This Tuesday’s Tips post will clarify some of the common misconceptions associated with 1031 tax-deferred exchanges. Knowing the facts can create more opportunities!
Myth: You must find someone willing to swap properties.
Fact: Section 1031 exchanges are not really exchanges in the context of two-party barter. Instead, they are typical sale and purchase transactions that involve the same exact ingredients as any other sale or purchase without the capital gains. Learn more.
Myth: Exchanges are new.
Fact: Exchanges date back to 1921. In 1991, the “final” regulations were issued and exchanges as we now know them were born. Since 1991, the number of exchanges completed has increased dramatically each year.
Myth: You must acquire the same type of property that was sold.
Fact: When dealing with real estate, the term “like-kind” refers to the nature or grade of the property and is a very broad and liberal definition. Just about any type of real property will qualify under Section 1031 regulations. What makes two properties like-kind is the fact that both are used for productive use in a trade or business or for investment.
Myth: Exchanges are only applicable to the larger properties.
Fact: Whether you have $20,000, $200,000 or $2,000,000 to defer, an exchange offers the same benefits. Rather than paying the tax liability now, you have the ability to roll all gain into a property and continue to enjoy appreciation. An exchange should be considered an interest free loan from the IRS where the principal can be increased and, if planned properly, never repaid!
Myth: It’s all or nothing.
Fact: While it is true that in order to maximize your tax deferral, you must acquire a replacement property of equal or greater value and equity than your relinquished property, a trade down does not taint the entire transaction. Only the amount of the trade down in value or equity is taxable. Estimate how your 1031 exchange will work.
Myth: Exchanges are expensive.
Fact: Exchanges are actually very inexpensive! Contact 1031 CORP. for a fee quote.
The 1031 CORP. Exchange Team is always available to answer your questions.
