Top Ten 1031 Exchange Misconceptions
Heather D. Walker
Operations Supervisor-Senior Exchange Officer at First American Exchange Company
Top Ten 1031 Exchange Misconceptions
1. LIKE-KIND MEANS I MUST EXCHANGE THE SAME TYPE OF PROPERTY, SUCH AS APARTMENT BUILDING FOR APARTMENT BUILDING.
All real property is like-kind to other real property. For example, you can trade an apartment building for an office building.
2. MY ATTORNEY CAN HANDLE THIS FOR ME.
Not if your attorney has provided you any non-exchange related legal services within the two-year period prior to the exchange.
3. I MUST LITERALLY “SWAP” MY PROPERTY WITH ANOTHER INVESTOR.
No. A 1031 exchange allows you to sell your relinquished property and purchase replacement property from a third party.
4. 1031 EXCHANGES ARE TOO COMPLICATED.
They don’t have to be. An experienced Qualified Intermediary will work with you and your tax and/or legal advisors to make sure the process is as seamless as possible.
5. THE SALE AND PURCHASE MUST TAKE PLACE SIMULTANEOUSLY.
No. The taxpayer has 45 days to identify the new replacement property and 180 days to close.
6. I JUST NEED TO FILE A FORM WITH THE IRS WITH MY TAX RETURN AND “ROLL OVER” THE PROCEEDS INTO A NEW INVESTMENT.
No. A valid exchange requires much more than just reporting the transaction on Form 8824. One of the biggest traps when not structured properly is the taxpayer having actual or constructive rights to the exchange proceeds and triggering a taxable event.
7. 1031 EXCHANGES CAN ALSO BE USED ON PERSONAL PROPERTY.
No. 1031 exchanges are only for real property.
8. ALL OF THE FUNDS FROM THE SALE OF THE RELINQUISHED PROPERTY MUST BE REINVESTED.
No. A taxpayer can choose to withhold funds or receive other property in an exchange, but it is considered boot and will be subject to federal and state taxes.
9. 1031 EXCHANGES ARE JUST FOR BIG INVESTORS.
No. Anyone owning investment property with a market value greater than its adjusted basis should consider a 1031 exchange.
10. I MUST HOLD PROPERTY LONGER THAN A YEAR BEFORE EXCHANGING IT.
The 1031 regulations do not list a time requirement on how long you must hold property, but it does say that property must be “held for productive use in a trade or business or for investment”.
Thank you for taking the time to read my post. Should you have additional questions please reach me direct at (408) 451-7994 or by Email: [email protected]
I look forward to talking with you soon!
Heather D. Walker-Senior Exchange Officer
First American Exchange Company