Debunking Some Myths About 1031 Exchanges
Robert G. Hetsler, Jr. J.D. CPA
Inspirational Leader, Spiritual Warrior, Life & Business Strategist, Author, Entrepreneur Talks about #Overcoming Adversity, #Leadership through Inspiration, #Belief System, #Success #Importance of Progress
There is no argument that #1031 exchanges have enjoyed explosive growth in popularity in recent years. Once the sole domain of professional investors and commercial brokers, today you will find 1031 exchanges being used by professional and casual investors alike.
However, along with this popularity has come many misconceptions about this powerful tax-deferral tool. Read on to debunk some of the most common myths about 1031 exchanges, and avoid trouble with the IRS down the road.
A taxpayer cannot complete a 1031 exchange with a related party.
FALSE! Related parties can buy or sell property in a valid 1031 exchange. When related parties (e.g., parents, spouses, children, siblings, etc.) exchange property, the related party is obligated to own the property for at least two years following the exchange before selling or exchanging it again. Failing to adhere to the Two-Year Rule will render the 1031 exchange invalid.
Vacant land does not qualify for a 1031 exchange.
FALSE! Any property that qualifies as real estate (as defined individually by each state) qualifies for a 1031 exchange. This means that things like water rights, mineral rights, leasehold interests greater than 30 years, and even air rights are eligible for an exchange. Of course, since each state defines “real estate” differently, it always pays to first confirm that an asset is eligible ahead of time.
All tax liability is deferred in a 1031 exchange.
FALSE! Boot is an important concept to understand in 1031 exchanges. Boot is any cash not spent on the purchase of replacement property. Boot is fully taxable regardless of the investor’s adjusted basis on the property. Boot is subject to federal capital gains tax of 15%, as well as any state capital gains tax that may apply. Likewise, if the property was depreciated after 1997, boot may be also subject to a 25% recapture tax.
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