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A 1031 exchange is a unique and valuable tool for commercial real estate owners who want to protect and enhance their investment. The IRS has long acknowledged that when exchanging similar properties under specific conditions, there is nothing to tax at that time (except for the boot, if there is any). It’s stipulated in the tax code Internal Revenue Code section 1031. The ability to reinvest all of your proceeds from a sale of commercial property can make a huge difference in your long-term investment strategies. It can provide flexibility in dealing with changing economic conditions and better enable you to take advantage of investment opportunities.
Over time, tax law changes and clarifications have made this rule more usable in a multitude of situations, and also more complicated. You will need a top-rated 1031 exchange professional to help you navigate through the regulations and achieve a valid and beneficial 1031 exchange. It will be important for you to interview several of the best 1031 tax exchange companies in your area and select the one whose services best meet your needs. The PropertyCashin directory will show you the most reputable, qualified 1031 exchange companies in your location. Choose the best qualified intermediary that will help take your property investment strategy to another level with a 1031 tax exchange.
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Frequently Asked Questions
What are 1031 exchange companies?
A 1031 exchange allows you to defer tax on the sale of real property if you replace it with a “like kind” property (basically any property that is acquired for investment, not necessarily of the same type), but only if you meet a number of specific requirements. 1031 exchange companies provide investment property exchange services to real property investors in order to help them meet all requirements of a 1031 exchange.
They give guidance regarding IRS rules and regulations, assist with the documentation that is required, and perform the functions of a qualified intermediary. There can be other benefits to you that are created by a 1031 exchange if you know how to use them in your investment planning. The best 1031 exchange companies are prepared to walk you through all the opportunities of a 1031 exchange.
What does a qualified intermediary mean?
Originally, the IRS considered an exchange of property to be a simultaneous swap of one property for another. This changed when a man named Starker sold one property and then, after closing, used the proceeds from that sale to buy another similar property. The IRS agreed that under certain restrictions this qualifies as an exchange.
One restriction is that the cash from the first sale must go into the replacement property without going through the investor’s hands. A qualified intermediary, or 1031 QI, is a person or firm that acts as a like kind exchange facilitator. They make it possible for you to exchange properties without taking receipt of the cash.
The qualified intermediary will transfer ownership of the original property from the seller to the buyer and hold the proceeds in escrow. They will use those funds to acquire the replacement property and then transfer that property to the investor. This meets the requirements of the IRS so that the transaction qualifies as an exchange of property.
A qualified intermediary has to be independent of any other role in the transaction and cannot be related to you or your agents. The role of qualified intermediary can be handled by 1031 exchange professionals who also act as exchange advisors to their clients. A professional section 1031 accommodator will go beyond the minimum duties of a qualified intermediary and provide expertise throughout the process.
What is the difference between 1031 exchange and title insurance companies?
A title insurance company protects a buyer of real property from damages that may occur if the seller of that property did not have undisputed ownership. They provide protection against financial losses that are caused by undisclosed defects in the title to the property. Unlike with title companies, the services provided by 1031 exchange companies are related to property owners’ tax liabilities.
Can you do a 1031 exchange without a qualified intermediary?
The seller cannot directly receive cash from the sale. So, a 1031 exchange without a 1031 QI is not allowed if money is involved in the transaction (which happens in most cases). The IRS advises that, “a qualified intermediary can facilitate the exchange using escrow accounts. This type of ‘qualified intermediary’ promises to return the proceeds of the exchange to the transferor of the property.”
As the exchange is usually conducted by selling a property to one entity and buying another one from a different entity later (Starker exchange) or buying a replacement property and selling the relinquished one later (reverse exchange), to properly and safely complete a 1031 exchange, normally the services of a reputable and experienced 1031 qualified intermediary are needed.
The same goes for simultaneous exchanges that involve cash. If the property of either party costs more than the other property and either party is receiving the price difference in cash (it’s also called “boot”), then a QI is required and this cash amount is taxable.
However, if you are conducting a simultaneous exchange by exchanging properties directly with the replacement property owner and neither party is compensating another party the difference in prices (so there is no cash involved), you don’t need a QI.
Who helps with a 1031 exchange?
A property exchange is still a real estate transaction. An investor can still use the services of a realtor. Your broker will assist in the sale of the relinquished property, and will also help you find the replacement property. Be certain to advise your real estate agent that you intend to perform a 1031 exchange.
There are time limits on how long you have to select a replacement property in order to complete the exchange. You and your broker should communicate closely with your 1031 exchange company throughout the process.
How much do qualified intermediary companies charge on average?
The cost of using a 1031 exchange company will vary depending on the complexity of the transaction and the services offered by the company. The fee for a standard exchange can be as little as $500. If you expect other services to be provided, such as tax advice or investment analysis, you should expect to pay up to $1,200.
The rates for more involved exchanges, such as reverse exchanges or transactions that exchange multiple properties, can be more than $3,000. Fees charged by qualified intermediary companies may be paid with exchange funds. You should get detailed quotes from several experienced 1031 exchange companies for comparison.
How to choose a qualified intermediary for a 1031 commercial property exchange?
A 1031 exchange can be accomplished to your greatest benefit and without undue stress if you have the right company assisting you. It’s important to remember that the 1031 exchange industry is not regulated, so you need to interview several companies and ask the right questions. Finding an experienced company is critical. Ask how long they have been in operation and how many exchanges they have facilitated.
Using a reputable company is essential. Ask if they are bonded. Do they carry Errors and Omissions insurance? Some companies will give you a performance or satisfaction guarantee. Do they offer a full range of services? Do they advise on tax matters? Provide investment analysis? Handle all required documentation? Ask about their escrow accounts. Your funds should never be commingled with theirs.
Where do I find a qualified intermediary?
If you are fortunate enough to know someone who has gone through a successful 1031 exchange you can ask them for a referral to a local company. You can also look for 1031 exchange companies on the Internet. But, unless you know someone who has used one of them you are relying on their ad copy to decide whether or not they are reputable and competent.
The directory found on PropertyCashin is a list of 1031 exchange companies that have been selected by PropertyCashin for their integrity, their knowledge, and their dependability. When so much is riding on having the right advisor on your side, PropertyCashin can take the guesswork out of selecting the right 1031 facilitator.
Are you a reputable 1031 exchange intermediary?
If you’re an established, reputable and qualified 1031 exchange facilitator with a high standards of service, apply to get listed on our directory.