The 1031 exchange strategy has created many controversies in the past years, but this only happened because those who engaged in this form of property exchange were misinformed or did not spend enough time documenting themselves on the subject. There are some simple rules that need to be followed in order to succeed:
- Do some detailed research to learn about the terms and conditions of the strategy and to understand the DST structure.
- Consider the 180-day rule
- Check the papers before signing any contract
Below in this article, you will find the most popular misconceptions related to the this property exchange strategy, which obviously are not true.
Misconception no. 1 – the 180-day period can actually be extended
This is probably the most popular myths when it comes to 1031 exchange, as many are of the opinion that there is no problem in exceeding the deadline. It is worth emphasizing that the 180-day period during which people are supposed to close a deal does not exclude holidays, Saturdays or Sundays, but on the contrary and from here the confusion. If your deadline is on a Sunday for instance, it is strongly recommended to close your deal in the Friday before the specific date to benefit from the desired results. Otherwise, you may end up losing the offer.
Misconception no. 2 – you are deferred of all tax liability
Another popular myth wandering in the real estate market is that those who undergo a 1031 property exchange are exempted of all tax liability, regardless of the situation, which is not true. Boot is an essential concept when it comes to the DST and the 1031 exchange and it refers to cash that was not spent when the replacement property was purchased. This sum of money is fully taxable because it is subject to federal and state capital gains that may apply.
Misconception no. 3 – 1031 can be used exclusively on commercial properties
Due to misinformation, many people do not resort to this strategy as they believe it can only be used in the case of commercial properties, but they couldn’t be any further from the truth. Keep in mind that the 1031 can be used for all types of properties that are held for productive or investment purpose in a business or trade. This does include commercial properties, as well as rentals and land. As a result, those who own residential rentals and want to exchange them for other properties qualify for the 1031. In order to ensure this is the right choice to make, it is best to consult with a specialist in the field though.
Misconception no. 4 – a DST company will only assist you with the paperwork
People refuse to go to a DST company because they believe the company will only offer guidance with the paperwork and nothing else. The truth is a professional company specialized in this domain will also help you search for the perfect replacement property to match your needs and requirements and will assist you throughout the entire process. Do your research and select the best DST company in your region.Read More