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Top Misconceptions About 1031 Exchanges

A 1031 “like-kind” exchange allows property investors to defer capital gains taxes on the sale of a property by reinvesting the proceeds into a replacement property. While engaging in a 1031 exchange is straightforward, some investors miss out on this opportunity due to misinformation. Here’s a look at five common misconceptions regarding a 1031 exchange.

Like-Kind” Means You Must Exchange for the Same Type of Property

The term “like-kind” often confuses. However, in the eyes of the IRS, all real property located in the U.S. is considered like-kind to all other real property in the U.S. This means that you can exchange an apartment building for retail space, industrial property for farmland, a hotel for a self-storage unit, etc.

The Sale and Purchase Must Take Place Simultaneously

While a simultaneous 1031 exchange is possible, the most common type of 1031 exchange is a delayed exchange. This allows you 45 days from the day you sell the relinquished property to identify one or more replacement properties. You have 180 days from the day of the relinquished property sale to close on the replacement property or properties.

All Funds from the Sale of Relinquished Property Must Be Reinvested

You’ll need to reinvest all sales proceeds to receive a full tax deferral; however, it’s not required to complete a 1031 exchange. In fact, it’s common for investors to withhold some of the sales proceeds, using the funds for personal expenses or other purchases. In this case, the amount withheld is considered “boot” and is subject to state and federal taxes.

A 1031 Exchange is Only for Big Investors

Anyone who owns an investment property may be able to take advantage of a 1031 exchange. If your property’s market value is higher than its cost basis, deferring your capital gains taxes can be advantageous, even if you don’t consider yourself a “big investor.”

1031 Exchanges Are Too Complicated

While there are many moving parts and some strict rules you need to follow, engaging in a 1031 exchange isn’t overly complex. Working with an experienced Qualified Intermediary and your tax, investment, and legal advisors can help to make the process as seamless as possible.

If you would like to learn more about 1031 exchanges and how they may benefit you, the team at FGG is here to help. Contact us today to schedule a consultation.

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Help Save 1031 Exchanges
Write to your Member of Congress and Senators urging them to oppose restricting Section 1031 like-kind exchanges. As part of the American Families Plan, the Biden Administration has proposed eliminating the application of Section 1031 for gains greater than $500,000. Like-kind exchanges have been part of the U.S. tax code since 1921 and are one of the tax code’s most powerful economic tools. It is critical that we all vigorously and visibly oppose this proposal. Make your voice heard with a pre-filled letter, which you can customize to add personal anecdotes or powerful client stories to highlight the positive impact of Section 1031 like-kind exchanges. Take action today by clicking HERE.

Paul Getty

Paul Getty is a licensed real estate broker in the state of California and Texas and has been directly involved in commercial transactions totaling over $3 billion on assets throughout the United States. His experience spans all major asset classes including retail, office, multifamily, and student, and senior housing. Paul’s transaction experience includes buy and sell side representation, sourcing and structuring of debt and equity, workouts, and asset and property management. He has worked closely with nationally prominent real estate brokerage and investment organizations including Marcus Millichap, CB Richard Ellis, JP Morgan, and Morgan Stanley among others on the firm’s numerous transactions. Paul also maintains a broad network of active buyers and sellers of commercial real estate including lenders, institutions, family office managers, and high net worth individuals. Prior to founding First Guardian Group/FGG1031, Paul was a founder and CEO of Venture Navigation, a boutique investment banking firm specializing in structuring equity investments made by institutions and high net worth individuals. He possesses over 35 years of comprehensive worldwide business management experience in environments ranging from early phase start-ups to multi-billion-dollar corporations. His track record includes participation in IPOs and successful M&A activity that has resulted in investor returns of over $700M. Paul holds an MBA in Finance from the University of Michigan, graduating with honors, and a Bachelor’s Degree in Chemistry from Wayne State University. Paul Getty holds Series 22, 62, and 63 securities licenses and is a registered financial representative with LightPath Capital Inc, member FINRA /SIPC. Paul is a noted speaker, author, and actively lectures on investments, sales, and management related topics. He is author of The 12 Magic Slides, Regulation A+: How the JOBS Act Creates Opportunities for Entrepreneurs and Investors, and Tax Deferral Strategies Utilizing the Delaware Statutory Trust (DST), available on Amazon and other retail outlets.

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