Three Common Mistakes Made When Dealing With 1031 Transactions

Chances are you’ve never heard of 1031 exchanges, but if you own an investment property and plan to sell it and purchase another, doing so as a 1031 transaction could be to your advantage. But prior planning is a must because the rules are complex, rigidly enforced, and can result in severe financial consequences for mistakes in execution.

Covered under IRS Section 1031, a 1031 exchange, also called a Like Kind Exchange, can be set up by any taxpaying entity, including individuals. These transactions may involve a simultaneous or deferred exchange, and are generally limited to business or investment properties. Again, please be advised, the rules are complex and enforcement is rigid, so gather your information beforehand and consult a qualified attorney for guidance.

And whether you are considering a 1031 exchange in Little Rock or elsewhere around the country, if you make any one of these three common mistakes, you risk derailing everything at a huge financial cost:

1. Mistaking Tax Deferment for Tax Avoidance – A 1031 exchange is a specifically designed transaction to defer tax payment on capital gains, and if not done correctly, you run the risk of the capital gains you planned to defer becoming a much higher tax on ordinary income and no deferment.
2. Consulting the Wrong Attorney – Because a 1031 exchange involves special planning and circumstances, make sure to consult with an attorney that is well informed on the intricacies of conducting a 1031 exchange.
3. Failing to Meet Deadlines – Some of the specific guidelines surrounding a 1031 exchange involve deadlines that are typically non-negotiable. The IRS grants extensions only under the most exceptional circumstances, so the safest avenue is to assume you won’t qualify and proceed accordingly. As indicated above, consult with a qualified attorney to make sure that you can meet these deadlines if you are contemplating a 1031 exchange.

Bottom line: Do your homework and make sure you are armed with the necessary information to hit the ground running, and a 1031 exchange can be a valuable tax planning tool.

If you need assistance with your 1031 (or reverse 1031), call First National Title Company today at one of our offices listed below. We have experience in all aspects of 1031 transactions and meet the guidelines to act as a Qualified Intermediary to hold all funds related to transactions in accordance with the law.