1031 Exchange Myths - Part 2

With the unwavering popularity of 1031 exchanges, it is no surprise that many myths about them exist. In Part Two of our series (Part One here), we debunk a few more of the most common misconceptions surrounding these powerful tax-deferral tools.

The 180-Day rule can be extended.

FALSE! The IRS is very strict when it comes 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 (or the replacement property in the case of a reverse exchange). This means if the 180th day falls on a Saturday, Sunday or holiday, closing must occur on or before that date – waiting until the next business day will cause the exchange to fail.

Anyone can act as the qualified intermediary.

FALSE! The IRS sets forth limitations on who can function as a qualified intermediary (QI) – the entity that will hold funds and title to exchanged property during the exchange. Neither the investor’s attorney or CPA can perform the QI role if they provided services to the investor within the preceding two years. Also, any real estate agent representing any party in the exchange is also prohibited from serving as the QI.

Residential property can never be for personal use.

FALSE! As long as an investor follows certain guidelines, properties like second homes or vacation homes can qualify for a 1031 exchange and be personally used by the investor. An investor must offer the property for rent at fair market rate and can then use the property him or herself for up to 14 days per year or 10% of the time the property is rented – whichever is greater.

To learn more about 1031 exchanges or our qualified intermediary and replacement property locator services, please visit our website.