When conducting a 1031 exchange, investors can utilize a 1031 exchange intermediary for an easier process. The term 1031 exchange comes from the Internal Revenue Code (IRC), section 1031, which states, “No gain or loss shall be recognized on the exchange of real property held for productive use in a trade or business or for investment if such real property is exchanged solely for real property of like kind which is to be held either for productive use in a trade or business or for investment.”
This type of real estate transaction presents opportunities for investors to move from one property to another replacement property with tax benefits from sale proceeds. These tax benefits can provide more capital to put into a new property. In order to fully obtain all of the benefits deferred exchanges can provide, there are specific 1031 rules and parameters that must be met on a specific timeline. 1031 exchange intermediaries can help to ensure timelines, rules, and parameters are met for the necessary transactions.
1031 exchange intermediaries are often critical to the success of this type of transaction for investors. There are benefits for 1031 investors from this type of transaction that can only be fully realized with the help of qualified intermediaries. If you are considering a deferred exchange for your next commercial real estate transaction, here is what you should know about the importance of working with a qualified intermediary.
Guide to Understanding How a 1031 Exchange Intermediary Helps
Qualified intermediaries can help with every step of the 1031 exchange process. The intermediary will oversee all transactions in the 1031 exchange, giving investors the most benefits possible from the sale of one property and the purchase of another. Here are the main ways the intermediary can help complete the deferred exchange process.
There is a strict timeline that must be followed in order to ensure the terms of the 1031 exchange transaction are met. This timeline covers the order in which events must occur, the time limits for each activity, and the deadlines that have to be adhered to with a 1031 exchange. An intermediary understands these rules and can help you meet every deadline.
Within the timeline, there are three key components that must be met. An intermediary helps investors understand and follow these rules so a 1031 exchange can be conducted. The 1031 exchange rules cover what and how many properties can be considered for the purchase portion of the transaction. The rules are:
- The Three-Property Rule: The three-property rule allows an investor to identify up to three properties to potentially purchase in the 1031 exchange.
- The 200% Rule: The 200% rule states that an investor can choose as many potential replacement properties as they like, so long as the cumulative value does not go over 200% of the sale of the relinquished property.
- The 95% Rule: The 95% rule says an investor can identify as many potential properties as they want, as long as they can be acquired at 95% valuation or more.
In addition to following the process, adhering to those three rules, and meeting each deadline as they come up, an intermediary plays an important role in moving and holding funds securely. This ensures that the capital from the sale of one property can be moved into the investment of another without tax risks or implications. Because of the way replacement property sales work, proceeds remain taxable unless passed through the qualified intermediary.
When seeking in the form of a selecting a qualified intermediary, look for a partial third-party without any formal relationship to anyone involved in the transaction. The intermediary’s only part in the 1031 exchange is the successful facilitation of the process, ensuring the parameters are met on time and funds are properly held and transferred.
A 1031 exchange is typically done with the sale and purchase at the same time. However, there is another type of 1031 exchange, though. If you decide you want to do a 1031 exchange before you sell your existing property, there are some rules to consider. For a Reverse 1031 exchange, an intermediary can help you understand the differences and how to accomplish this real estate transaction as well.
Finding a Qualified Intermediary for a 1031 Exchange
When investors want to take advantage of the way a 1031 exchange can help to easily transition into a new investment or diversify investment portfolios, an intermediary can ensure the investor gets all of the benefits of the tax deferral that can help move proceeds into a new property. The strict rules and the process that must be followed to ensure a successful transaction can be stressful and complicated. With a reputable, qualified intermediary, investors will have the support of someone who knows the process and the rules, as well as the market, to help you approach the transaction armed with the best possible information.
Not all real estate agents have the experience, skills, or knowledge necessary to make a 1031 exchange a smooth process. To find a reputable and qualified intermediary, real estate investors want to work with someone who has experience conducting past 1031 exchanges. They will be best able to walk you through the process so you know what to expect each step of the way.
The 1031 exchange intermediary will be your trusted advisor throughout the entire process. At Sands Investment Group, we have extensive 1031 exchange experience. We want you to succeed, so we help navigate the rules so you understand your options and make the best choices to get the full benefits of a 1031 exchange.
If you’re ready to learn more about working with our real estate brokers that are experienced, reputable exchange intermediaries, Sands Investment Group is ready to start the conversation. From understanding the 1031 process to identifying properties that fit your requirements, the 1031 exchange experts can help every step of the way. Get in touch with an expert today by calling 844.4.SIG.NNN or sending us an email at info@SIGnnn.com.