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Misconceptions about 1031

"You have to buy equal or up." Not true!

The Exchanger can always net off commissions, escrow

fees, title insurance premiums, recording fees and excise

taxes. So a sale at $350k might net to $320k. Ideally they

would buy a property for approximately $320k, or more.

However, a significant percentage of exchanges are "partial" where the

Exchanger does not fully reinvest. The Exchanger will be taxable but only to

the extent they fall short of the target value. Some examples of partial

exchanges:

1. The perfect replacement property only costs $295K.

2. The Exchanger wants $15k to take a trip.

3. The Exchanger wants $20k to pay off a line-of-credit on their primary

residence.

When considering a partial exchange the Exchanger must consult with their

tax advisor. Some partial exchanges are so partial that they don't shelter any

gain. The tax advisor will know.

"If you sell a rental you have to buy a rental." Not true!

The best feature of 1031 is the generous definition of what is considered

"like-kind." All real estate is like-kind as long as what is being sold and

purchased is held as an investment or for productive use in a trade or

business. A simple way to look at this...1031 is available for the sale of

rental properties, commercial properties and land. What does the Exchanger

have to buy? Land, or commercial or rental - basically whatever they want

as long as it isn't for personal use or held for sale (inventory). Someone who

no longer wants a residential rental can reinvest in an office building, a

warehouse property, farm land, etc.

1031 is a great way to reposition investments into something that better suits

the Exchanger's personal or business goals.

"I can extend the 45-day identification deadline by paying an additional

fee." Or, "I have 90 days to identify, right?" Definitely not true.

The 45-day deadline to identify replacement properties is carved in stone.

The only way to get an extension is in the event of a federally-declared

disaster.

"The escrow company can hold the funds." Not true.

While both the escrow and exchange companies hold funds on behalf of

others there is no similarity in their purpose or function.

Treasury regulations require the use of an exchange company in a delayed

exchange - and almost all are delayed. A Taxpayer wishing to shelter

taxable gain must engage the services of an exchange company.

"You can move into the new property and the tax bill will go away."

Not any longer.

2008 IRS guidance created a dwelling unit "safe harbor" calling for an initial

rental period of 24 months. After seasoning the property for 24 months as a

rental the Exchanger can safely move in.

Congress amended the primary residence rules so that living in the house

for two years will no longer automatically convert all of the gain to tax-free.

By moving into the house the Exchanger can gradually convert much of the

gain to tax-free. If they ever sell the house there will be some remaining

taxable gain and depreciation recapture.

"Forward exchanges are pretty easy. The reverse exchange can't be

too difficult." Think again.

The forward exchange is a paperwork fiction that the exchange company

sells and buys a property on behalf of the Exchanger.

In a reverse exchange the Exchanger is closing on the new property before

closing the sale of the old. While the IRS rules allow reverse exchanges

they prohibit the Exchanger from being the owner of both properties at the

same time. The exchange company will have to take title to either the new or

the old property.

While the Exchanger will have full control of the parked property the reverse

exchange comes with higher expenses (double closings for the parked

property, CPA expenses, exchange fees, etc.) and hassle factor. Far more

difficult.

Kelci Paiva