IRS Regulations enable taxpayers to exchange any type of real property for any other type of real property as long as it’s “like-kind.” When it comes to real estate, all property is like-kind to all other real estate. “Like-kind” refers to the nature or character of the property. Some examples of like-kind include rental properties such as duplexes, triplexes, apartment buildings, office buildings, raw land, storage facilities, warehouses, factories, hotels, parking lots, shopping centers, farms, etc.

 

Therefore, an individual who owns a duplex may do a 1031 exchange and purchase an office complex or vice versa. “Non like-kind” property, such as, stocks, bonds, notes, or an interest in a partnership, does not qualify for a 1031 exchange. If individuals planned to sell their duplex or office building and buy stocks with the proceeds from that sale, they would not be eligible for the 1031 exchange.

When doing a 1031 exchange, the taxpayer can sell a property in one state and purchase replacement property(ies) in the same state or any of the other 49 states or the District of Columbia. For example, a taxpayer can sell their property in Pennsylvania and purchase a replacement property in New Jersey, a replacement property in Florida, and a replacement property in California. However, a taxpayer cannot sell a property in the United States and then try to purchase replacement property outside the United States other than certain U.S. territories.

The time restrictions for a 1031 exchange must be strictly adhered to. There are almost no time extensions allowed for either the 45-day Identification Period or for the 180-day Exchange Period. The taxpayer must identify their potential replacement properties by the end of the day on the 45th day of the Exchange Period even if the 45th day falls on a weekend or holiday and they must close by the 180th day of the Exchange Period. Unlike filing a tax return, there are no extensions and extremely limited exceptions.

This is a very common mistake. The IRS requires the use of a Qualified Intermediary. Qualified is defined as someone who is not the taxpayer or an agent of the taxpayer. Therefore, a relative or anyone who worked in any capacity (attorney, accountant, realtor, employee, broker, etc.) for the taxpayer in the past two years is prohibited from facilitating the exchange. The other issue a taxpayer must consider is whether the person or entity chosen to act as QI really has the skill and knowledge to do it correctly and in compliance with the IRS code.

A partially tax deferred exchange is the likely outcome if the taxpayer trades down in either fair market value or equity. If this is the case, then some gain is likely to be recognized. If the exchange is otherwise valid, a partially deferred exchange will be the result and taxes will have to be paid on whatever gain was recognized. Some taxpayers may choose to do a partial exchange because they would like to take money out of the property for personal use.

An alternative for taxpayers who want to take money from their property is to refinance the replacement property after the exchange. There is generally more flexibility for post-exchange refinancing. In this scenario, taxpayers can do a tax deferred exchange and then refinance the property after the exchange has been completed. There is no waiting period regarding a refinance, and this allows taxpayers to do a full exchange and to take equity from the property once the exchange is completed.

This is not true. Title to the replacement property must be the same as the title to the relinquished property. An entity such as a Partnership or a Limited Liability Company ( LLC) may sell a property and then purchase a replacement property in that same entity name. This would be a valid 1031 exchange. Likewise, Corporations, Partnerships, and LLC’s can all effectuate a 1031 exchange.

This is not true. It is not possible for partners in a partnership to sell the partnership property and do a 1031 exchange. Only the partnership can enter into a 1031 on property owned by the partnership. This situation generally arises when partners want to sell partnership property and do a 1031 exchange, but they do not want to remain partners.

Anyone who owns investment property should seriously consider doing a 1031 exchange before selling his or her property. Regardless of whether the taxpayers are selling a duplex or a shopping center, they have the option of simply paying the capital gains tax or affecting an exchange. The taxpayers should consult with an experienced tax advisor to determine if a 1031 exchange would be beneficial to them.

Actually, most exchanges are not that complicated. With the right tax advisor and the proper QI, many 1031 exchange transactions can be performed  quickly and seamlessly. Capital 1031 Exchange Company makes every effort to efficiently manage the entire exchange process.

 

 

Common 1031 exchange misconceptions – Capital 1031 Exchange Company