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I have been handling Section 1031 tax-deferred exchanges as a Qualified Intermediary for more than 30 years.  The following are some of the typical exchange myths I hear repeated almost every day.

View The Previous Posts in This Series
Common 1031 Myths – Part 1
Common 1031 Myths – Part 3

Myth # 7:  Bowling Alley Misconception/Simultaneous Exchange

The Correct Answer:  One of our exchangor’s is selling (exchanging) a bowling alley for an interest in a shopping center.  The taxpayer (Exchangor) was very upset because he was told by a “professional” that he had to conclude a simultaneous transaction in order to have a valid Section 1031 tax-deferred exchange. So, let me correct one of the many misconceptions (myths) about 1031 exchanges.  A one-for-one simultaneous exchange need not take place. In a standard forward delayed exchange (the most common type of exchange), the property is sold (Relinquished Property) and replacement property is purchased (Replacement Property) within 180 days following the sale of the Relinquished Property.  In 99% of the cases, the exchanger is purchasing the Replacement Property from a new seller, who had nothing to do with the exchangor’s Relinquished Property transaction

Myth # 8:  Getting hit up at a party—1031 is a tax loophole?

The Correct Answer:  When was the last time you went to an event and asked your friend the Doctor who was in attendance at the event, about something you thought was medically wrong with you.  I get “hit up” all the time. As a lawyer, people are always asking for “free advice”. Last week, at a party, someone, knowing that I handle thousands of 1031 tax-deferred exchanges each year, asked, no let me change that, stated, that Section 1031 was a loophole in the Tax Code.  So, let me get this off my chest, once and for all. Section 1031 of the Internal Revenue Code has been a part of the Code since the inception of the Internal Revenue Code during the 1920s. It is a valid and legal tax deferral strategy, which stimulates investment in our economy and is NOT a gimmick or loophole in the Tax Code.  Enough said.

Myth # 9:  My attorney can and should act as the Qualified Intermediary.

The Correct Answer:  The IRS Regulations refer to those parties that cannot act as the Qualified Intermediary as  “disqualified persons.”  Well then, who is a “disqualified person?” Disqualified people are agents of the taxpayer or a related party to the taxpayer.

Examples of  “disqualified persons” are the taxpayer’s agent or real estate agent at the time of the transaction; family members, including ancestors, descendants, and siblings.  Additional “disqualified persons” are corporations in which the taxpayer owns more than 10% of the stock of the corporation; Trusts in which the taxpayer is both the fiduciary and beneficiary or fiduciary and grantor; or Partnerships in which the taxpayer owns more than 10% of the partnership, etc.

I know you are asking yourself, “OK, what is an agent?”  The IRS Regulations define an agent for disqualification purposes as anyone who may have acted as the taxpayer’s employee, attorney, accountant, investment banker, broker, or real estate agent within the two-year period of the sale of the relinquished property.

LIBERTY 1031, LLC always recommends that the taxpayer should consult their tax and/or legal counsel on all matters dealing with the Internal Revenue Service.

I personally look forward to working with you on your next Section 1031 exchange.  To answer any of your questions or to open a Section 1031 transaction, please contact Stephen A. Wayner, Esq. CES at our toll-free telephone number: 866-903-1031 or at swayner@liberty1031.com.

–Steve