They say that knowledge is power and, nowadays, knowledge is at our fingertips. You can pick up your smartphone and find anything you wish by asking Siri or searching Google. Unfortunately, that doesn’t necessarily mean that Siri or Google are providing accurate information. The Exchange Team at 1031 CORP. are often asked to clarify misconceptions about 1031 exchanges. In today’s Tuesday Tip, we will address the most common misconceptions about 1031 exchanges and make sure you know the truth so you can put the power of 1031 to work for you.
Misconception #1: Your attorney or CPA can handle your 1031 exchange.
Truth: Your professional advisors can help you assess your tax liability, your short and long-term investment and/or business objectives and whether or not a 1031 exchange makes sense for you. However, under the regulations a Qualified Intermediary (QI), such as 1031 CORP., must facilitate your 1031 exchange. The QI is an independent party that cannot be your close relative, partner, employee or a professional advisor you have worked with in the past two years, such as your attorney, accountant or real estate professional. As the QI, 1031 CORP. prepares all pertinent exchange documentation, coordinates details with the closing agents, controls (and safeguards) your exchange proceeds and keeps you aware of your deadlines. Our Exchange Team keeps you aware of all exchange guidelines and is always available to answer your questions.
Misconception #2: You have to find someone willing to swap properties with you.
Truth: While occasionally you will find two property owners who want to do a two-party swap, they are extremely few and far between. The word “exchange” doesn’t really mean you have to swap deeds. Instead, a 1031 exchange involves the sale of business use or investment real property followed by the subsequent purchase of like-kind property from a third party linked together by paperwork and completed with the required timelines.
Misconception #3: You have to acquire the same type of property that was sold.
Truth: 1031 exchanges are often referred to as like-kind exchanges. Like-kind refers to the nature or character of the property, not the specific type, so any real property can qualify provided it is held for productive use in a trade or business or for investment purposes. The broad and liberal definition of like-kind creates significant opportunity when exchanging and allows you to diversity the type of property, location, expand or relocate a business or create additional cash flow.
Misconception #4: It’s all or nothing!
Truth: To maximize your tax deferral, you must acquire a replacement property of equal or greater value and equity than your relinquished property. Section 1031 regulations, however, do not require you to reinvest all value and equity. You could elect to trade down in value and/or equity and pay tax on the difference. The taxable portion is referred to as boot. This trade down does not jeopardize your exchange but you should discuss it with your tax advisor to make sure your trade down is not so much that you eliminate all of the tax benefits of your 1031 exchange.
Misconception #5: Exchanges are complicated.
Truth: Exchanges are not complicated! While exchanges do involve the sale and purchase of properties within a relatively short period of time, when working with 1031 CORP. as your QI, we strive to keep the exchange process easy for you. Our Exchange Team guides you through the exchange process so that you can focus on selling your old property and buying a new one that better suits your needs.
Our Exchange Team is always glad to answer any questions you may have about 1031 exchanges. Contact us today to discuss your situation.
