5 Common Misconceptions About 1031 Exchanges

From the definition of a “like-kind” property to the tax benefits involved, there are several common misconceptions about 1031 exchanges. To make informed decisions, real estate investors should work with an experienced 1031 exchange expert throughout the process.

There are several strict rules and requirements for 1031 exchanges—and if real estate investors don’t comply with these rules and requirements, they won’t be able to achieve the tax benefits that are available. As a result, informed decision-making is key. Unfortunately, many common misconceptions exist, and investors need to be careful not to rely on bad information.

At the same time, the definition of a “like-kind exchange” is also broader than many people realize. Investors can claim the tax benefits that are available under Section 1031 in a wide range of circumstances—including circumstances that may not look anything at all like an exchange of similar properties.

What Are Some Common Misconceptions About 1031 Exchanges?

With this in mind, here are five common misconceptions about 1031 exchanges:

1. A “Like-Kind” Exchange Requires Similar Properties

A “like-kind” exchange does not require similar properties. As the IRS explains, “[r]eal properties generally are of like-kind, regardless of whether they’re improved or unimproved.” As a result, it is possible to exchange any property for any other, provided that they are both located either in or outside of the United States.

2. An “Exchange” Requires a Swap with Another Real Estate Investor

An “exchange” does not require a direct swap with another real estate investor. Most 1031 exchanges are delayed exchanges, which involve selling one property and then buying another. Conducting a reverse exchange—which involves buying a replacement property first—is also an option.

3. Investors have 180 Days to Find and Close on a Replacement Property

This common misconception is only partially true. While investors have 180 days to close on a replacement property when conducting a delayed exchange, they only have 45 days to “identify” a replacement property after they sell their relinquished property. Failure to properly identify a replacement property within 45 days will result in loss of 1031 exchange treatment eligibility.

4. Conducting a 1031 Exchange Permanently Eliminates Tax Liability

This is one of the biggest—and most important—misconceptions about 1031 exchanges. Conducting a 1031 exchange does not permanently eliminate tax liability on the sale of a relinquished property. Instead, the investor defers their tax liability. Investors can achieve indefinite deferral by conducting a series of 1031 exchanges, but if there is ever a break in the chain, they will need to pay what they owe.

5. You Don’t Need to Hire a Qualified Intermediary

A qualified intermediary (QI) is required for all 1031 exchanges, except for “true” exchanges that involve directly swapping one property for another. This is because of the rules on taking possession of the proceeds from the sale of a relinquished property (or taking possession of a replacement property in the case of a reverse exchange). Attempting to conduct an exchange without a QI will also result in loss of eligibility under Section 1031.

How 1031 National Services Can Help

At 1031 National Services, we serve as qualified intermediaries for 1031 exchanges nationwide. If you are preparing for an exchange—or if you have questions about the requirements for claiming tax deferral under Section 1031—our team can explain everything you need to know. Our services for real estate investors include:

• Meeting the “identification” requirements for conducting a 1031 exchange
• Holding sale proceeds in escrow during delayed exchanges
• Establishing Exchange Accommodation Titleholders (EATs) for reverse exchanges
• Structuring the closing process to comply with Section 1031’s deadlines
• Documenting investors’ eligibility for tax deferral under Section 1031

We have decades of experience helping investors maximize the tax benefits available under Section 1031 while ensuring they can demonstrate compliance to the IRS if necessary. If you would like to learn more, contact us today.

Schedule a Free Phone Consultation with a 1031 Exchange Expert Today

1031 National Services is a team of experienced 1031 exchange experts who work with individual and institutional investors nationwide. Whether you have questions about the requirements for conducting a 1031 exchange or you are ready to start the process, we can guide you forward. To schedule a free phone consultation at a time that is convenient for you, call us at 888-872-1031 or tell us how we can help online today.