In a 1031 exchange, you have 180 days to complete your exchange. If you’re closing near the end of the calendar year, you don’t get your full 180 days if the due date for the filing of your federal income tax return pops up within that 180 day period. What a lot of smart real estate agents and brokers do is send an email to the client (CCing their accountant) that informs them that they may want to file an extension for their tax return in order to get full use of their 180 day exchange period. Remember – you can’t extend the 180 day exchange period. That is set in stone. But you can extend t ..read more

The most successful taxpayers who utilize 1031 exchanges are constantly thinking about their next exchange. These taxpayers don’t start and stop their 1031 exchange – they live the exchange all the time. Theoretically, you can start with a single-family rental property, and exchange that into a duplex. After a while you can parlay that into an 8-unit property. When you’ve got your bearings, you can then exchange that 8-unit for a 24-unit property. Before you know it, you could be up to 100 units. You can use 1031 to build your wealth without the drag of taxation. 1031 allows you to accumulate ..read more

In a typical 1031 exchange, the taxpayer sells their property, parks their money with the qualified intermediary and then starts looking for their replacement property. But what if the replacement property they find is $130,000 less valuable than the relinquished property? How can you fix that gap in value? If the property you’re buying is an ugly duckling and could use some work, you could build improvements in a build-to-suit exchange. The intermediary can form an LLC and acquire the property while the taxpayer arranges for the construction to occur. These improvements need to be finished w ..read more

Section 1031 is always a potential sacrificial lamb in the eyes of many politicians from both sides of the aisle. It was republicans that restricted 1031 exchanges in 2018 and nearly wiped out the industry. Additionally, the Biden and Obama budgets have proposed to cap or eliminate section 1031. It’s really a bipartisan issue. 1031 exchanges are viewed as a “pay for” but that view is based on flawed logic. If you own a property and have a ton of potential gains, you’re going to be slapped on the wrist by the taxman if you sell that property outright. If section 1031 did not exist, many people ..read more

Many people think that, in a 1031 exchange, you need to use the exact entity for both the relinquished property and the replacement property. However, that’s not always the case. The bottom line is that the same taxpayer needs to be the one selling and purchasing all property in a 1031 exchange. That said, the properties do not have to be titled identically. It could be the taxpayer acting between and through a trust or LLC or something else. Every US taxpayer is an individual with a social security number. If you want to buy property in your revocable trust, that’s probably considered you as ..read more

Partnerships are great for buying and owning property. But partnerships can be awful when you want to sell property. If you’re in a partnership and are thinking about selling property in a 1031 exchange, it might be a good idea to reconfigure the ownership into a tenancy-in-common before even listing the property for sale. That breaks everyone out into separate ownership. It’s also a good idea to negotiate with your bank at the very beginning of the process that they will consent to their collateral being reconfigured into a different ownership structure. If a partnership owns a piece of prop ..read more

There are many different motivations for doing a 1031 exchange of real estate. One motivation that we often see in the Minneapolis area is what we call “grumpy goats.” These are people who are fed up with various things (high tax rates, insurance, local regulations and restrictions, tenants, etc.) and want to try out owning real estate in a different area. So they sell their relinquished property but they don’t want to get slapped with the taxes so they do a 1031 exchange. The first thing that you have to do in this situation is talk to a qualified intermediary. If you sell your property and ..read more

In a 1031 exchange, the qualified intermediary acts as an insulator by temporarily taking possession of the sales proceeds and, under a contract, utilizing that money to purchase replacement property as a continued investment. That property needs to be identified clearly and unambiguously within 45 days after the closing of your relinquished property. The most common identification rule is the “three property rule,” under which you can identify any three like-kind properties. For example, in Minneapolis you could identify the IDS Center, the Foshay Tower, and the Wells Fargo Center. These are ..read more

If you want to do a partial 1031 exchange and pay a little bit of tax, you can do it. But the first thing that happens in a 1031 exchange is that your old adjusted basis gets transferred to the new property. You don’t really start to benefit from your 1031 deferral until you’ve bought replacement value over and above your transferred basis. If your old basis was $200,000 and you buy a $300,000 replacement property, you’re deferring gain on that additional $100,000 of value that you just purchased over and above your transferred basis. That’s great, but maybe your gain was $700,000 and you bou ..read more

When you do a 1031 exchange, there are three accounting mantras that you want to keep in the back of your head at all times. In order to defer your capital gains taxes when selling real estate in a 1031 exchange you need to buy replacement properties of equal or greater value. You don’t want to cash out. Rather, you want to continue your investment into a property of at least equivalent value. Next, you have to reinvest all of your equity from the sale of the property. This is the money that you entrusted to the qualified intermediary to hold during the exchange period. All of this should be ..read more