

There is a big difference between legally deferring your taxes in a proper 1031 Exchange and stretching the truth to fabricating the value of your replacement property.

Do Not Do the Crime

Section 7201 says that any person who willfully attempts to evade or defeat any tax imposed by this title, or the payment thereof, shall in addition to other penalties provided by law, be guilty of a felony. And, upon conviction thereof, shall be imprisoned not more than five years. Or they may be fined not more than $250,000 for individuals or both together with the costs of prosecution.

Like-Kind Qualified Intermediaries

For help through your 1031 exchange, contact Commercial Partners Exchange Company and speak with one of our skilled intermediaries. We have more than two decades of experience facilitating exchanges of real property for clients across the United States. Our intermediaries can help you with your required 1031 exchange documents, answering your questions, and advising you on best practices. Give us a call today to learn more about the services our intermediaries provide. Our primary office is located in Minneapolis, but we have satellite offices in many other states around the country.

Filed Under: 1031 Exchange Tagged With: property value, replacement property

May 24, 2018 by Jeff Peterson Leave a Comment

1031 Exchange into Property of Greater Value

1031 Property Value

Property value is an important element to consider in a 1031 exchange of real estate. In this article, we’re going to talk about why it’s important to exchange into replacement properties that are equal to or greater than your relinquished property in value.

Rules Regarding Value

When conducting a 1031 exchange of real estate, there are many important rules to keep in mind. There are rules governing timing, the type of property that’s allowed, and more. One of the most often overlooked rules (but nonetheless important) is the rule governing property value. You need to make sure that your replacement property is greater in value compared to your replacement property. The same goes for debt and equity. This is known as the “napkin test” – and it’s a great preliminary test for determining your eligibility for a 1031 exchange of real estate.

Minnesota Real Estate Exchanges

1031 exchanges offer a fantastic alternative to paying capital gains taxes on the sale of real property. When used correctly, a like-kind exchange can help you defer these taxes and keep your money working for you in a continued investment – compounding wealth over time. At Commercial Partners Exchange Company, our qualified intermediaries have twenty years of experience facilitating exchanges of real estate. Give us a call today at our downtown Minneapolis office to speak with one of our qualified intermediaries about your exchange and get started with the process!

Filed Under: 1031 Exchange Tagged With: 1031 exchange property, property value

November 9, 2017 by Mark Goodman Leave a Comment

Will I Still be Covered by Title Insurance if my Property Value Increases?

Property Value Increase

Title insurance covers your interest in your property against any potential future claims. But will you still be sufficiently covered if your property value increases, or if you construct improvements to your property? In this article, we are going to discuss what happens with your title insurance coverage if the value of your property increases.

Title Insurance Coverage

When it comes down to it, your title insurance policy covers you up to the value of your policy – no more and no less. The exact value of your policy will depend on a variety of factors, the details of which will be set out in your title insurance policy. You will be able to review the extent of these terms prior to closing when your title company provides you the title commitment.

Constructing Improvements to the Property

If you construct any improvements to your property you may need to get additional coverage or endorsements through your title company. The same is true for any significant increases in the value of your property over time. If you are unsure about your title insurance policy coverage and whether you need to purchase any additional coverage, don’t hesitate to contact your title insurance company with your questions.

Commercial Partners Title Company

At Commercial Partners Title, we bring decades of experience to the table and work hand-in-hand with each of our clients to provide the best possible service. We are recognized as the experts in commercial transactions not only in Minnesota, but across the country. Our title closers, escrow agents, and underwriters are available now to answer any questions and walk you through the title insurance process. Contact us today at our downtown Minneapolis office to discuss your commercial real estate transaction.

 

Filed Under: Title Insurance Tagged With: property value, title insurance, title policy

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