Sell an Investment and Pay No Taxes with a 1031 Exchange

Theres no argument that 1031 exchanges have enjoyed explosive growth in popularity in latest years. After the sole domain of professional investors and commercial brokers, today youll find 1031 exchanges being utilized by professional and casual investors alike. Nevertheless, along with this popularity has come many misconceptions about its strong tax deferral tool.

Read on to debunk a few of the most typical myths about 1031 exchanges, and avoid problems with the Internal revenue service down the road. A taxpayer cant complete a 1031 exchange with a related party. FALSE.

Related parties can sell or buy property in a valid 1031 exchange. When related parties exchange property, the related party is obliged to own the property for at least 2 years after the exchange before selling or exchanging it again. Failing to comply with the Two Year Rule will render the 1031 exchange invalid.

Vacant land doesnt qualify for a 1031 exchange. FALSE. Any property that qualifies as real estate qualifies for a 1031 exchange.

Which implies that things such as water rights, mineral rights, leasehold interests greater than 3 decades, and even air rights are eligible for an exchange.Palatine HomesObviously, since each state defines real estate differently, it always pays to first confirm that an asset is eligible in advance. All tax liability is deferred in a 1031 exchange.

FALSE. The boot is an essential concept to understand in 1031 exchanges. The boot is any money not spent on the purchase of replacement property.

The boot is fully taxable irrespective of the investors adjusted basis on the property. The boot is subject to federal capital gains tax of 15%, as well as any state capital gains tax that might apply.Similarly, if the property was depreciated after 1997, the boot can be also subject to a 25% recapture tax.

The 18Day rule might be extended. FALSE. The Internal revenue service is very strict with regards to enforcing the time limitations imposed on 1031 exchanges.

Like-kind exchanges must be completed within 180 days after the deed transfer date of the relinquished property. This means if the 180th day falls on a Saturday, Sunday or holiday, closing must occur on or before that date waiting till the next working day will cause the exchange to fail. Everyone can act as a qualified intermediary.

FALSE. The Internal revenue service sets forth limitations on who can act as a qualified intermediary the entity which will hold funds and title to exchanged property throughout the exchange. Neither the investors attorney or CPA can carry out the QI role if they provided services to the investor inside the preceding 2 years.

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