Common 1031 Exchange Misconceptions
Like-kind means I must exchange the same type of property, such as a retail property for another retail property.
All real property is generally “like-kind” property to all other real property. You can exchange a retail property for an office building or for an apartment building, or even vacant land.
I can just report the sale of one property and the acquisition of another property as an exchange on my tax return.
The transaction must be structured as an exchange and not just a sale, followed by a purchase. The taxpayer must engage the services of a Qualified Intermediary (QI), sign an exchange agreement before the closing on the sale and cannot have access or control of the exchange proceeds. For more information on how 1031 exchanges must be reported your tax returns, please consult with your accountant or tax advisor.
My CPA or attorney can act as my Qualified Intermediary.
Your CPA and attorney are considered disqualified persons if they have provided any non-exchange related services within the two-year period prior to the exchange.
I have to “swap” with another investor to make the exchange work.
Not true. In the early days of tax-deferred exchanges, this was commonplace. However, regulations do not require this. Two parties actually swapping properties with one another to complete an exchange is fairly rare.
I own one small investment property. 1031 exchanges are too complicated for someone like me.
Although there are many rules related to exchanges, we will work with you and your tax advisor to make sure the process is as seamless as possible. If you would have to recognize gain on your sale, you should consider an exchange.
The sale and purchase must take place simultaneously.
The taxpayer has 45 days to identify the new replacement property and up to 180 days to close. You can close on your properly-identified replacement property any time prior to the expiration of your exchange.
I can also do a 1031 exchange on personal property.
In the past, exchanges were allowed on personal property but changes to the federal tax code in 2017 narrowed the scope of exchanges so they are only allowed on real property.
I am required to reinvest all my proceeds into my replacement property.
The IRS does allow a taxpayer to take some money out when the relinquished property closes, but it is considered boot and will be subject to all applicable taxes.
The rules state that property must be “held for productive use in a trade or business or for investment”, but do not define how long I have to hold my replacement property before selling or exchanging again. What is the minimum holding period?
The longer you hold the property, the easier it is to prove your intent to hold it for investment purposes rather than for sale. Determining whether or not the property was held long enough is a discussion you should have with your tax advisor.
Leader1031.com, LLC is a Qualified Intermediary that cannot provide legal or tax advice concerning the tax consequences of a given transaction. Please consult with your legal or tax advisor about your particular circumstances before making any investment or financial decisions. To ensure compliance with requirements under Treasury Department Circular 230, we inform you that the contents of this publication are not intended or written to be used, and may not be used, for the purpose of (i) avoiding U.S. federal tax penalties or (ii) promoting, marketing, or recommending to another party any matter addressed herein. Each taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax adviser.
