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1031 Exchange Facts and Fiction Internal Revenue Code section 1031 exchanges are an almost regular occurrence in real estate transactions these days. Most people believe they know the basics of a 1031 exchange. But how much of what you know is really fact or fiction? Read on and find out for yourself. FACT OR FICTION? Only properties which have an improvement on the land qualify for like-kind exchanges. FICTION: Vacant land qualifies. For instance, you can exchange a rental home for vacant land. In fact, the exchange can be for anything defined as real property under state law. Just remain aware of the fact that the definition of real property may vary from state to state. FACT OR FICTION? There’s no limit to the value of the property an exchanger can identify. FACT: So as long as the exchanger identifies no more than three properties as possible replacement. For example, if an exchanger sold one property for One Million Dollars ($1,000,000), the exchanger could identify Five Million Dollars ($5,000,000) of replacement property. However, if the exchanger identified more than three properties, the properties cannot have an aggregate value of more than two hundred percent (200%) of the property they’re replacing. FACT OR FICTION? The exchanged property must be exclusively used for rental purposes to third parties. FICTION: A second home or vacation home used for personal purposes may be acquired. You must abide by the guidelines which include that the replacement property needs to be placed up for rental and offered for rent at market rate. You can use the property for up to fourteen (14) days per year or ten percent (10%) of the time the property is rented, whichever is greater. In addition, you can stay in the property while you perform maintenance on the property. FACT OR FICTION?: All tax liability is deferred when you exchange property under Section 1031. FICTION: Any proceeds not used to purchase the replacement property is taxable. FACT OR FICTION? The 180-day rule can be extended if Day 180 falls on a weekend or a Holiday. FICTION: Like-kind exchanges must close no later than on the one hundred and eightieth (180) day after the deed transfer date of the relinquished property. If day 180 is on a Sunday, you better close on the previous Friday and not the following Monday. There’s also no exception to the forty five (45) days given to identify a property for exchange. FACT OR FICTION? Your attorney can act as the qualified intermediary for your exchange. FICTION: Not if there has been an attorney-client relationship over the preceding two years. Others are also excluded so be careful. On the other hand, there are no statutes setting forth the requirements or qualifications for a Qualified Intermediary. Freitas, McCarthy, MacMahon & Keating, LLP does not act as a Qualified Intermediary but has advised our clients in countless transactions involving this valuable tool to defer one’s taxes.
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