1031 exchange myths versus realities

1031 ExchangeMyths vs. Realities

Myth1031 exchanges of real estate must be made between identical types of property.

Any real estate property can be exchanged for any other. Vacant land can be exchanged for rentals, commercial buildings, long term leases, mineral rights, etc.

Reality

MythIn a 1031 Exchange two parties must swap investment assets with each other.

Reality

A taxpayer can sell to one party and buy replacement assets from any seller. There is no requirement to swap assets.

Myth1031 like-kind exchanges are a tax loophole.

The IRS created 1031 exchanges. They are part and parcel of the Internal Revenue Code and have been for nearly 100 years.

Reality

Myth1031 Exchanges are only for real estate assets.

1031 Exchanges can be completed with a wide range of assets, among them precious metals, heavy equipment, art, franchises, fleet vehicles and professional athlete contracts.

Reality

MythYou must purchase the same type of property to meet "like-kind" rules for an exchange.

Any real property interest is like-kind to any other real property interest as long as it is held for investment purposes or a trade or business. For personal property (assets other than real estate) like-kind rules are defined by General Asset Class or NAICS classifications.

Reality

MythOnce I have done a 1031 exchange I never have to pay my taxes.

A 1031 exchange is a tax deferral strategy, which means taxes are deferred for a period of time which may, under certain circumstances be long-term or even indefinite.

Reality

MythI can use my attorney, CPA, realtor or equipment dealer as a qualified intermediary in a 1031 Exchange.

A qualified intermediary provides Safe Harbor protection for 1031 exchanges, and this party must be a "disinterested third party" who has not acted as your agent in any way within the two-year period ending on the date of the transfer of the relinquished property.

Reality

MythAll I have to do is reinvest the gain on the property to defer all taxes with a 1031 exchange.

According to 1031 exchange rules, to defer all taxes in an exchange the replacement asset(s) must be of equal or greater value than the relinquished assets, and all proceeds (not just the gain) from the sale must be reinvested.

Reality

MythUnless the asset I’m selling has increased in value, there’s no benefit to doing an exchange.

An exchange of an asset that has remained flat in value will allow you to defer the recapture depreciation on that asset. This so-called “phantom gain” is often overlooked and can be substantial.

Reality

MythIt is not possible to exclude any portion of your sale proceeds without tainting the ability to perform a 1031 exchange on your investment asset.

A taxpayer may exclude a cash portion of their choosing from an exchange as long as the cash is excluded from the Exchange Agreement before the sale takes place or is taken beyond day 180 of the exchange. Cash taken is considered to be cash boot and will be taxed.

Reality

Myth1031 Exchanges are too complicated and can only be done by the rich.

Any taxpayer of any means can benefit from a 1031 exchange with the assistance of a competent qualified intermediary.

Reality

Photos:

MinotaurSasquatchDragonLeprechaun

For more information or for a free 1031 Exchange consultation visit Accruit.com.

ChimeraNessie JackalopeGnome

YetiFaerieUnicornGryphon

Sphinx