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10 Misconceptions Surrounding the 1031 Exchange

Today we’re joined by Julie Tumbaga, the vice president and regional manager of Old Republic Exchange Company, to help dispel some myths surrounding the 1031 exchange. A 1031 exchange is a way to defer paying capital gains tax. This applies only to investors. They sell or buy a property within a specific time, and if they have gain and they want to defer it, they have to do an exchange. Here are the top 10 misconceptions about the 1031 exchange:

  1. Like-Kind means you must exchange the same type of properties. Nope! Like-Kind is actually very broad and can be any combination of real property.
  2. Your attorney can handle it for you. Your attorney hopefully can handle a lot of things, but they actually cannot handle this for you if they have been your attorney for the last two years.
  3. You must literally swap your property with another investor. Wrong - you only have to be buying and selling investment properties. It doesn’t matter who you buy the property from, only how you use it.
  4. 1031 exchanges are too complicated. They’re actually not so bad. The paperwork is pretty standard. Just sign when you buy and sign when you sell.
  5. The sale and the purchase must take place simultaneously. There are, on the contrary, different timeframes when it comes to the exchange. You have 45 days to identify the property and 180 days to close on it.
  6. You only need to file a form with the IRS with your tax return and roll over the proceeds into a new investment. While you do need to report your 1031 exchange with the IRS, you also have to have all the 1031 exchange paperwork signed before the closing and purchase.
  7. 1031 exchanges are only for real estate. There are other types of exchanges. For example, a personal property exchange.
  8. All of the funds from the sale must be reinvested. When the client sells the relinquished property, the net proceeds come to the exchange company, and then they must use all of those funds as their down payment for the new property. They can then use cash or get a mortgage to make up the difference. If you don’t use the money, whatever is remaining will be exposed to taxes.
  9. 1031 exchanges are only for “big” investors. Any level of investor can do an exchange as long as they’re selling or buying an investment property.
  10. You must hold the property longer than a year before exchanging it. There is no rule or law on how long you have to hold an investment property.

1031 exchanges only apply to investors.

If you have any more questions or are interested in contacting Julie, you can reach her at 877-591-1031 or at jtumbaga@orexco1031.com. Thanks and aloha!