1031 Exchange Intermediary

When investing in real estate, savvy investors know that a 1031 exchange can be a powerful tool. Also known as a like-kind exchange, a 1031 exchange allows investors to defer capital gains and depreciation recapture taxes when they sell property held for investment or business purposes and reinvest the proceeds into a similar property.

By deferring the tax, investors can use the additional capital to purchase more real estate, further increasing their potential profits. And because the 1031 exchange provisions are codified in the Internal Revenue Code, investors can be confident that they are taking advantage of a legal tax-planning strategy.

Whether you are looking to defer taxes on the sale of a rental property or hoping to capitalize on the 1031 exchange to upgrade your investment portfolio, it is important to partner with a qualified intermediary.

A qualified intermediary is a person or entity that facilitates the 1031 exchange process by holding the proceeds of the sale in escrow until the replacement property is identified and purchased. The role of the qualified intermediary is critical, as they must be independent of the taxpayer to avoid triggering the tax. When choosing a qualified intermediary, select a reputable firm with extensive experience in 1031 exchanges.

There are different 1031 exchange types, each with its own benefits and drawbacks.

The most common type of exchange is the Forward Exchange, in which the taxpayer sells their investment property and then replaces it within 180 days. This exchange is relatively simple to execute and provides the taxpayer with a wide range of options for replacement property. However, it can be difficult to find a suitable replacement property within the 180-day timeframe, and the taxpayer may be forced to accept a less desirable property than their original investment.

Another type of exchange is the Reverse Exchange, in which the taxpayer purchases the replacement property before selling the relinquished property. This exchange gives the taxpayer more time to find a suitable replacement property but requires a greater upfront investment. In addition, Reverse Exchanges are much more complex than Forward Exchanges and are often subject to additional restrictions from the IRS.

Less common exchanges include International Exchanges, Build-to-Suit Exchanges, and Leasehold Improvement Exchanges. These exchanges can benefit taxpayers with specific needs, but they are often more difficult to execute and may be subject to additional limitations from the IRS.

Here is a brief overview of the different types of 1031 exchanges:

• Forward Exchange – In this scenario, the taxpayer sells their property and then replaces it with a new one.
• Reverse Exchange – Taxpayers purchase a replacement property before selling the current property. An EAT “Exchange Accommodator Titleholder” is required to accomplish this.
• International Exchange – These include exchanges of property outside the United States and its territories.
• Build-to-Suit Exchange – An individual sells their property and uses the exchange funds to purchase and improve a parcel of land.
• Leasehold Improvement Exchange – Like in a Build-to-Suit Exchange, the proceeds of the relinquished property are used to improve the taxpayer’s existing property.

Choosing the right type of 1031 exchange depends on several factors, including the nature of the investment property, the desired replacement property, and the timeframe for completion of the exchange. Taxpayers should consult with a qualified 1031 exchange specialist to ensure that their exchange meets all IRS requirements.