What you Should Know Before Hiring a 1031 Exchange Facilitator

If you’ve flipped through our 1031 Exchange Series from beginning to end and are still looking for answers, perhaps it’s time to consider hiring an exchange facilitator for assistance.

The 1031 exchange (also called the like-kind exchange) is regularly utilized by Commercial Real Estate (CRE) investors to defer capital gains taxes. Under 1031, investors who own investment or business property can reinvest returns from sold real estate into property of the “same nature, character or class.” The exchange must be completed within a period that’s determined by the Internal Revenue Service (IRS).

The task may seem simple, but in fact, it’s just the opposite. Like-kind properties can participate in the exchange as well as cash, liabilities and other non like-kind property, which are considered taxable gains. 

According to the IRS,

“It is important to know that taking control of cash or other proceeds before the exchange is complete may disqualify the entire transaction from like-kind exchange treatment and make all gain immediately taxable.”

In this scenario, investors often hire an exchange facilitator, also called a qualified intermediary, to hold proceeds until the exchange is over. CRE investors and even agents, including real estate agents or brokers, investment bankers or brokers, accountants, attorneys, employees or anyone who’s worked for an investor within the previous two years cannot act as an intermediary.

Investors should be careful for scammers when they’re looking to partner with an intermediary. Over the last few years, the IRS has received a slew of reports from investors who have hired intermediaries that file bankruptcy before they were able to fulfill contractual obligations. The scam leaves investors with the burden of completing the exchange alone and most are eventually disqualified from the transaction.

According to San Diego-based intermediary firm, Exeter, qualified intermediaries are unregulated, meaning they require no license and are not overseen by a governmental agency. Since their role is to prepare agreements, safeguard assets and provide counsel on an exchange, it’s crucial that investors hire an individual that’s qualified and experienced. Investors should be sure that their intermediary knows the full scope of the real estate transaction.

“The 1031 exchange industry has many gray areas because there are many unanswered questions in section 1031 of the Internal Revenue Code and section 1.1031 of the treasury regulations,” Exeter says.

“Perhaps the most important role of all is for the qualified intermediary to ensure that its 1031 exchange specialists are sufficiently trained and have sufficient experience and expertise in order to provide the necessary guidance and advisory services to help guide you through the confusing 1031 exchange arena.”

For more readings visit: IRS and Exeter.

To learn more about the 1031 exchange, check out our full series:  https://www.mynoi.com/category/1031-exchange/.

Stefanie Donahue is a freelance writer based in Bellingham, Washington. She’s a well-versed communicator with an extensive background in journalism and media production. Her writing draws from the insight of industry experts to uncover best practices for real estate investors.