1031 Exchange: Common Misconceptions About 1031 Exchanges

Misconception: Limitations on investment property types

The Truth: Some investors may still believe an old fashioned “swap” is required by 1031 tax code. Although this was once true, current rules only require you to sell property in a normal manner and reinvest the returns of that sale in accordance with the 1031 rules. The parties often do not know each other, and their properties may even be located in different states or different countries.
An exchange usually involves four principal parties: the exchanger (taxpayer), a buyer for the relinquished property, a seller of the replacement property, and the Qualified Intermediary.

Misconception: Only large properties can be exchanged.

The Truth: The nice thing about 1031 exchanges is that they apply to all investment properties, large and small. 1031 exchanges result in savings for a corporation selling a large shopping mall as well as provide benefits for an individual selling a single-family home used as a rental property in a vacation area.

Misconception: Only similar types of properties can be exchanged.

The Truth: Many believe you must acquire a property of similar kind or type in order to qualify for the benefits of a 1031 exchange. While the term "like-kind" exchanges is often used in reference to 1031 exchanges, this term simply refers to any real property held for business use or investment. For example: You can sell vacant land and acquire an apartment building or sell several buildings and acquire a warehouse plus raw land; you can sell one property and use the proceeds to invest in three properties or you can sell four properties and purchase one. Virtually any type of real property used for business use or investment will qualify.

Misconception: Exchanges are too complex for some investors.

The truth: When working with a qualified 1031 exchange intermediary the process is very simple. The intermediary will keep you aware of the requirements you must comply with and insure that everything is done in strict compliance with IRS regulations.