Do you know what a 1031 exchange is? Many investors think they have a handle on it. Unfortunately, often they know enough to appreciate the sentiment but not enough to navigate its many nuances. As investors learn the hard way, one false step can lead to millions of dollars forfeited in failed 1031 exchanges.
For starters, a 1031 exchange is a transaction whereby investors are allowed to sell one property and obtain another without paying capital gains tax. But if you went on that definition alone, you would most likely find yourself in violation of the IRS code, because like all things involved the IRS, there are layers. A key element, often missed, is that to be eligible the property must be held “for productive use” (i.e. not for purposes of reselling). This is catching more people lately because in our current economic climate there is a desire to buy now when prices are low and then quickly flip the property.
A 1031 exchange is not for the “intent to resell”; the IRS has been very clear about this and will invalidate your exchange if it sees that as the true purpose. Furthermore, even if you complete the exchange and then dispose of your new property immediately after, the IRS will retroactively declare your 1031 exchange defunct because the new property was not held for qualified purposes. In short the mantra is intent. There are some common rules of thumb, such as if you hold the property for a year and a day or two tax years you are perceived to be “less aggressive” amongst most groups of tax advisors. But no where does the IRS or congress say this, it is just a general understanding that has evolved. The only way to be “100% buttoned-up” is to contact a CPA or tax attorney before proceeding with any aspect of the exchange and evaluate your unique facts and circumstances. In the end it is important to remember you have to be an investor, not a dealer, to reap the rewards of a 1031 like-kind exchange.Sphere: Related Content
