1. All 1031 Exchanges must involve swapping or trading with other property owners...NO
Well before delayed exchanges were codified (by IRS) in 1984, all simultaneous exchange transactions of Real Estate required the actual swapping of deeds plus the simultaneous closing among all parties to a 1031 exchange. In most cases these type of exchanges were comprised of many of exchanging parties, as well as numerous exchange real estate properties.
Now today, there's no such requirement to swap your own property with someone else's property, in order to complete an IRS approved exchange. The rules have been refined and ratified to the point that the current process
is much more indicative of your qualifying intent, rather than the logistics of the Real Estate property closings.
2. It's required that all types of 1031 Exchanges must close simultaneously...NO
There was a time when all types of exchanges had to be closed on a simultaneous(same day) basis, now 1031's are rarely completed in this type of format any longer. As a matter of fact, a majority of the exchanges executed are closed as delayed exchanges.
3. "Like Kind" means pruchasing the same type of property which was sold...NO
Often the definition of "like-kind" has been misinterpreted or misunderstood to mean "The requirement of the acquisition of property to be utilized in the same form as the exchange property". In laymen's terms, hotels are for hotels, apartments are for apartments, farms are for farms, etc. This is all true however, the exact definition is again more reflecive of the intent than its use. As a result, there are currently only 2 types of properties that qualify as a like-kind":
-- Property held for investment and/or
-- Property held for a productive use, as in a trade or business.
4. 1031 Exchanges must be limited to 1 exchange and 1 replacement property..NO
This statement is a perfect example of another 1031 exchanging myth. Let me repeat, there are no provisions within either the IRS Code or the US Treasury Regulations that can restrict the amount and number of real estate properties that can be involved in an exchange. Thus, in exchanging several properties into one replacement property or vice versa of selling of one property and acquiring several other properties, both are perfectly acceptable stategies and uses of a 1031.
Bernie Germani
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Bernie:
That's a nice summary. However, I'd like to clarify the Like Kind requirement. In the case of audit, the taxpayer will have to substantiate that the property he sold (relinquished property) was held for productive use in a trade or business at the time of sale and the property acquired (replacement property) was acquired with the intent to hold it for productive use or investment.
The key distinction and the simplest way to explain it to most people is that if property falls into the following two categories, it will not qualify as investment property under 1031:
1. Primary Residence: If it's relinquished property the last use of the property cannot be as a primary residence. If it's replacement property, its first use cannot be as a primary residence because then the taxpayer's intent would not be to hold it for investment but rather to use it as a primary residence. There are some exceptions, which I will cover in my own blog but it would make this comment too long.
2. Property Held For Resale: The IRS has not given a specific minimum time period that it deems will meet the "held for investment" requirement. So, it depends on the interpretation of the individual's tax advisor. Depending on the aggressiveness of the tax advisor, the taxpayer may be advised to hold it anywhere from at least one year to at least two years. The key factor is the "intent to hold." The clearest example of property "held for resale" is the "the flipper." The taxpayer acquires the property with the intent to sell it very shortly after the acquisition.
Asset Preservation, Inc., is a leading national qualified intermediary for 1031 exchanges. Part of the Stewart family of companies. 1.800.282.1031 www.apiexchange.com.
The information provided is for educational purposes only. It is not legal or tax advice. Accordingly, the taxpayer should review the details of the specific transaction with taxpayer's own legal or tax advisor.