People often fail to consider exchanges as an investment strategy because they are misinformed about the requirements of exchanging. However, once their misconceptions have been cleared up, property owners usually find that IRC §1031 is worth considering.
Here are a few misconceptions about exchanges:
Myth: Exchanges require two parties who want each other’s properties.
Fact: Two-party exchanges are possible, but in reality, such two-party swaps rarely occur. Today, an exchange is accomplished with the help of a Qualified Intermediary and usually involves four principal parties: the exchanger (taxpayer), a buyer for the relinquished property, a seller of the replacement property, and the Qualified Intermediary. The parties often do not know each other, and their properties may even be located in different states.
Myth: The like-kind requirement limits a taxpayer’s options.
Fact: Property must be exchanged for “like-kind” property. But like kind simply means that real property must be exchanged for real property. All real property is like kind, so a fee simple interest may be exchanged for a tenancy in common interest; one property may be exchanged for more than one property; a duplex may be exchanged for a four-plex; a single family may be exchanged for a motel; vacant land may be exchanged for an office building when dealing with “like-kind” property, it is the use of the property for investment trade or business that is impacted. Personal property may be exchanged for other personal property. However, in an exchange of personal property the definition of “like-kind” is not as liberal as for exchanges of real property.
Myth: In an exchange, title to the exchanged property must pass simultaneously.
Fact: Although exchanged properties may pass simultaneously, they do not have to close at the same time. In an exchange that is not simultaneous, the replacement property must be received by the taxpayer within 180 days after closing on the relinquished property. When the two transactions do not close at the same time, the exchange is called a Deferred Exchange.
