Your Guide to a Successful 1031 Exchange - Part 2

We are pleased to introduce Bill Exeter, CEO of Exeter 1031 Exchange Services, LLC as one of our nationwide investment expert partners. As a leading national provider of comprehensive 1031 Exchange services, Bill Exeter has contributed the following article from his 1031 Exchange Guidebook on our website to provide valuable insights for investors in the area of 1031 Exchanges.

Partial Tax Deferral

You can complete a partial 1031 Exchange transaction by trading down in value or by pulling cash out. The amount that is not reinvested in qualified replacement property is called cash boot or mortgage boot and will generate income tax liabilities. 

Exchanging Multiple Properties and Fractional Interests

You can sell multiple relinquished properties and/or purchase multiple replacement properties as part of your 1031 Exchange transaction. Your 1031 Exchange is not limited to one relinquished property and/or one replacement property. The relinquished and/or replacement properties can also involve the sale or purchase of a fractional interest, which means you do not have to acquire and/or own 100% of the property.

Seller Carry-Back Financing

We advise our clients to plan carefully if they intend to sell a relinquished property with a seller carry-back note when completing a 1031 Exchange transaction. You must decide whether you want to include or exclude the seller carry-back note inside your 1031 Exchange before the close of the sale of your relinquished property. The installment note and deed of trust or mortgage will be drafted differently depending on which strategy you select. 

Seller carry-back financing can significantly complicate your 1031 Exchange transaction. Consult with your advisors and Exeter 1031 before you finalize the terms of your transaction. 

Assignment of the Purchase and Sale Agreement

To defer all of your income tax consequences, you must select your Qualified Intermediary, and have the Purchase and Sale Agreement and any related Escrow Instructions (if applicable) assigned to your Qualified Intermediary, before the close of the sale of your relinquished property.

Transactions that close without a 1031 Exchange set-up prior to closing will be taxable because you have the right to the net proceeds.

Early Release of Funds before Closing

Purchase and Sale Contracts often provide for early release (payment) of earnest money deposits, extension payments, option payments, or other funds before the close of the sale of the relinquished property. 

If the early release has not been structured properly, early release payments can result in taxable boot even when the transaction has been structured as a 1031 Exchange. We always recommend you first have your Qualified Intermediary assigned into your relinquished property sale transaction, and then have the funds released to your Qualified Intermediary. 

Legal Entity

Generally, the replacement property must be acquired by the same legal entity that sold the relinquished property. There are some exceptions to this rule such as entities that are classified as disregarded entities. Consult with your legal and tax advisors and Exeter 1031 for more information.

Entity Breakup Issues

Taxpaying entities of all types, including “C” Corporations, “S” Corporations, General and Limited Partnerships, Multi-Member Limited Liability Companies, and Revocable and Irrevocable Trusts can defer the payment of their income tax liabilities through a 1031 Exchange transaction. 

 

Significant tax planning problems arise when the taxpaying entity selling the relinquished property and the underlying owners (stockholders, partners or members) want to go separate directions. If you own investment real estate inside of an entity, it is critical that you discuss your exit strategy today with your legal, tax and financial advisors, and Exeter 1031 so that you avoid any last-minute tax planning problems. 

Related Party Issues

Related party 1031 Exchange transactions occur when you sell your relinquished property to, or you buy your replacement property from, a related party. Related party 1031 Exchanges might qualify provided you comply with specific regulations and rulings issued by the Internal Revenue Service. The relinquished property sold to a related party or the replacement property acquired from a related party must be held for at least two years to qualify for 1031 Exchange treatment. 

Replacement properties acquired from a related party have additional requirements outlined in Revenue Ruling 2002-83, and will often not qualify for 1031 Exchange treatment.

Access to Your 1031 Exchange Funds

Treasury Regulations and Rulings allow you to access your 1031 Exchange funds only when you have met one of the following conditions: 

  • Your 45 calendar day identification period has expired and you did not identify any replacement properties; 
  • You have purchased all of your identified replacement properties and your 45 calendar day identification period has expired; or 
  • Your 180 calendar day 1031 Exchange period has expired.

We hope the insights provided by Bill Exeter of Exeter 1031 Exchange Services, LLC in this article have been informative and beneficial. We at CBC Capital Advisors are proud to partner with such a distinguished firm. Together, we are committed to facilitating a seamless 1031 exchange process for our clients. Our collaboration ensures that you receive comprehensive support and guidance, making your exchange experience as smooth and efficient as possible.

For the past 40+ years it has been our honor and pleasure to help clients achieve their investment goals through commercial real estate investing through…

  • Our Exclusive Nationwide Investment Network
  • Off-Market Commercial Real Estate Opportunities – Nationwide
  • and Saving Taxes with 1031 Exchanges

To Learn More, Give CBC Capital Advisors a Call at (806) 793-0888

In addition, you can learn all about our exclusive nationwide investing network and capabilities by watching Rick Canup’s short investment presentation below.