1031 Corp.
Full Service Intermediary

SOME COMMON MISCONCEPTIONS OVER THE BENEFITS OF SECTION 1031

Some of the common misconceptions that have clouded the many benefits of Section 1031 are as follows:

A 1031 exchange is just like what a repeat home owner does under the Section 1034 rollover.
Although there are many similarities, such as the ability to defer gain, 1031 exchange regulations are more structured. 1031 exchanges must be completed within a 180-day exchange period as opposed to the two year period under the 1034 rollover. Unlike a 1034 rollover, a taxpayer must use a qualified intermediary to facilitate his 1031 exchange.

Both properties must be "like-kind".
The regulations are extremely user-friendly, enabling a taxpayer to exchange any type of real property for any type of real property. For example, an investor may sell raw land and acquire a multi-unit apartment building or he may sell two single family homes (used as rentals) and acquire an office building. You can sell more than one property and acquire more than one property. Some examples of "like-kind" property are rental properties (single family home, duplexes, triplexes, multi-units), office buildings, raw land, motels, farms, marinas, parking garages, storage facilities, warehouses, factories and interests in a co- tenancy. Examples of non-like-kind are primary residences, second or vacation homes, stocks, bonds, notes and partnership interests.

I need to find someone to swap properties.
Fortunately, this has not been the case in many years. Although they are several rules attached, an exchange is much like a typical sale and purchase transaction but without the capital gain.

1031 exchanges only work for big investors.
The truth is that anyone who owns investment property should consider a 1031 exchange before selling. Regardless of whether you are selling a duplex or a shopping center, you have the option of simply paying the gain and throwing away your hard earned money or effecting an exchange and preserving your estate. All investors should consult a tax adviser with knowledge on 1031 exchanges to determine the best tax strategy for their particular needs.

1031 exchanges are too complicated.
An exchange is actually a very smooth and simple process when working with an experienced intermediary.

They may lower capital gains and I won't have to pay as much.
Even if lower capital gains are approved, isn't it better to have the ability to reinvest all of your net equity? How many opportunities are you afforded the option of reinvesting with pre-tax dollars? The astute investor can put that money to work for himself now. Taxpayers work hard to earn their money, why just hand it over to the IRS when it is not necessary?

I can just use my attorney or accountant to facilitate my 1031 exchange.
Unfortunately, this is a common and costly mistake. The IRS requires the use of a qualified intermediary. Qualified is defined as someone who is not the taxpayer or an agent of the taxpayer. Therefore, a relative or anyone who worked in any capacity (attorney, accountant, Realtor, employee, broker, etc.) for the taxpayer in the past two years is prohibited from facilitating that exchange.

I need the cooperation of my Buyer and Seller.
The regulations simply say the Buyer and Seller must be notified in writing.

I can just put my sale proceeds into an escrow account with a title company and decide if I want to do an exchange later.
A qualified intermediary must be in the picture prior to the closing of your relinquished property to prepare the necessary documentation, effect the transfer and properly guide the taxpayer.

The cost of an exchange outweighs the benefits.
When working with an intermediary specializing in 1031 exchanges, the costs are surprisingly very low. With all the benefits of Section 1031, the tax deductible fee should be considered an investment in your future rather than an expense.

I can never use the replacement property for personal use.
Once a required holding period is maintained, the primary use of a property may change. Generally, a two year holding period is recommended before converting property use.

To receive a complete information packet on 1031 exchanges, please contact Margo Mucha or Cheryl Fagan at 1-800-828-1031.