The following are two additional myths that trip up investors and cause them to pay more taxes than they should. This post is a continuation of my previous posts where I am trying to help investors understand the power of 1031 exchanges and not fall into certain misunderstandings.
Myth No. 5
I can’t do a 1031 exchange because I am purchasing the Replacement Property and I haven’t sold my Relinquished property yet.
A reverse exchange is the “flip side” of a deferred exchange, where an investor directly or indirectly acquires a like kind replacement property before disposing of a relinquished property. Once the replacement property is acquired, the investor has 180 days from that date to close on the sale of their relinquished property (or until the due date of their tax return, including extensions). In the current real estate market, owners of real estate often face the prospect of losing the opportunity to acquire a desirable replacement property when the seller of such property is unwilling or unable to wait while the investor completes the disposition of a relinquished property. Sellers in today’s market may have a hard time estimating how many days their relinquished property will be listed on the market for sale before the deal will actually close. Furthermore, it is taking buyers more time than usual to secure financing and get to the closing table. However, in the meantime, perhaps the seller has found the perfect replacement property, or a property that has just been reduced and now the price is right and they need to act quickly. Or perhaps a business owner who is relocating may desire to purchase their new office space before selling their current office space to accommodate a smooth transition of employees and daily operations. A reverse exchange is perfect for these scenarios.
On October 2, 2000 the Internal Revenue Service (”IRS”) issued Revenue Procedure 2000-37 providing guidance on structuring reverse exchanges to avoid IRS challenge. The Revenue Procedure describes a safe harbor for reverse exchanges if certain requirements are met. All States 1031 has been a leader in structuring and implementing reverse exchanges, and has formed an affiliated company, All States Reverse Exchange Facilitator, LLC, to handle the high volume of transactions. Taxpayers contemplating a reverse exchange also need to consider their financing options in advance. It is important to note that if a taxpayer wishes to defer taxes with a reverse exchange, they must contact a Qualified Intermediary like All States 1031 before they close on the purchase of their replacement property. Anyone considering the purchase or sale of investment property is encouraged to call Alexandra L. Hart at All States 1031 toll free at (877) 395-1031 for a complimentary consultation. Planning ahead is the best way to ensure a seamless 1031 exchange, so call today!
Myth No. 6
My partners don’t want to exchange, so I’m going to exchange my partnership interest.
Exchanges of partnership interests generally do not qualify for non-recognition treatment under IRC § 1031. Therefore, when partners want to end their relationship, they cannot each exchange out of their partnership interests into another partnership interest or real property under IRC § 1031. Such transactions can be structured as 1031 exchanges, however, by converting the partnership interest into a real property interest. Once the partners dissolve their partnership and hold the property as tenants in common, they can each defer taxes with their own 1031 exchange(s), or some partners can take cash at closing and pay tax on their portion. The various structures include partnership split-ups, split-offs, buy-outs and formations. Such transactions are often referred to as “drop & swaps” or “swap & drops.” Structuring these transactions is not without tax risk, and requires the advice of an experienced tax professional. When partners are selling investment property and no longer want to stay in the partnership, the key to structuring a successful exchange is to plan ahead. Once the partnership has signed a legal contract to sell, it may be too late to structure a 1031 exchange, since the name on the contract should not be the partnership entity, unless the partnership is staying together to buy the replacement property. However, with proper planning, it is possible for each partner to get exactly what they want out of the sale. The owner of All States 1031, F. Moore McLaughlin, IV, Esq., CPA, CES®, is a licensed tax attorney and nationally recognized educational speaker on this subject. To start planning ahead for a partnership exchange, please call Attorney McLaughlin toll free at (877) 395-1031 for a complimentary consultation.
Educate yourself and don’t fall for these common myths.
Check back for more posts dispelling other myths about 1031 exchanges. In the meantime, click here for more 1031 myths or contact me or Alexandra L. Hart at 877-395-1031 or by e-mail fmm@allstates1031.com or ahart@allstates1031.com.
Over the next few posts, I will be dispelling many of the common myths surrounding 1031 exchanges. The confusion and misunderstandings caused by the myths has resulted in many taxpayers paying more taxes than they should. By paying the excess taxes, the non-exchangers have reduced the amount that they can reinvest, thereby needlessly reducing their income.
The primary reason why 1031 exchanges can be used so effectively in estate planning is because of the law that allows the heirs to receive a stepped-up basis in the assets transferred to them upon death. 
and the proliferation of single-tenant triple-net lease properties. I’ve worked with many people in this exact situation and they come to realize that they can enjoy a greater stream of income by reinvesting all of their sales proceeds, not just the net after taxes. 1031 exchanges all investors to achieve a 
make our living understanding and applying the tax laws in ways to help our clients. I have been teaching tax law to CPAs, attorneys, real estate brokers, real estate and other investors, and anyone who will listen since I began 
I encourage everyone who is interested in exchanging to read, read and read, and ask questions. As a caveat, make sure you ask the right people, not your brother, your neighbor, or your friend from the gym (unless these people are trained in 1031 exchanges). Visit our website at 
I have read some recent posts on various websites proclaiming that 1031 exchanges are dead among Baby Boomers. As Mark Twain wrote from London after reading his own obituary, “The reports of my death are greatly exaggerated.” In fact, the baby boomers may be the demographic group that uses 1031 exchanges most frequently. The reasons are fairly obvious. Wealth is not accumulated overnight, usually. It takes time. The older you are, the more time you have had to accumulate wealth. Plus, those with wealth tend to have better tax and investment advisors who can teach them all the tricks.