common misconceptions» advantages & disadvantages Common Misconceptions Regarding Exchanges People often fail to consider Exchanges as an investment strategy because they are misinformed about Exchange requirements. However, once their misconceptions have been cleared up, property owners usually find that IRC §1031 is worth considering. One common source of past confusion was that people would often mistake Exchanging for a rollover of a principal residence under IRC §1034. Prior to the repeal of IRC §1034, taxpayers could defer the tax on the sale of their principal residence by replacing the residence with a new principal residence within 24 months of selling the old one. No Exchange was required. However, in May1997, IRC §1034 was repealed in its entirety and replaced with the following general provisions under IRC §121: Gain from the sale of a qualifying principal residence is excluded from taxable income to the extent of $500,000 for a married couple filing a joint return and $250,000 for a single taxpayer. Under the new provisions, there is no requirement for a rollover into a new principal residence. These tax changes will eventually eliminate some of the confusion between the repealed principal residence rollover provisions and an Exchange. Here are other common misconceptions about Exchanges: Myth: Exchanges require two parties who want each other's properties. Fact: Two-party Exchanges are possible, but they rarely occur. Today, an Exchange is accomplished with the help of a Qualified Intermediary and usually involves four principal parties: the exchanger (taxpayer), a buyer for the relinquished property, a seller of the replacement property, and the Qualified Intermediary. The parties often do not know each other, and their properties may even be located in different states. Myth: The like-kind requirement limits a taxpayer's options. Fact: Property must be exchanged for like-kind property. But like-kind simply means that real property must be exchanged for real property. All real property is like kind, so a fee-simple interest may be exchanged for a tenancy in common interest; one property may be exchanged for more than one property; a duplex may be exchanged for a four-plex; a single family may be exchanged for a motel; vacant land may be exchanged for an office building, etc. However, real property may not be exchanged for personal property and both the real property given up and the real property received must also satisfy the Purpose Requirement, which will be discussed later. Myth: In an Exchange, title to the Exchanged properties must pass simultaneously. Fact: The properties do not have to close at the same time. However, the replacement property must be received by the taxpayer within 180 days after closing on the relinquished property. When the two transactions do not close at the same time, the Exchange is called a deferred Exchange. Myth:  Only real estate qualifies for an Exchange. Fact:  Personal Property may be Exchanged for other personal property.  However, in an Exchange of personal property the definition of like kind is not as liberal as for Exchanges of real property.