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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, Executive Vice President at FYNTEX, a 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 said in an interview with 1031 Crowdfunding.

This material does not constitute an offer to sell or a solicitation of an offer to buy any security. An offer can only be made by a prospectus that contains more complete information on risks, management fees and other expenses. This literature must be accompanied by, and read in conjunction with, a prospectus or private placement memorandum to fully understand the implications and risks of the offering of securities to which it relates. As with all investing, investing in private placements are speculative in nature and involve a degree of risk, including loss of your principal. Past performance is not necessarily indicative of future results and forward-looking statements and projections are not guaranteed to achieve the results described and your actual returns may vary significantly. Investments in private placements are illiquid in nature and there may be no secondary market or ability to sell the investment should the need for liquidity arise. This material should not be construed as tax advice and you should consult with your tax advisor as individual tax situations will vary. Securities offered through Capulent, LLC, member FINRA, SIPC.