Rules For Conducting a 1031 Exchange
The importance of engaging a qualified 1031 accommodator at the beginning of the process.
Conducting like-kind exchange transactions under Section 1031 allows taxpayers to defer capital gains tax triggered by the sale of qualifying replacement properties. As a result, the like-kind exchange is an extremely powerful tool for those wishing to sell an investment property and purchase another.
However, in order to achieve this tax deferral, taxpayers must strictly comply with the rules of 1031 exchanges. This is where working with a qualified 1031 accommodator is beneficial. At 1031 National Services, our specialists provide 1031 exchange services to individual and corporate real estate investors throughout the United States.
What Is a 1031 Exchange Accommodator?
An exchange accommodator is an independent third party that facilitates like-kind exchanges under Section 1031 of the Internal Revenue Code. To qualify for capital gains tax deferral, a like-kind exchange must take place without the proceeds from the sale of the relinquished property (or properties) coming into the investor’s personal possession. An exchange accommodator prevents this from happening by holding the proceeds in escrow until the investor is prepared to purchase one or more replacement properties.
Beyond serving as a financial intermediary, some exchange accommodators, including ours, provide additional services as well. At 1031 National Services, we advise our clients regarding the options they have available and guide our clients through the entire exchange process. This includes helping ensure that they meet Section 1031’s strict deadlines and all the other technical requirements for a valid and legal tax deferral. We are also available to answer our clients’ questions throughout the process, and we assist many of our clients with managing and growing their investment portfolios on an ongoing basis.
Work With an Experienced 1031 Accommodator
A qualified 1031 accommodator can help with many aspects of tax-deferred exchanges under Section 1031. This includes everything from providing assistance with determining real property’s eligibility for like-kind exchanges and preparing exchange agreements, to holding proceeds in escrow to preserve taxpayers’ eligibility for capital gains tax deferral. Of course, you should still consult with your tax professional to make sure a 1031 exchange is right for you.
At 1031 National Services, we have been facilitating 1031 exchanges for taxpayers since 1994. As a result, we are very familiar with the 1031 exchange process, and we can use our experience to help guide and assist you. Whether you are interested in conducting a “straight” 1031 exchange or an advanced exchange (such as a delayed, reverse, or improvement exchange) we can help you proceed with confidence while providing support every step of the way.
One of the key reasons to work with an experienced 1031 accommodator is to ensure that your exchange funds remain eligible for indefinite tax deferral. If you aren’t careful, you can lose your tax deferral eligibility, and, if you do, you cannot gain it back. Through our comprehensive 1031 exchange services, we help ensure that our clients are able to claim tax deferral so they can reinvest as much as possible in their replacement properties.
Understanding the Rules for Different Types of 1031 Exchanges
Under Section 1031, real estate investors can conduct various types of exchanges and retain their eligibility for indefinite tax deferral. At 1031 National Services, we provide comprehensive and custom-tailored 1031 exchange services for all of the following:
Simultaneous Exchanges
The “straight” like-kind exchange under Section 1031 is a simultaneous exchange. As its name suggests, this type of exchange involves closing on the sale of the relinquished property and the purchase of the replacement property at the same time. While conducting a simultaneous exchange avoids any potential timing-related concerns under Section 1031, there is a lot involved in getting two separate deals to the closing table on the same day.
At 1031 National Services, we make it happen. If you are interested in conducting a simultaneous exchange, we can do the legwork necessary to get both of your deals scheduled for closing. We can also provide qualified intermediary services to ensure the appropriate transfer of funds without inadvertently triggering an immediate tax liability. We have extensive experience managing simultaneous exchanges, and you can rely on the experience of an exchange accommodator at 1031 National Services to move forward with confidence.
Delayed Exchanges
If you are not prepared to purchase your replacement property (or properties) on the day you close the sale of your relinquished property, then you will most likely be looking at conducting a delayed exchange. Section 1031 gives real estate investors up to 180 days to acquire their replacement properties and remain eligible for tax deferral.
The 180 days is a hard and fast deadline. If you do not close on the acquisition of a qualifying replacement property within 180 days, you will lose your tax deferral eligibility. You will also need to engage a qualified intermediary to hold the funds from the sale of your relinquished property to remain compliant with Section 1031. If you are considering a delayed exchange, we can help you plan accordingly, and we can hold your exchange funds until they are needed for closing.
Reverse Exchanges
Another option for real estate investors who don’t want to pursue a simultaneous exchange is to pursue a reverse exchange. If you have the funds or financing available, you can acquire your replacement property first and then focus on selling the property you no longer wish to own. Conducting a reverse exchange requires working with a qualified intermediary as well. We can provide the full 1031 exchange services you need to protect your tax deferral eligibility.
Importantly, just like delayed exchanges, reverse exchanges are subject to strict deadlines. Our specialists can explain everything you need to know to make an informed decision about when to start the process.
Improvement Exchanges
Normally, if you don’t reinvest the full sale proceeds from a relinquished property into the purchase of a replacement property, the amount that you don’t reinvest is treated as taxable “boot.” However, this outcome can be avoided with an improvement exchange.
In an improvement exchange, you intentionally purchase a replacement property that costs less than the amount you receive from the sale of your relinquished property. You then use the excess funds to improve the replacement property so that it is fit for a particular use. As long as you do this correctly with the help of a qualified intermediary, you can avoid incurring tax liability on “boot” from the exchange.
Which type of 1031 exchange are you interested in pursuing? Whether you have a clear idea of how you want to proceed, or would like to know more about the options that are available, we invite you to get in touch with our office. Our specialists are here to help, and we are more than happy to answer any questions you may have about our 1031 exchange services.
Contact Us to Learn More
As a qualified 1031 accommodator, we assist taxpayers nationwide with securing tax deferral for like-kind exchanges under Section 1031 of the Internal Revenue Code. For more information, give us a call or request a consultation online today.