Top Ten Misconceptions about 1031 Exchanges
means I must exchange the same type of property, such as an apartment
building, for another apartment building. No! Like-kind is an unfortunate
misnomer within the context of real property. 1031
exchanges are often called “like-kind exchanges” because that is the
language used in the tax code. And there’s the rub: “like-kind,” in
effect, simply means that as long as you’re selling real property
somewhere in the USA and then buying/exchanging into some other real
property located somewhere in the USA, then you’re OK. Exchanges can be
done anywhere in the country and can cross state lines. If you sell a
rental condo, you do not necessarily have to exchange into another
rental condo! You could exchange into raw land, or a strip shopping
mall, or a commercial office building, etc. So let’s recap: all real
property is like-kind to other real property. Although most 1031
exchanges are done with real property, exchanges can be done with
aircraft, artwork, machinery, business vehicles… just about anything
that has a capital gain tax can be exchanged. We call these non-real
property items “personal property.” The term “like-kind” means that you
can’t exchange real property for an aircraft. You can’t exchange
machinery for artwork. But in the context of real property, always
remember that all real property is like-kind to all other real
1031 exchange means that the sale and the purchase have to happen at
the same time. In other words, the seller has to find someone willing
to swap properties. No!
The odds of you finding someone else with the exact property that you
want – and who wants the exact property you have – are slim. For that
reason the vast majority of exchanges are “delayed exchanges” in which
you can sell your investment property to anyone wanting to buy it. You
need to use a special “middleman” called a Qualified Intermediary
(“QI”) or Accommodator who is required to hold the sale proceeds for
you and who then uses those proceeds to buy any replacement property
that you want.
attorney can handle the exchange for me as my Qualified Intermediary.
Or, my accountant knows all my tax stuff – I’m going to use my CPA as
my QI. No!
If the seller’s attorney or accountant has provided any legal or
accounting related services (or any service not exchange-related) in
the two-year period before the exchange, they are disqualified and may
not act as the Qualified Intermediary.
do a 1031 exchange I just need to file a form with the IRS with my tax
return and “roll over” the proceeds into a new investment. As long as
the seller doesn’t touch the sales proceeds, he can do an exchange any
A valid exchange requires much more than just reporting the transaction
on Form 8824. One of the biggest “no-no’s” in structuring an exchange
is allowing the taxpayer to have actual or constructive receipt of the
sale proceeds. This could trigger a taxable event. The QI must hold the
sale proceeds during the course of the exchange. There are specific
deadlines that must be adhered to as well. You have 45 calendar days,
starting from the date you close on your sale, to simply identify the
possible replacement properties you might want to buy. Then you have
180 days (again, starting from the day you close on the sale) to close
on the purchase of one or more of the properties identified.
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