Over the past 20 years, tax-deferred exchanges have become an increasingly important part of real estate transactions. Surprisingly, there are still some deep-rooted misconceptions about Section 1031 of the Internal Revenue Code, even though tax-deferred exchanges are prevalent in the real estate community today. Some of these misconceptions are so severe that real estate investors wind up losing their chance to take advantage of the tax savings afforded by structuring their transactions as an exchange. What follows are the five biggest misconceptions:
1. In order to complete a 1031 exchange, a taxpayer has to find someone to “swap” a property with.
While this is originally how exchanges were structured, taxpayers are now free to sell their property to anyone they wish, and to buy from anyone they wish. Although there are a few issues regarding sales and purchases between related parties, most exchanges are structured not unlike any other typical sale and subsequent purchase commonly found in the industry.
