What is 1031 Exchange Intermediary?

by Sudarsan Chakraborty writer

Real estate investors have been taking advantage of 1031 exchanges for a long time so as to defer paying taxes in the process of selling and buying investment properties.

You must have enough capital to buy the next investment by deferring taxes, making 1031 exchange a perfect wealth-building strategy.

So, What Is 1031 Exchange?

A 1031 exchange is basically a real estate tool for investing, enabling investors to swap investment properties for others and defer capital gains tax that they would have paid at the time of selling.

This strategy is common with investors who want to upgrade their properties without getting charged taxes for proceeds.

At times, you can hear some investors referring 1031 exchange as a starker exchange or like-kind exchange. Usually, section 1031 applies to properties beyond real estate. However, most 1031 cases can also deal with land and buildings.

Types of Exchanges in Real Estate

There are four main forms of exchanges in real estate, which you may consider if you choose to take part in the 1031 exchange. These types include:

Delayed exchange
Improvement or construction exchange
Simultaneous exchange
Reverse exchange

1031 Exchange Rules and Timelines

Classically, the 1031 exchange encompasses an easy swap for one asset between two individuals. However, the chances of getting a person with the same properties you want are very slim.

For this reason, most exchanges are starker, delayed, or three-party exchanges. When it comes to delayed exchange, you will require a qualified 1031 exchange intermediary who will hold cash after selling the property and use the money to purchase the replacement property on your behalf. You will also have to observe two timing rules in the delayed exchange, including the 180-day rule and the 45-day rule.

Exchange Requirement

The first process in the 1031 exchange is contacting a reliable and qualified intermediary to create several exchange documents, which should be signed before relinquished properties are transferred.

If those documents are not signed before the closing date, the transaction can be treated as a subsequent purchase and taxable sale instead of an exchange.

Plus, the exchange proceeds shouldn’t be received by or under the taxpayer's control or an agent. However, it should be sent directly by the buyer or closing agent to a qualified intermediary.

Choosing a Qualified Intermediary

Choosing the best-qualified intermediary is vital as picking a suitable replacement property to complete a 1031 exchange. A qualified intermediary must hold finances from selling a relinquished asset in the FDIC-insured bank account.

They should also be versed when it comes to nuances associated with submitting and preparing exchange documents that IRS requires.

A knowledgeable QI should as well understand how to facilitate purchases of replacement properties and even initiate wire transfers to little companies. Other considerations to look for in a qualified intermediary include:

Complex exchanges
Business history
Experience
Designation and licensure

Concluding Remarks!

Real estate will always be a hot market, making now a perfect time to determine whether to sell or buy. Regardless of your decision, using a 1031 exchange will enable you to defer taxes on the sale of properties.