Top Misconceptions About 1031 Exchanges

Written by Paul Getty | Jun 9, 2022 4:00:00 PM

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.

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