Top Ten 1031 Exchange Misconceptions Consider 453 Deferral Options as an Alternative
1. LIKE-KIND MEANS I MUST EXCHANGE THE SAME TYPE OF PROPERTY, SUCH AS APARTMENT BUILDING FOR APARTMENT BUILDING.
All real property is like-kind to other real property. For example, you can trade an apartment building for an office building. IRC 453 Deferral options allow you to invest into any asset type.
2. MY ATTORNEY CAN HANDLE THIS FOR ME.
Not if your attorney has provided you any non-exchange related legal services within the two-year period prior to the exchange. We can recommend QI's that work for both 1031s and 453 deferral options including ability to amend a 1031 into a 453 deferral.
3. I MUST LITERALLY “SWAP” MY PROPERTY WITH ANOTHER INVESTOR.
No. A 1031 exchange allows you to sell your relinquished property and purchase replacement property from a third party.
4. 1031 EXCHANGES ARE TOO COMPLICATED.
They don’t have to be. An experienced Qualified Intermediary will work with you and your tax and/or legal advisors to make sure the process is as seamless as possible. 453 deferral option are more flexible and do not have all the rules to follow like 1031s.
5. THE SALE AND PURCHASE MUST TAKE PLACE SIMULTANEOUSLY.
No. The taxpayer has 45 days to identify the new replacement property and 180 days to close.
You can even amend a 1031 into a 453 deferral structure if within the 45/180 windows and the QI allows the amendment.
6. I JUST NEED TO FILE A FORM WITH THE IRS WITH MY TAX RETURN AND “ROLL OVER” THE PROCEEDS INTO A NEW INVESTMENT.
No. A valid exchange requires much more than just reporting the transaction on Form 8824. One of the biggest traps when not structured properly is the taxpayer having actual or constructive rights to the exchange proceeds and triggering a taxable event.
7. 1031 EXCHANGES CAN ALSO BE USED ON PERSONAL PROPERTY.
No. 1031 exchanges are only for real property.
453 deferral can be used on ANY asset type!
8. ALL OF THE FUNDS FROM THE SALE OF THE RELINQUISHED PROPERTY MUST BE REINVESTED.
No. A taxpayer can choose to withhold funds or receive other property in an exchange, but it is considered boot and will be subject to federal and state taxes. 453 deferrals allow you to defer some of the funds into real estate and the rest can be deferred with a 453 structure. They work in tandem for full tax deferral.
9. 1031 EXCHANGES ARE JUST FOR BIG INVESTORS.
No. Anyone owning investment property with a market value greater than its adjusted basis should consider a 1031 exchange.
10. I MUST HOLD PROPERTY LONGER THAN A YEAR BEFORE EXCHANGING IT.
The 1031 regulations do not list a time requirement on how long you must hold property, but it does say that property must be “held for productive use in a trade or business or for investment”. 453 deferral options do not have any type of time frame or holding rules or restrictions.