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.

Like-kind refers to the nature or character of the property. Examples of like-kind include rental properties such as duplexes, triplexes, multi-unit apartment buildings, office complexes,

raw land, storage facilities, warehouses, factories, hotels, marinas, farms, parking lots, shopping centers, etc.

Examples of non like-kind include primary residences, second or vacation homes, stocks, bonds, notes or interest in a partnership. Exchangers can sell one property and acquire three or vice versa.

Both properties must be held as a business use or investment property for a minimum of one to two years.

A qualified Intermediary must be used to facilitate your exchange.

Qualified is defined as someone who is not the taxpayer or an agent of the taxpayer (realtor, attorney, accountant or tax advisor, broker, lineal descendant, employee, etc.)

The Intermediary agrees to acquire the relinquished property from the exchanger and convey it the buyer and acquire the replacement property from the seller and convey it to the exchanger.

Again, the escrow agent must be qualified, as defined above.

The exchanger cannot have actual or constructive receipt of sale proceeds.

The exchanger is entitled to interest earnings on the escrow account.

The 45-day Identification Period begins at the closing of the relinquished property and requires the written identification of like-kind replacement property.

The 180-day Exchange Period runs concurrently to the 45-day Identification Period and requires the acquisition of the identified replacement property

Using the net proceeds as a 20% down payment on the replacement property, the taxpayer can acquire a property with the following fair market value:

The 1031 exchange enables the astute investor to move up $150,000 in property value. This $150,000 invested at a modest 4% appreciation per year, will yield:

CAN YOU DIRECT DEED WHEN USING AN INTERMEDIARY?

Yes, the IRS regulations allow the direct deeding method from the grantors to the grantee, as in a typical sale transaction. This procedure eliminates duplicate transfer taxes.

No, the regulations simply say that your buyer and seller must be notified in writing of your intent to effect an exchange. However, most buyers and sellers are very cooperative because the exchange has no effect on their property.

The best time to retain an Intermediary is when you are in the planning stages. This allows us ample time to notify all parties and affords you the opportunity to carefully review all documentation well in advance.

Once you settle on your relinquished property (convey title and receive sale proceeds), it’s too late. Therefore, contact an Intermediary prior to closing/escrow.

Yes. This exchange process is known as a REVERSE EXCHANGE

Yes. Construction/Improvement Exchanges are a very viable option to exchangers. However, they require advanced planning.

Unfortunately, there is no licensing required to be an Intermediary, except in the state of Nevada. 1031 Corp. welcomes the idea as it would eliminate the many ill advised who are attempting to facilitate exchanges.

You should choose a solid corporation specializing in Section 1031. The Intermediary should be staffed by well informed professionals with the experience and expertise to facilitate even the most complex exchange transactions. An Intermediary should be able to provide you with a list of client references.

Yes, the exchanger is permitted to receive some of the equity or taxable "boot." However, be sure to discuss this with your Intermediary prior to going to closing of your relinquished property.

Yes, but you must meet the holding period requirement prior to converting use of the property. The IRS has not specifically stated how long the holding requirement is but we recommend maintaining a one to two year holding period prior to selling or converting its use.