Debunking a Common 1031 Exchange Myth

If you are a real estate investor, you’ve certainly heard about 1031 exchanges and their great tax deferral benefit. Of course, like any popular topic, you’ve probably also heard a few things that are more myth than reality.

Before you embark on an exchange, be sure you can separate fact from fiction.

Myth – My replacement property must cost the same as my relinquished property.

FALSE. When you do an exchange, the replacement property can cost more or less than the property you are giving up. However, if you receive any cash or debt reduction at the end of the exchange (known as “boot”), then that amount will be subject to immediate tax. You must also be aware of strict IRS rules regarding timing for identifying and closing on the replacement property, as well as the different rules related to valuation of the replacement property in order to have the entire transaction qualify under section 1031.

So long as you adhere to all the requirements (and avoid boot), the value of your replacement property does not have to be equal to the relinquished property.

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