At 1031 CORP., we believe an informed client is an empowered client. However, there’s no shortage of misinformation surrounding 1031 exchanges. Whether you’re a real estate investor, advisor, or simply exploring your options, it's time to set the record straight.
Here are some of the most common myths — and the truths behind them:
❌ Myth #1: A 1031 Exchange Is Only for Large Real Estate Investors
✅ Truth: While many high-net-worth investors use 1031 exchanges, they’re just as valuable for small investors. Anyone selling an investment or business-use property and looking to defer capital gains taxes can benefit. The key is reinvesting in like-kind property — size doesn't matter.
❌ Myth #2: "Like-Kind" Means You Must Buy the Same Type of Property
✅ Truth: “Like-kind” in the context of 1031 refers to the nature or character of the property, not its grade or quality. You can exchange a single-family rental for a commercial office building, vacant land for a multi-unit rental, and more — as long as both properties are held for investment or business purposes. Learn more.
❌ Myth #3: You Only Have to Reinvest the Gain to Defer Taxes
✅ Truth: To fully defer capital gains taxes in a 1031 exchange, you must reinvest all net proceeds and acquire property of equal or greater value than what you sold. Reinvesting just the gain will result in a partial tax deferral, and the difference (called “boot”) will be taxed. Learn more.
❌ Myth #4: It’s All or Nothing — You Must Reinvest All Equity and Value or Lose All Tax Benefits
✅ Truth: Partial exchanges are allowed! You can choose to reinvest only part of your proceeds or acquire property of lesser value — you’ll just pay taxes on the portion you don’t reinvest (the “boot”). It’s not all or nothing — you’ll still receive tax deferral on the reinvested portion. Learn more.
❌ Myth #5: You Can Use 1031 Exchanges for Your Primary Residence or Vacation Home
✅ Truth: Primary residences are not eligible for 1031 treatment. Vacation homes are typically also ineligible unless they’ve been rented out and meet strict IRS use requirements. The IRS is clear: the property must be held for investment or business use, not personal enjoyment. Learn more.
❌ Myth #6: You Have a Year to Complete the Exchange
✅ Truth: This one trips up a lot of people. The IRS gives you 45 days from the sale of your relinquished property to identify replacement property and 180 days to complete the acquisition. These are hard deadlines, and missing them kills the exchange. Learn more.
❌ Myth #7: You Can’t Take Any Cash Out
✅ Truth: Any cash you receive (known as “boot”) in the exchange is taxable. While the rest of your gain may be deferred, the IRS will tax you on any boot received. A fully tax-deferred exchange requires you to reinvest all net proceeds into like-kind property of equal or greater value.
❌ Myth #8: 1031 Exchanges Are Going Away
✅ Truth: There have been proposals to limit or repeal 1031 exchanges but none currently. The provision has remained a part of the tax code since 1921. In fact, 1031 exchanges continue to have strong bipartisan support due to their role in encouraging economic growth, job creation, and property reinvestment.
❌ Myth #9: You Can Do a 1031 Exchange on a Property You Flipped
✅ Truth: Properties held primarily for resale — such as flips — are considered inventory, not investment property, and therefore do not qualify for 1031 exchange treatment. The IRS requires that the relinquished property be held for investment or productive use in a trade or business, not for quick resale.
If you buy a property, renovate it, and list it for sale within a few months with the intent to profit, the IRS will likely treat that transaction as a dealer sale — not an eligible exchange. Even if you rent it out briefly, the holding period and intent are key. A general rule of thumb is to hold the property for at least 12–24 months and report rental income, though there is no magic number.
Why Understanding These Myths Matters
Misinformation can lead to costly mistakes. By learning the facts and working with a qualified intermediary (QI), investors can take full advantage of the benefits of a properly executed 1031 exchange — including tax deferral, increased purchasing power, and portfolio growth.
Got Questions?
Our experienced team at 1031 CORP. is here to help you separate fact from fiction. Reach out today to ensure your next exchange is a smooth and successful one!
