Six Myths About 1031 Exchanges - Part 1

Today it seems like everyone is doing a 1031 exchange. And why not? Deferring capital gains taxes on the sale of investment or business property can be very lucrative for an investor. They can take that money and reinvest it in bigger and better properties, and build their portfolio faster.

Unfortunately, with this popularity comes a lot of misinformation. Read on for a few of the most common 1031 myths.

All tax liability is deferred in a 1031 exchange.
FALSE! Boot is an important concept to understand in 1031 exchanges. Boot is any cash not spent on the purchase of replacement property. Boot is fully taxable regardless of the investor’s adjusted basis on the property. Boot is subject to federal capital gains tax of 15%, as well as any state capital gains tax that may apply. Likewise, if the property was depreciated after 1997, boot may be also subject to a 25% recapture tax.

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.

To find out how we can help you find and close on your next 1031 exchange property or to learn more about the exchange process and our qualified intermediary services, please visit our website.