Many questions that cause the exchangor stress, are often caused by misconceptions rather than complex rules.

When I first began learning about 1031 exchanges, the process and rules seemed daunting. Maybe it was due to the fact that the IRS was involved or perhaps because there are strict timelines. Whatever the reason, I found that the investors we assisted had similar feelings. The process can feel overwhelming so it helps to have a partner you can count on.

Common misconceptions to understand upfront

“I can decide on a 1031 exchange after I close”

In reality, exchange planning must be done prior to closings on the property you wish to relinquish. In order for taxes to be deferrable, a Qualified Intermediary, also know as a QI, must be engaged to handle the funds per IRS stipulations. Once a contract is in place, it’s best practice to let your QI know and submit your information so that you are ready at closing.

“I have plenty of time to identify replacement property and close on the replacement(s).”

The day you sale your relinquished property signifies day 1. You have until the end of day 45 to submit your replacement properties. These properties must be identified to the QI and clearly defined as part of your 1031 exchange in order for the IRS to recognize them. From day 45 you have an additional 135 to close on the replacement property(s). The entire 1031 exchange process is 180 days. You can identify and close on replacement properties prior to the 45 and 180 day deadlines; however, you cannot go past either of those deadlines or your funds become taxable to the IRS.

“My CPA or broker will handle the exchange.”

Your CPA and Broker will play a role in the exchange; however, no one can manage the exchange unless a Qualified Intermediary is involved. Your QI will work with your broker and CPA to make sure all paperwork and replacement identification is handled properly.

“Like-kind property means that I have to buy and sell the same kind of property.”

Like-kind rules are broader than you think. The important thing to remember is that you have to invest in real property. This means that you can sell an office building and buy timber land. You can sell farmland and buy a rental home. You can sell retail buildings and buy renewable energy land. Vacant land is always going to qualify as a 1031 property as long as it’s held for business or investment use.

Most 1031 stress comes from assumptions, not the process itself. Our team is here to answer your questions prior to beginning the process and throughout the exchange. Don’t let the stress of a real estate transaction weigh you down. Choosing a good partner is an important first step and we’re here to help!

The information presented is for information purposes and is not intended as investment, legal, tax or compliance advice. Land 1031 does not offer or sell investments or provide investment, legal, or tax advice.

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