Tools and Investment
What 1031 Exchange is Not
1031 real property exchange is rapidly becoming an important aspect of real estate dealings. But there still are misconceptions regarding 1031 exchanges that hinder investors from taking advantage of the benefits of a 1031 exchange. Here are some of the most popular misconceptions:
1. 1031 is a tax free property exchange
A 1031 exchange is a tax-deferred transaction, NOT a transaction wherein the capital gains tax would entirely be free and no longer required to be paid.
2. To complete a 1031 transaction, you need to find someone to swap properties with
This was originally how exchanges were structured but now the investor can choose anyone to sell their property to and buy anyone's property. There are just a structure being followed and certain rules and regulations regarding related investors or parties involved.
3. You have to buy the exact same type of property you are selling for the exchange to be "like-kind"
As long as both properties to be sold and bought are used for investment and/or for business purposes, the investor can buy any property. Although exchanges are a creation of federal law, investors must also look at state laws to determine what is considered real property. Dependinn upon state law, some non-traditional interests in real property such as development rights, air rights and timber rights can also be exchanged in the process.
4. The 1031 exchange must be completed in one simultaneous transaction
Investors are allowed to complete the Starkers exchange on a delayed basis given they still follow a certain time restriction. They have to determine the replacement property 180 days after they have relinquished the property to be sold.
5. There is no need for a qualified intermediary, an attorney or accountant can hold the sales proceed until the replacement property is purchased.
It is essential to have a qualified intermediary to complete a deferred exchange since neither the investor, nor any disqualified person or entity, can come into receipt of the exchange funds during the exchange, or the exchange will be void. The IRS substantially disqualifies any person or entity from acting as an intermediary, if that individual has had an existing business relationship with (and/or is related to) the taxpayer within the past two years. Using a qualified intermediary enables an investor to avoid situations that might void an otherwise valid exchange. It is also a good practice to research the background, the expertise and the security of the qualified intermediary.
1. 1031 is a tax free property exchange
A 1031 exchange is a tax-deferred transaction, NOT a transaction wherein the capital gains tax would entirely be free and no longer required to be paid.
2. To complete a 1031 transaction, you need to find someone to swap properties with
This was originally how exchanges were structured but now the investor can choose anyone to sell their property to and buy anyone's property. There are just a structure being followed and certain rules and regulations regarding related investors or parties involved.
3. You have to buy the exact same type of property you are selling for the exchange to be "like-kind"
As long as both properties to be sold and bought are used for investment and/or for business purposes, the investor can buy any property. Although exchanges are a creation of federal law, investors must also look at state laws to determine what is considered real property. Dependinn upon state law, some non-traditional interests in real property such as development rights, air rights and timber rights can also be exchanged in the process.
4. The 1031 exchange must be completed in one simultaneous transaction
Investors are allowed to complete the Starkers exchange on a delayed basis given they still follow a certain time restriction. They have to determine the replacement property 180 days after they have relinquished the property to be sold.
5. There is no need for a qualified intermediary, an attorney or accountant can hold the sales proceed until the replacement property is purchased.
It is essential to have a qualified intermediary to complete a deferred exchange since neither the investor, nor any disqualified person or entity, can come into receipt of the exchange funds during the exchange, or the exchange will be void. The IRS substantially disqualifies any person or entity from acting as an intermediary, if that individual has had an existing business relationship with (and/or is related to) the taxpayer within the past two years. Using a qualified intermediary enables an investor to avoid situations that might void an otherwise valid exchange. It is also a good practice to research the background, the expertise and the security of the qualified intermediary.
Publisher: Akbar Bhamani Date posted: 06/16/2007
