Do I Need An Attorney For A 1031 Exchange?

Do I Need An Attorney For A 1031 Exchange?

The IRS statute requires that you use a qualified intermediary (QI) to perform your 1031 exchange. While it is possible for an attorney to provide this service, it doesn’t have to be an attorney and it can’t be an attorney you have utilized for any other matters. This is because the IRS statute also requires that the QI be an unrelated third party. This means that the attorney you typically do business with can’t also be your QI.

Successful investors typically select an experienced national QI. While this can be an attorney who exclusively handles exchanges for you, the law degree shouldn’t be the deciding factor in your QI selection. This is because 1031 exchanges are generally a small part of a client’s legal needs. Most attorneys do not specialize in that part of the tax code and will only do them occasionally. Lack of familiarity with the mass amount of case law and frequently evolving requirements can jeopardize the success of your exchange.

SELECTING YOUR 1031 EXCHANGE QUALIFIED INTERMEDIARY

When selecting a QI, focus on finding a company with national coverage and the reputation and experience to:

  • Secure your exchange funds in a way that protects you
  • Prepare quality, time tested exchange documents that meet all IRS standards (some QIs offer a guarantee)
  • Respond to inquiries in a timely and thorough manner

For a more detailed discussion, see the article Choosing Your Qualified Intermediary.

Once you have identified QIs that meets the above criteria, then consider their cost. The range of prices for quality QIs can vary. Saving (or spending) an extra couple hundred dollars can be the difference between a smooth or troublesome transaction. If you are wondering if the QI you are considering is charging too much, check out our Bigger Pocket’s blog post on 1031 Exchange Costs.

Attorneys who only occasionally handle 1031 Exchanges tend to be quite a bit more expensive. At the opposite end of the spectrum are attorneys who “specialize” in 1031 Exchanges but have devolved to bargain basement QIs offering little or no real time support. I recommend concentrating your efforts on finding an unrelated QI –  attorney or otherwise – who will 1) ensure the safety of your funds, 2) guarantee the quality of your exchange documents, and 3) be responsive to your inquiries all at a price that lets you sleep at night.

Discover how 1031 Exchanges can be used to keep the tax on your TIC working for you!

What To Do With Your Slice Of The Pie: 1031 Exchanges And Tenants In Common (TICs)

Tenants In Common (TIC) is a wonderful little arrangement wherein multiple owners each have a deeded interest in a property. That interest is a percentage or portion of the property. But can investors who hold an investment as Tenant in Common still take advantage of a tax deferred 1031 Exchange?

Long answer short: YES! When you sell your TIC, you can each decide what you want to do with your slice of the pie.

  1. You can stay together as one 1031 Exchange or
  2. You can 1031 Exchange your portion while the other(s) to take cash or
  3. You can each do a 1031 Exchange into separate properties with your portion.

You’ve got great flexibility in how you transition out of a property held as tenants in common. Because each situation and investor has unique circumstances, always consult with your financial adviser before proceeding.

1031 Exchange: The Most Important Thing to Know

Using a 1031 Exchange to grow your real estate portfolio faster using Uncle Sam’s money is a strategy that has helped millions of investors.

But of all the things you need to know about a 1031 Exchange, the most important thing is that it must be in place BEFORE you sell your investment real estate. The moment you receive your sale proceeds, it’s TOO LATE and you will have to pay the tax. Many investors new to this tax deferral method have discovered this after their sale and paid for it – literally.

The great news is that even if you are closing tomorrow or don’t know when you will close, it is quick and easy to start your exchange. Once you know what title company will be handling the transaction, the exchange can be initiated on your behalf by your Qualified Intermediary (QI).

Initiating your exchange with a QI prior to your sale is a rule that is a critical thing to keep in mind as you continue to learn about 1031 exchanges. I hope you will use the free online resources here at www.the1031investor.com as you explore this option.

Refinancing Before and After a 1031 Exchange. What’s the Difference?

Refinancing before and after a 1031 exchange are viewed differently by the IRS. Refinancing immediately before a 1031 starts is a good way to get heartburn from the IRS. The IRS has an extreme dislike for refinancing before an exchange. Refinancing after a 1031 is a different story. In a refi after a 1031 you are not accessing gain, you are borrowing against equity in a property you are holding for productive use. Which is the whole point of a 1031.

A short disclaimer though. If the IRS thought you were a bad actor and wanted to get at you anyway, could they challenge a refi done immediately after a 1031? Sure, but those instances are hard to prove and rare. Have your ducks and rationales in a row and wait until after the 1031 is complete. And always talk to your tax professional.

What is a Reverse Exchange?

The statutory order of a 1031 is this: a sale followed by a purchase of investment real estate. You can’t exchange into something you already own, and you can’t exchange into construction on real estate you already own without a different approach.

In a reverse exchange, the qualified intermediary forms a holding entity called the EAT (exchange accommodating title holder). This EAT takes title to the lot you want to build on. The property is under your control, but you’re not on the title yet. Then you construct the building on that property. Now you complete your sale if you haven’t already, and you “purchase” the lot and building owned by the EAT for exactly what was paid/spent on it. By doing this, you are able to maintain the integrity of your exchange and also purchase the exact right replacement property.

Timing, complexity, financing, and cost are all the issues you’ve got to wade through. But reverses can be a pretty powerful tool to get you right where you want to be. Nonetheless, it might be worth talking to your tax expert about structuring a more straightforward 1031 exchange.

2 Things You Should Know About a Reverse Exchange

In simple terms, a reverse exchange is a 1031 exchange where the replacement property is purchased before the original investment property is sold. But they aren’t quite as simple as a 1031 exchange. It should be said before anything else, find a qualified intermediary (QI) before beginning the process.

1.   Financing can be a hassle if you are in need of funds for the purchase until you sell. In a reverse, the QI takes title to the new property in the EAT (Exchange Accommodating Title holder). So the loan has to be made to the EAT but guaranteed by you.

2.   The Reverse is relatively expensive because a holding company must be created to hold the replacement property until the exchange is complete.

Because of its complexity, taking some time with your QI to get fully educated on the nuances of the reverse will be well worth your while. It is always wise to check with your tax expert before making any moves towards a 1031.

What’s in it For Me?

If you are thinking of carrying out a 1031 exchange, you might be wondering, “What’s in it for me?” A 1031 has the power to transform your real estate investing strategy. More specifically, a 1031 offers you a chance to defer capital gains taxes and get your proceeds working for you. In order to qualify for a 1031, your intent must to hold the property for investment purposes only. What you will find is that as you hold your property for investing, it will also hopefully be accruing appreciation. With more equity to toy around with you are on your way to leveraging your first investment property into something better.

Once you are ready to exchange your first property, it is time to get imaginative. A 1031 gives you immense freedom when finding a replacement property. While primary residences, personal property, and inventory (fix and flips) are not allowed with a 1031, all other types of investment real estate are on the table. You can even leverage your first property into multiple replacement properties. A 1031 offers you a real chance to snowball wealth and build your fortune.

Which Florida Cities Are Hot Right Now?

It has been a good year for Florida. With northern buyers drawn to Florida by the 2018 tax plan, the state is booming at the moment. But which cities in the Sunshine State are especially growing right now?

1.   Sarasota

Home to the fastest growing luxury housing market in the United States. Prices in Sarasota’s luxury housing market grew by 21% in June when compared to one year ago. Half of all luxury houses in the city sold within 157 days.

2.   Naples

Home sales in the city of Naples rose 11 percent year over year in January. A month in which national sales dropped over four percent. Fun fact: the Naples zip code of 34102 is ranked as one of the fifteenth richest zip codes in the United States.

3.   Fort Lauderdale

According to Forbes, Fort Lauderdale has become a city of choice for savvy investors of commercial and residential real estate. The city is currently in the midst of a building boom. Some 7,000 residential units were under construction or approved in 2017.

What Are the 2 Timelines in a 1031 Exchange?

There is a very specific timeline that the IRS lays out for your exchange calendar that must be followed to the letter. From the day that you close the sale of your investment property, it is important to know that there are two periods for you to respect: the identification period and the exchange period.

1.   45-Day Identification Period

The 45-day identification period is the time in which an exchanger must either identify potential replacement properties or take title to their new property and finish the process. However, at the minimum, one must have a list that shows the properties that are being considered for purchase. On day 46, the list is finalized and cannot be changed. Whatever is on that list is there for the remainder of the exchange period. Make every effort not only to get into contract during the 45-day period but also to close and purchase a replacement property or properties.

2.   180-Day Exchange Period

Concurrently, with the 45-day period is the total exchange period of 180 days. From the day that you close the sale of your property, you have 180 days to complete the process. The purchase has to be one or more of the properties that are on your 45-day list. If you start your exchange in such a way that you’re going to run up against your tax return deadline prior to the 180 days, file an extension and you’ll still get the full 180 days for your exchange period.

While these strict timelines might seem intimidating, there is no need to worry. There is no penalty for starting and not finishing a 1031 exchange. If you start a 1031 exchange but do not complete it because of a 45-day issue, or any other reason, simply do not report the exchange on the next tax return. Let the time periods motivate, rather than intimidate you.