Are You Required to Use a 1031 Exchange Facilitator?

If you are planning to conduct a like-kind exchange under Section 1031 of the Internal Revenue Code (IRC), are you required to use a 1031 exchange facilitator? Or, can you successfully navigate the like-kind exchange process on your own (or with the help of your real estate agent or broker)?

While there are certain circumstances in which engaging a 1031 exchange facilitator is not required, working with a 1031 exchange facilitator will be necessary in most cases. This is due to the requirement for a true “exchange” of properties under Section 1031. When necessary, working with a 1031 exchange facilitator ensures that the sale proceeds involved in the exchange do not come into the taxpayer’s possession, which would trigger immediate federal income tax liability.

When Is a 1031 Exchange Facilitator Not Required?

So, when isn’t it necessary to work with a 1031 exchange facilitator? The only time that a 1031 exchange can be conducted without an exchange facilitator is when the exchange involves a direct swap of qualifying properties between two parties. If two parties are interested in exchanging ownership of their respective properties, then in this true “exchange” scenario, the parties can close both transactions simultaneously and meet the requirements for indefinite tax deferral under Section 1031 (assuming all other requirements are met).

When is a 1031 Exchange Facilitator Required?

Outside of this type of direct swap scenario, working with a 1031 exchange facilitator is necessary. This is because one of the fundamental requirements under Section 1031 is that the proceeds from the sale of a taxpayer’s “relinquished” property do not come into the taxpayer’s possession. A 1031 exchange facilitator holds the relevant proceeds in escrow (in addition to providing other services) and ensures that they are only disbursed at the appropriate time.

This allows for one of the most common methods of conducting a like-kind exchange under Section 1031, which is commonly referred to as a “deferred” exchange. With a deferred exchange, a real estate investor or business sells its property (the “relinquished”) property before purchasing one or more replacement properties. Without the involvement of a 1031 exchange facilitator, this would trigger immediate tax liability (because the sale proceeds would come into the investor or business’s possession), even if the plan is to buy another property for investment or business purposes.

But, engaging a 1031 exchange facilitator to hold the sale proceeds from the relinquished property prevents this from happening. The Internal Revenue Service (IRS) makes this clear: “If you make a deferred exchange using a qualified intermediary (QI), the transfer of the property given up and receipt of like-kind property is treated as a like-kind exchange.”

“Qualified intermediary” is another term for a 1031 exchange facilitator.

Importantly, when conducting a deferred exchange under Section 1031, other requirements apply as well. These include strict deadlines, among others. In addition to providing escrow services, an experienced 1031 exchange facilitator will be able to assist with ensuring that you meet all other applicable requirements for securing indefinite tax deferral.

How Can an Experienced 1031 Exchange Facilitator Help?

So, how can an experienced 1031 exchange facilitator help? We’ve covered some of the key benefits of working with a 1031 exchange facilitator already, but these truly are just examples. Broadly speaking, there are three ways that an experienced facilitator can help when a direct swap is not a viable option:

• Deferred 1031 Exchange – The discussion above focuses specifically on deferred exchanges. If you need (or want) to sell one property before purchasing another, the way to do this (while maintaining your eligibility for indefinite tax deferral) is by working with an experienced 1031 exchange facilitator.
• Reverse 1031 Exchange – A 1031 exchange facilitator can also help you conduct what is known as a “reverse” 1031 exchange. With a reverse exchange, you purchase your replacement property before selling the property you intend to relinquish. The replacement property is “parked” with the 1031 exchange facilitator in the interim.
• Build-to-Suit 1031 Exchange – Working with a 1031 exchange facilitator to conduct a build-to-suit exchange allows investors and businesses to reinvest sale proceeds into improving a replacement property without triggering “boot” treatment for funds not directly reinvested in the replacement property at the time of acquisition. This can be a desirable option in many scenarios as well.

Contact 1031 National Services for More Information

If you have more questions about working with a 1031 exchange facilitator, we invite you to get in touch. Call 888-872-1031 or contact us online to schedule a free consultation at 1031 National Services today.