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Common
1031 Misconceptions
In
simple terms, a 1031 exchange
moves the gain from the sale of an old investment
property into the purchase of a new investment
property. By moving the gain into a new property,
you defer paying tax on that gain into the
future.
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Cody
Walkup is a 1031 Qualified
Intermediary for the 1031Exchange Experts,
LLC.
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For example, suppose Jane Doe sells
her rental house for $200,000. She bought it five
years ago for $150,000. Now using a 1031 exchange,
she buys another investment property for $200,000.
By following the IRS’s requirements, she
is able to transfer all her gain into her new property
instead of paying taxes on the sale.
Since the most recent real estate
boom, people have become more aware of 1031 exchanges
than ever before. Even with this increased awareness,
there are still some prevalent misconceptions about
this specific section of the tax code. As a 1031
exchange consultant, I hear these misconceptions
everyday. Here are the most frequent three I hear:
1) I’m selling a rental
house, so now I have to buy a rental house.
This is not true. The IRS uses
the term “like-kind,” but for real
estate this is very broad. Both your old
and new properties only need to qualify as investment
or business use. If both properties pass this test,
you can exchange nearly any type of real estate
for any other kind. In our first example Jane Doe
is selling a rental house. Now she can buy an office
building, a commercial property, or even bare land.
And of course she can always buy another rental
house.
2) I’m selling for $200,000;
if I buy a property of less value it will invalidate
my exchange.
In order to not pay any tax, you
must buy equal-or-up. If Jane sells her old property
for $200,000 and buys a new property for $190,000,
this doesn’t toast her whole exchange. She
merely pays tax on the $10,000 buy-down. And the
whole $10,000 will be taxable.
3) In order to complete my exchange,
I must find someone to swap properties with.
Originally, this was how exchanges
were structured. This is not the case anymore.
You actually have 45 days from your sale closing
to identify your replacement property, and 180
days from your sale closing to close on your new
replacement property.
§1031 is an evolving IRS
code section; the rules occasionally change, and
there are still many misconceptions out there.
Real estate investors and professionals need a
reliable source to keep up-to-date on the latest
developments.
Call The
1031 Exchange Experts with any 1031
questions you have, nationwide, toll-free, at 866-694-0204. |
