In part one of this two-part blog series, we went over some of the most common misconceptions out there regarding the 1031 exchange process. As professionals dedicated to our field, we at 1031 Exchange Place are committed to informing our clients – including debunking these myths and getting you on the right track.
In part two of our series, we’ll look at a few more of these unfortunate misconceptions. Here are few regarding rolling over and reinvesting your 1031 exchange funds, who these exchanges are for, and some issues with the 1031 exchange holding period.
I can simply file IRS Form 8824 to rollover.
Some falsely assume that as part of the exchange process, all you have to do to roll over your exchange proceeds into a new investment of some sort and file Form 8824 with the IRS. This is not all that goes into a valid exchange – you need proper structuring, otherwise you might accidentally trigger a clause or event that ruins your exchange and causes additional tax payments.
Exchangors often think that you are not required to reinvest all funds from a relinquished property. Beware that some of your tax benefits will evaporate if you choose to reinvest only a portion of your proceeds as part of your exchange – any funds not reinvested in replacement property is considered “boot,” and is considered taxable income.
“1031 Exchanges are only for…”
There are a couple misconceptions that begin with this phrase, the first of which is that, “1031 exchanges are only for…real estate”. While real estate exchanges are our focus here at 1031 Exchange Place, in reality, both personal and real property, can potentially qualify for tax-deferred status if it’s held for productive use in a trade, business or for investment. Update: as of the tax reform at the end of 2017, personal property is no-longer eligible for 1031 exchange – not much help to the confusion!
In addition, some believe that, “1031 exchanges are only for big investors with large profits.” This is not true – anyone who owns an investment property that is being sold for a profit can qualify, and should consider such an exchange when selling.
The 1031 exchange holding period also comes with a common myth: That you have to hold the property for a year or more before exchanging it. There are no such requirements under 1031 regulations, though as we noted above, the property does need to be held for productive use in a trade, business or for investment. If you want to learn more on this common topic go HERE.
To clear up any other 1031 exchange questions or misconceptions, or to learn about any of our related services, speak to an advisor at 1031 Exchange Place today.