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5 Things to Know Before Your 1031 Exchange Process Begins

1. You need a QI before you sell:

All exchange transactions, from the sale of the relinquished property to the purchase of the replacement property(ies), must be completed with the assistance of a Qualified Intermediary (“QI”), also known as a 1031 Accommodator or Facilitator. The job of the QI is to help you navigate the complicated 1031 real estate exchange process, helping you properly comply with each of the exchange code’s regulations and requirements. A QI is an independent entity that is not the investor, an agent of the investor, or a related party to the investor and that enters into a written agreement with the investor to complete the exchange transactions on behalf of the investors for the purpose of adhering to 1031 real estate exchange requirements.

2. Get started early:

When asked what advice he regularly gives clients, Thomas Bottenberg, Regional Supervisor at IPX1031, a 1031 Crowdfunding partner qualified intermediary, said, “Start looking for properties early, even before you close. The 45-day identification period does go by very quickly.”

3. Know your 45-day identification period rules:

There are very specific identification period requirements for a 1031 real estate exchange. Replacement properties under consideration for acquisition in a 1031 exchange should be identified to the QI and must be identified no later than midnight of the 45th calendar day following the close of the relinquished property sale transaction. 1031 exchange investors must comply with one of the three property identification rules when identifying potential replacement properties. These rules include the Three Property Identification Rule, the 200% of Fair Market Value Identification Rule, and the 95% Identification Exception.

4. Tax deferral leverages your income:

Deferring capital gains tax payments through a 1031 exchange enables investors to leverage the income earned on the sale of a relinquished property and earn greater proceeds on a reinvestment in a replacement property. The potential value of reinvestment proceeds could increase incrementally each time an investor defers the payment of capital gains taxes and exchanges real estate property through a 1031 real estate exchange.

5. Use a Delaware Statutory Trust as a backup plan:

Jonathan Kinney of Bean, Kinney, & Korman Attorneys in the newsletter entitled 1031 Exchanges with a Twist, “The main advantage of the Delaware Statutory Trust is that you can identify the trust’s real estate as one of the three replacement properties by the end of the 45-day identification period for a 1031 Exchange. The trust can serve as a backup if the preferred exchanges are unable to be consummated for any reason during the statutory period. In other words, the Delaware Statutory Trust can be an effective backstop in a 1031 Exchange.”

“[A DST backup plan] is incredibly helpful. In the old days, we never had that. If you couldn’t find a property, you took your money back and paid the taxes.” Thomas Bottenberg, Regional Supervisor at IPX1031, a 1031 Crowdfunding partner qualified intermediary, said in an interview with 1031 Crowdfunding.

While the information provided above has been researched and is thought to be reasonable and accurate, it’s important to talk with your tax professional regarding your personal tax situation.

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