Generally, a Qualified Intermediary is known as ‘facilitator,’ as they facilitate 1031 exchanges. But, there are a few real estate firms that too facilitate 1031 investments. For your investment to perform in 1031 exchanges, you need to pay attention when you shop for facilitators. Instead of looking at who is charging what, it would be better if you look at their experiences and how many 1031 exchanges they have closed in the past. There are a few factors that you can especially keep in consideration while selecting your 1031 exchange facilitator. However, before we get to that, let’s see why it is better to do a 1031 exchange on a property rather than selling it.
Why should you do a 1031 exchange on your property instead of selling it for hard cash?
No doubt managing an investment property requires time as well as money, which increases along with the age of the property. At some point in time, every investor decides to sell their old property because of its rising maintenance cost. However, selling your old property and getting your proceeds taxed may not be the wisest of all options, at least not when you can exchange it out and defer capital gains tax. A 1031 exchange gives you an opportunity to defer capital gains tax on exchanging like-kind properties. In other words, using a 1031 Exchange, you can exchange your old investment property for a new one and defer up to 100% tax. Isn’t it great? After all, why would anyone throw away the money that could be saved?
When you sell a property, all you’re left with is taxable proceeds, which automatically reduces your investment. Whereas, on account of doing a 1031 Exchange, you can easily save those extra dollars and purchase bigger, better, and newer properties. So, how do 1031 Exchanges allow tax deferment? Well, it’s a simple calculation. As per IRS guidelines, an investor must reinvest 100% of their sale proceeds in the replacement property. As the proceeds from the relinquished property are entirely reinvested in the replacement property, you gain no profit or loss at the end of a 1031 Exchange and no tax consequences either.
Here are a few instructions you must follow to qualify for a 1031 Exchange.
- You must sell your old property first and then acquire the new one.
- Once the relinquished property is sold, a deadline of 45 days is given to identify the potential replacement property. Written identification of the property must reach to the IRS on or before the 45th day, or else the transaction will no longer be valid.
- A time limit of 180 days is given to acquire the replacement property. Your 180 days begin the day you close on the sale of the relinquished property.
- It’s mandatory to hire a Qualified Intermediary for every 1031 Exchange you do. A Qualified Intermediary carries out the transaction on behalf of the investors.
- Under no circumstances, a 1031 Exchange investor can hold the titles of the relinquished and replacement properties at the same time.
For doing a 1031 Exchange, the first thing you need to do is find an experienced and credible 1031 Exchange company. The journey for your 1031 Exchange starts here. As there are hundreds of companies that claim to provide 1031 Exchange services, finding a good 1031 Exchange Company isn’t that easy.
You can distinguish various 1031 exchange companies based on the following factors –
- Services provided by the company apart from 1031 Exchanges.
- How much a company is charging for 1031 Exchange services.
- Types of 1031 Exchanges the company offers.
- Insurance and bonding costs.
- Quality of assistance and customer support.
- Years of field experience the company possesses.
These factors can help determine the credibility and experience of 1031 Exchange companies that are on your list. In case you haven’t prepared any list, one of our 1031 experts can help you close your transaction.