Myths about 1031 exchanges, debunked
At Diversified Investment Strategies, we know how confusing 1031 exchanges can seem, especially if you don’t have a team of professionals helping you through the process. That is why there are many myths about these exchanges available for real estate investors, and why we are here to help clear some of these up for you today!
Realtor Magazine shared a list of common 1031 myths and the truth behind each one. See if you were confused about any of these topics:
Myth 1: Residential properties transferred through a 1031 exchange must be used as rentals.
Truth: You can use a 1031 exchange to acquire a second home or vacation home with 1031 funds, if you follow certain guidelines. The property must be offered for rent at market rate. The exchanger can use the property for up to 14 days per year, or 10 percent of the time. Contact DIS for more information on this!
Myth 2: Only developed property qualifies for 1031 exchanges.
Truth: ‘Sticks and bricks’ aren’t the only like-kind properties that can be used in 1031 exchanges. Vacant land also qualifies. Therefore, when looking for like-kind properties to exchange for your apartment building, office building, etc., vacant land is one possibility. The laws are a little different in each state, as far as what qualifies for a like-kind exchange, so contact DIS to learn more!
Myth 3: 1031 exchangers must find replacement property that is equal in value to the property they’re exchanging.
Truth: There’s no limit to the value of the property an investor can exchange as long as he or she doesn’t identify more than three properties as possible replacement. An investor could sell one property for $500,000 and then identify $10 trillion of replacement property, but this amount must come from three properties or less. Contact DIS for more information on this!
Myth 4: You defer all tax liability when you exchange property within a 1031 exchange.
Truth: Any cash not spent on the purchase of replacement property in a 1031 exchange is referred to as boot, and this amount is fully taxable. Therefore, it is wise to find replacement property that is of equal value or higher, if you want to delay paying federal taxes altogether. At DIS, we can help you find the ideal replacement property for your needs in a 1031 exchange!
As you can see, the 1031 exchange process has many rules to be followed, but also many loopholes. It helps to have a team of professionals helping you through the entire process, so everything is done properly and in a way the benefits you most as a real estate investor. For more 1031 exchange myths debunked, check out this Realtor Magazine article.
When you are ready to move forward with a 1031 exchange, or you have more questions that you would like answered, contact our team of professionals here at Diversified Investment Strategies!
Bryan Hakola
Diversified Investment Strategies
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