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1031 Exchanges: Common Pitfalls & Misconceptions

By Rick Longpre on Dec 05, 2013 at 02:32 PM in 1031 Exchanges, Investing in Commercial Real Estate, Santa Barabara Commercial Real Estate

The “1031 Exchange” has always been a cornerstone of long term real estate investing. However, it is surprising how many experienced investors are misinformed (or worse, misled) with incorrect information that could be fatal to a 1031 exchange. Good information is readily available online, particularly from the national, accredited accommodators.

Here are some quick tips to avoid common pitfalls and misconception that I see regularly in my investor representation:

1. The 1031 exchange requires an exchange for “like kind” property. Many do not know that this simply means real estate for real estate; there is no requirement that the “type” of property be the same, only that the intent is to hold the property for investment purposes. Therefore, you can exchange an office for an apartment or industrial for land, etc.
2. I recently had a client advised that the property must be in the same County; completely false – it must be in the United States;
3. To completely avoid any tax, the investor must invest the total net proceeds from the sale including debt and equity (many believe that only the equity component must be reinvested). If a smaller loan replaces the loan paid off (or if less equity is used than received), the investor, the exchange may still be completed and the investor will have a partial tax liability;
4. The time frames to identify and purchase the replacement property are absolute (45 days from Close to identify and 180 to Close on one of the identified properties). Any accommodator (and investor) willing to ignore those time frames is committing tax fraud;
5. If there is any taxable gain, a 1031 is the only option. An investor should have their accountant compute their potential tax liability in order to make a sound investment decision. Paying the tax can be a far smarter move than making a bad investment decision.

As with any complex transaction, an investor should receive expert advice from qualified professionals with experience in 1031 exchanges. Seek out advice from your CPA, attorney, qualified intermediary and real estate professional. If their answers are not the same, you need to dig deeper!