Wednesday, June 12, 2024

1031 Common Misconceptions

Common Misconceptions

You must “Exhange” one property for another simultaneously. False

A one-for-one simultaneous exchange need not take place. In a Forward Delayed Exchange (the most common type of Exchange), property is sold (Relinquished Property) and Replacement Property is purchased within 180 days following the sale of the Relinquished Property. In a Reverse Exchange, however, the Replacement Property is purchased before the sale of the Relinquished Property.

1031-exchange-3-stepsThe real estate purchased has to be the same type as the real estate sold to meet “like-kind” requirements. False

Any real estate is “like-kind” to any other real estate under 1031 guidelines. This means that a shopping center can be “like-kind” to raw land, and an office building can be “like-kind” to a residence that is held for investment purposes.

If I am having difficulty with my purchase, I can extend the 1031 deadlines. False

As a general principle, there are no extensions for either the 45 or the 180 day rules. However, Presidential others may provide an extension to these deadlines in cases of declared emergencies. Examples include the terrorist attacks of September 11, 2001 and areas affected by a natural disaster such as wildfires, hurricanes and tornadoes.

The 1031 Exchange is a loophole in the tax code. False

Section 1031 has been a part of the Internal Revenue Code since the inception of the Code during the 1920’s. It is a valid tax deferral strategy, which stimulates investment and is not a gimmick or loophole in the Tax Code.

I can hold the money from the sale of my property and use it to purchase Replacement Property without dealing with a Qualified Intermediary. False

A “Qualified Intermediary” provides safe harbor protection for 1031 Exchanges. Without using a Qualified Intermediary, an Exchange may be reviewed by the I.R.S and invalidated by the courts. A Qualified Intermediary must remain completely independent and cannot have been your agent (attorney, CPA, broker, etc.) in the past two years.

Through a 1031 Exchange, I never have to pay the capital gains taxes that would otherwise be payable. False

A 1031 Exchange is a tax deferral strategy. Taxes are deferred, and the cost basis transfers from the Relinquished Property to the Replacement Property. Through continue 1031 planning; it may be possible to turn this tax deferral into tax savings.