What is a 1031 Exchange Company? Complete Guide

Written by Peter Keszegh

Usually, when you get some profit from the sale of your own property, you should pay the tax to the state. However, there’s a way for you to postpone this payment and use the profit to acquire a new house or apartment without direct taxes. 

This is known as an 1031 exchange, and this is where a 1031 exchange company is required. This company assists you in performing this exchange, so you can place the profits from selling your property into buying a new one.

But what exactly is this exchange, and what do these companies do? Let’s break it down.

Real Estate Agent Holding a Signage

Understanding 1031 exchanges

A 1031 exchange, based on Section 1031 of the U.S. Internal Revenue Code, allows investors to postpone paying the capital gains on selling a property if its proceeds are desirable for getting a similar property. This promotes the recycling of capital within the real estate sector. 

To be eligible for an exchange, both the abandoned and acquired property must be engaged in business or investment activities. In the context of these exchanges, the term “like-kind” is broadly all-encompassing, allowing almost all kinds of real estate to qualify, including commercial buildings and rental properties.

The role of a qualified intermediary 

When dealing with 1031 exchanges, you’ll need a qualified intermediary (QI). The QI holds the sales proceeds from a relinquished property sale and uses it to acquire the replacement property. The QI acts as a bridge to ensure that the entire process is backed by supporting judicial rules and regulations.

Time constraints

The time frame for 1031 exchanges is very tight. After selling the relinquished property, the investors have to identify potential replacement properties within 45 days. Afterwards, they have a total of 180 days to complete the purchase of the replacement property they have chosen. There are no exceptions to this rule.

This is why the investors need to make sure they stay on track. With a trusted 1031 exchange company, you can work through the tricky parts of a 1031 exchange and take advantage of all the benefits over time.

Real Estate Agent Discussing in Front of His Client

The role of an 1031 exchange company

1031 exchange companies are critical in understanding the complexities of these exchanges. As a core link in these transactions, the companies not only guarantee taxpayers’ compliance with the rigorous IRS standards, but also ensure a smooth transfer of properties and capital gains to maximize their returns.

Here’s what 1031 exchange companies can provide:

  • Expert guidance: 1031 exchange companies provide focused expertise necessary to guide investors through a 1031 exchange. These companies can conduct in-depth consulting, which helps the taxpayers grasp the magnitude and the benefits of these investment decisions.
  • Qualified intermediary (QI) support: A 1031 exchange company is the neutral third party, which receives the funds from the buyer of a taxpayer’s old property, and they act in the capacity of a qualified intermediary (QI) to directly acquire the new property. This transforms the transaction into a three-party scenario as opposed to a two-party scenario, which is necessary due to the provisions of the Section 1031. 
  • Documentation and compliance: 1031 exchange companies also pay attention to the compliance issues, preparing all the necessary documentation, including the Exchange Agreement and a list of properties to be replaced. 
  • Resource support: Finally, various 1031 exchange companies provide the investors with numerous tools, resources, and calculators, which greatly simplify the decision-making process during these transactions.
Salesman Discussing Real Estate to a Senior Woman

Choosing the right 1031 exchange company

Now, the question is, what is the right 1031 exchange company? There is no objective “best” company, but the right company for you should be able to address all your needs. 

Key criteria for investors when choosing the ideal 1031 exchange company include the following:

Experience and expertise

A 1031 exchange is not a simple process, and the company you consider should be experienced and ready to deal with it. 

The number of exchanges already carried out by the company is a significant indicator of how competent they are, and it’s best if they’ve handled thousands of exchanges over several years. 

The company’s team members are also important, and they should include lawyers, tax advisors, and other specialists in tax law, and people who can handle many different exchange processes.

Compliance and security

A good 1031 exchange company must also ensure the safety of one’s investment. A reliable company has extensive security measures protecting one’s funds.

This means including compliance with all IRS regulations and requirements for qualified intermediaries, as well as secure, segregated accounts, and comprehensive insurance coverage, including errors and omission insurance and fidelity bonds.

Comprehensive services

The best 1031 exchange companies offer a broad range of services to support investors in their exchange. 

The company should assist in the identification of potential replacement properties, provide access to an array of calculators and other financial planning tools, and offer educational resources to assist the investor. 

Good companies should also help in closing and simplify the entire exchange process from beginning to end. 

Customer support and communication

Good customer service is essential. The 1031 exchange company must be easily available with knowledgeable staff willing to quickly and efficiently address any concerns or questions.

The company should maintain transparent communication regarding the exchange process, deadlines, and requirements. 

Reputation and reviews

Companies must have numerous positive reviews and testimonies attesting to their claim, as well as professional affiliations and industry awards that may support their standing. 

By considering these criteria, an investor will arrive at a 1031 exchange company that ensures the exchange process moves seamlessly.

Person Holding Silver Key

Maximizing investments with an 1031 exchange company

The ideal 1031 exchange company is more than just another step in the best project management strategy. It’s a foundation that can make or break the success of your tax-deferral endeavor. 

If you use the knowledge and criteria in this guide, you’ll be prepared to make an informed selection. Keep in mind that the 1031 exchange company “for you” is one that blends flexibility, understanding of securities, a wide range of services, elevated consumer service, and an excellent image. 

If you choose a company that meets or surpasses all of these qualifiers, you will benefit from the ability to count on your investment and follow the procedures while having peace of mind.

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