There are many myths and misconceptions about 1031 Exchanges. Here is our latest list of misconceptions we’ve found that the public has about 1031 Exchanges:
Top Ten 1031 Misconceptions for 2019
- “Like-kind” means I must exchange the same type of property, such as an apartment building, for another apartment building. FALSE
- A 1031 Exchange means that the sale and the purchase have to happen at the same time. In other words, the seller has to find someone willing to swap properties. FALSE
- My attorney or CPA can handle the exchange for me as my Qualified Intermediary. FALSE
- To do a 1031 Exchange I just need to file a form with the IRS with my tax return and “roll over” the proceeds into a new investment. FALSE
- I can only defer my capital gains tax via a 1031 Exchange. FALSE
- All of the funds from the sale of the relinquished property must be reinvested. NOT NECESSARILY
- You must replace the debt that you had on the relinquished property with at least the same amount of debt on the replacement property. FALSE
- Opportunity Zone Funds are another alternative to defer my taxes. POSSIBLY
- When I sell my personal residence I need to set it up as a 1031 Exchange. FALSE
- If I sell property I can only exchange into one property. FALSE
Tax Straddling: Pay Taxes in 2019 or 2020?
If your transaction closed at the end of 2018 and you are unable to find new property to identify or purchase the property that you have identified, you may still be able to defer paying taxes on your capital gains until 2020. Since you will receive your 1031 funds back in 2019, in certain circumstances, since you did not have control/possession of your funds until 2019, the IRS may allow you to pay taxes on your 2020 tax return instead of 2019. This is in accordance with IRC Section 453(d) and requires your accountant to file specific tax forms. Ask your accountant if you are eligible to take advantage of this “mini” tax deferral.