When it comes to a tax-deferred property exchange, we at 1031 Exchange Place are here to help you through the ins and outs of the process. We’ve helped countless clients complete a 1031 exchange and save huge sums in unnecessary taxes, all through our friendly service combined with years of expertise.
Unfortunately, through our years in the field, we’ve noticed a number of common myths and misconceptions when it comes to 1031 exchanges. Let’s look at some of the most common, and set the record straight.
They’re incredibly complicated.
There are misconceptions here on both sides of the ledger. For some, they believe that a 1031 exchange is too complicated to spend time on, and won’t be worth the eventual payout – this could not be further from the truth, as we can provide you with a simple and seamless process that could net you huge savings. In most cases, the only thing you need to do is to send us a copy of your purchase and sale agreement and get us in contact with your title company – we’ll take care of the rest.
I can benefit from an exchange just by reconciling it with my taxes.
On the flip side, some believe that this process is so simple that their regular attorney or accountant can handle it for them without any additional effort – this is also false. Additionally, if your attorney has performed even a single non-exchange-related service in the last two years preceding your exchange, they are a disqualified party and cannot facilitate your exchange.
I must exchange for the same type of property that I’m selling.
Some assume that you have to exchange an apartment for an apartment or a house for a house, but this is not the case. “Like-kind” property includes all types of real estate used for business or investment purposes. More info on like-kind property here >>>
I must literally exchange or swap one property for another.
Nope! While you can execute a “simultaneous exchange”, there are a number of different 1031 exchange formats and simultaneous exchanges are relatively rare. Of all the available methods, only one of these formats is a literal swap of one property for another. In most cases, an exchangor will sell one piece of property and acquire another within prescribed time restraints. In other cases such as a reverse exchange, an exchanger will purchase their replacement property first.
I can simply file IRS Form 8824 to rollover.
Some falsely assume that as part of the exchange process, all you have to do to roll over your exchange proceeds into a new investment of some sort and file Form 8824 with the IRS. This is not all that goes into a valid exchange – you need proper structuring, otherwise, you might accidentally trigger a clause or event that ruins your exchange and causes additional tax payments.
Exchangors often think that you are not required to reinvest all funds from a relinquished property. Beware that some of your tax benefits will evaporate if you choose to reinvest only a portion of your proceeds as part of your exchange – any funds not reinvested in the replacement property are considered “boot,” and are considered taxable income.
“1031 Exchanges are only for…”
There are a couple of misconceptions that begin with this phrase, the first of which is that “1031 exchanges are only for…real estate”. While real estate exchanges are our focus here at 1031 Exchange Place, in reality, both personal and real property, can potentially qualify for tax-deferred status if it’s held for productive use in a trade, business, or for investment. Update: as of the tax reform at the end of 2017, personal property is no longer eligible for 1031 exchange – not much help to the confusion!
In addition, some believe that “1031 exchanges are only for big investors with large profits.” This is not true – anyone who owns an investment property that is being sold for a profit can qualify and should consider such an exchange when selling.
The 1031 exchange holding period also comes with a common myth: That you have to hold the property for a year or more before exchanging it. There are no such requirements under 1031 regulations, though as we noted above, the property does need to be held for productive use in a trade, business, or for investment. If you want to learn more on this common topic go HERE.
To clear up any other 1031 exchange questions or misconceptions, or to learn about any of our related services, speak to an advisor at 1031 Exchange Place today.
For more on common misconceptions, or to learn about our 1031 exchange properties or planning services, don’t hesitate to reach out to us with your questions!